[miningmx] — XSTRATA said it would cut capital expenditure by $1bn, while the
expectation is that BHP Billiton, the giant of the mining industry, will slash its capital
budget some $3bn. Anglo American has already lowered its capex budget $1.5bn,
while Vale has announced similar parsimony in recent times.
The reasons are well known by now: shareholders are seeking yield, and given
production slippages amid increased instances of so-called resource nationalisation,
as well as the sheer technical difficulty of commissioning new mining projects, they
would prefer money in their pockets today rather than promises of more tomorrow.
Pity, though, the small- to medium-sized miner: he (or she) with less operating
flexibility, weaker balance sheets against which to raise major capital and, as the
commodity market and metal prices take a breather, a near crippling reduction in
cash flow. These are dark and difficult times.
Just ask John Wallington, Ferdi Dippenaar and even Stuart Murray, the CEO of
Aquarius Platinum which, in 2007, had the luxury of wondering what to do with a
$400m cash pile and then a year later bought back Impala Platinum’s 8.4% stake in
the company for a tidy sum of $790m.
These are the CEOs in whose shoes you’d prefer not to stand as they are slayed by
outrageous fortune. They are not the only ones, as demonstrated by the fact that
the distress extends to many commodities; in this case, coal, gold and platinum.
JOHN WALLINGTON, CEO, Coal of Africa (CoAL)
Share price: -70% in 2012
Biggest worry: $17m shortfall
With a year-to-date share price performance of -70%, the market isn’t buying
CoAL’s story that it represents the bulk of South Africa’s coking coal prospects, a
mineral that has solid long-term fundamentals.
The problems for Wallington & Co are probably rooted in the fact that the company
was never properly capitalised for its ambitions. But the year-long delay in the
company’s Vele project in Limpopo province, the result of environmental concerns,
was a catalyst.
The delay gave rise to later-than-expected cash flow, exactly at a time when the
bottom fell out of thermal export coal market to which CoAL’s ageing and limited
Mpumalanga province mines are exposed.
Solution:
The board has been reconstituted with former Impala Platinum CEO, David Brown,
taking up the chairmanship.
The hope is that new thinking can give greater support to Wallington, whose coal-
mining credentials are not in question. But the thermal coal market has to recover
to $90/t plus, while an equity investment by Exxaro Resources in its coking coal
prospects would provide to its balance sheet. The quicker Vele can start generating
real cash flows the better.
Talk all you want about the future, CoAL’s problems are all about present cash flow.
FERDI DIPPENAAR, CEO, GREAT BASIN GOLD
Share price: -49.5% in 2012
Biggest worry: $150m debt due 2013
Shares in Great Basin Gold are down 49.4% since the beginning of the year as the
company returned again to shareholders for funds, a share issue that was priced
downwards mid-stride. All in all, the company has doubled its shares in issue to
545m since it began developing the Burnstone gold mining project, located near
Balfour in Mpumalanga province. The major problem was a geological miscalculation,
which delayed full production ramp-up.
However, critics says Great Basin Gold’s bold move to mechanise the mine, given
the structure of that orebody, was a mistake. In the meantime, its empowerment
partner, Tranter Gold, had to be bailed out after a decline in Great Basin stock saw it
in danger of breaking bank covenants.
Solution:
Start beating production guidance. There were early signs of this in the last
quarterly figures when Burnstone produced 6,671 oz of gold against a 5,511 oz
target. Off such a low base, however, sustained production increases are likely
required to win investor confidence and get that share price up. Critics say only the
sale of its mine in Nevada, US, will properly capitalise the Burnstone project, but a
tick-up in the gold price won’t go amiss. Here’s hoping HSBC is right in forecasting
gold at $1,900/oz by year-end.
STUART MURRAY, CEO, Aquarius Platinum
Share price: -77.4% in 2012
Biggest worry: Negative cash margin
The signs are ominous for Stuart Murray’s Aquarius Platinum. Two of its mines, both
joint ventures with Anglo American Platinum (Amplats), are mothballed, and a third
was running at a negative cash margin of -24% in the June quarter. Amplats has
said it won’t provide charity to any unprofitable ounces in its portfolio, so Aquarius
executives can be excused if they are looking anxiously over their collective
shoulder.
The figures don’t stack up. Revenue for its basket of platinum group metals (PGMs)
averaged R9,160 against costs of R9,890/PGM oz in the June quarter. There’s
$180m in cash left, enough to finance the loss-making SA operations for a year,
assuming it decides not to proceed with its Buttonshope project with Northam
Platinum. Meanwhile, Aquarius Platinum’s profitable Mimosa Platinum Mines in
Zimbabwe is subject to a 50% sale to the government.
Solution
Aquarius says it’s not the reason Amplats is in danger of breaking its own bank
covenants and therefore would resist the closure of its extant mine, Kroondal. In the
meantime, a shift in operational focus to owner/operator control (away from
contractors) is perhaps the best way to bring costs under control, but critics wonder
whether Aquarius can staff itself appropriately, and quickly enough, to make a
difference after so many years of relying on contractors to mine.
In Murray, Aquarius shareholders have an iron-like, almost bulldog resistance. But
dragging Kroondal into profitability, in double quick time, is a bit like expecting the
English soccer team to win a penalty shootout; not impossible, but hard to see.
– Finweek
