MINING FINANCE / INVESTMENT

Some SA miners falling horribly behind on promises

Noisy headlines may have disguised a good number of performances that have fallen below what companies promised on listing

JOHANNESBURG - 

Miners are traditionally resourceful, and just as South Africa offers up all sorts of idiosyncratic challenges, noisy headlines may have disguised a good number of performances that have fallen way below what companies have promised. In the foreground, persistent - and increasing - interventions by the South African government continue to erode confidence.

Some mining executives have used the cover available to at least partially concoct smoke and mirrors in and around wimpy behaviour and half baked decisions. No doubt, innocence is pervasive, yet a powerful trendline has developed under the blaring banner of "over promising and under delivering".

Thus, a June 2009 presentation by Gold One had it that Modder East, east of Johannesburg, would kick into production from the fourth quarter of 2009. It would ramp up from 20,000 ounces of gold in 2009 to 140,000 in 2010, and, beyond that, to 180,000 ounces a year. Really?

Latest available results indicate that Gold One will be lucky to produce 65,000 ounces of gold this year, less than half the number investors may previously have relied on. Back in June 2009, Gold One promised "cash costs of only USD 250 per ounce, well below industry average". The latest quarterly numbers indicate unit cash costs of USD 483 an ounce, nearly double what was indicated. This is probably not good.

At Great Basin Gold, which mines at Burnstone in South Africa and Hollister in Nevada, guidance has been lowered once again. Realistically, around 100,000 ounces of gold could be the outcome for 2010, compared to Great Basin Gold's guidance in February this year of 190,000 ounces. Is Great Basin Gold developing a habit of regularly missing targets and continuously downgrading the outlook?

Toronto- and Johannesburg-listed First Uranium, with operations at Ezulwini and MWS in South Africa, is another kind of story. First Uranium has several times slashed forecast production since April 2008, when for 2011 it anticipated production of 1.9m pounds of uranium, and 507,000 ounces of gold. It seems that gold production for 2011 could now be in the order of 150,000 ounces. There is no readily available guidance for uranium output.

Following years of bitter controversy, First Uranium's prior management and board, largely in place from 2005, was finally ejected early this year. The company is returning from the grave; those who promised the world are free as birds.

First Uranium has completed several debt restructurings. Net debt (including cash), mainly in the form of convertible instruments, was at USD 206m on 30 September. The convertible programme was partially supported by Simmer & Jack, which holds 34% of First Uranium, and which could increase to as much as 48% if conversion is eventually chosen.

First Uranium was spun out of gold miner Simmer & Jack in 2007, which was controlled by the same prior board and management that was unceremoniously booted out of First Uranium earlier this year. Both entities continue to face challenges in generating strong positive free cash flows. First Uranium now looks more like a gold miner; overall a case can be made out for it to merge once again with Simmer & Jack.

Only in recent months has uranium started to recover from a 2007 price collapse, following a bubble. By contrast, gold miners have been heavily assisted by a dollar gold bullion price that's been experiencing a broad bull market for nearly a decade. Platinum miners have also benefited from broadly rising prices, which have recovered strongly from a collapse across 2008. For miners generally, strong "commodity currencies", including the rand, have eroded home-currency mining margins.

Most platinum miners, heavily concentrated in southern Africa, are struggling. Earlier this year, Anglo Platinum, world leader in platinum, raised USD 1.7bn in a fresh equity placing (mostly from 80% parent entity Anglo American), aimed at fixing a somewhat battered balance sheet, where net debt (including cash) had ballooned from USD 526m at the end of 2007 to USD 2.6bn at the end of 2009.

It's been far tougher for those further down the ladder. In January this year, newly installed Platmin CEO Tom Dale was anticipating that the Pilanesburg mine would be close, by now, to producing at an annualised rate of about 250,000 ounces of PGMs (platinum group metals, mainly platinum, palladium, rhodium and gold).

Based on latest results, it seems that production for 2010 will come in at about 65,000 ounces. Production next year looks set to rise to around 140,000 ounces, and to about 225,000 ounces in 2012. Just one issue is that the mining contractor has been unable to increase volumes sufficiently.

A significant sum of Platmin's precious cash has been restricted, tied up in cash bank guarantees handed to South African authorities for rehabilitation liabilities. During the first nine months of this year USD 67.9m has been sterilized in this manner. Dale argues that the current Environmental Management Plan for the Pilanesberg mine envisages backfilling the pit at significant cost, "with negligible sustainable benefits for the community or the nation".

Overall issues at the Pilanesberg operation have continued to act as a drain on cash balances; add the additional environmental rehabilitation liability funding commitments, and Platmin faces a situation where it could run out of cash within the next six months. Pallinghurst Resources, the majority shareholder in Platmin, has already poured hundreds of millions of dollars into this stock, and may face another call.

USD 135m in Platmin debentures were issued in May this year to Ridgewood Investments (Mauritius), Pallinghurst and Investec Bank Limited. These are convertible into Platmin shares at USD 1.215 a share by 31 December 2010 (the stock price is currently around CAD 1.00 a share).

Other budding miners have been hit by unexpected cash calls; most mentioned are significant sums demanded by capital-starved Eskom, the state-owned monopoly electricity entity, which wants cash for connections. This has previously been an unknown. Likewise, various authorities have demanded cash for water connections, also an unknown, previously.

At a yet smaller platinum player, Pt Australia, investors continue to be disappointed on what's coming - or not coming - out of Smokey Hills. Says one specialist platinum analyst: "What started out as a junior capable of self-funding all or most of the growth plan has ended up as a questionable growth story with a cash burning asset". There is also an unsavoury scrap on at Smokey Hills around contracting issues

Amid the gloom, some miners seek legendary status. London- and Johannesburg-listed Central Rand Gold on Friday released an interim management statement indicating that the company, which seems to be located not too far from the streets of central Johannesburg, may produce about 10,000 ounces of gold during 2010 as a whole.

Central Rand Gold raised GBP 100m (about ZAR 1.5bn, at the time) in cash from its initial public offer, just ahead of taking up its London listing on 8 November, 2007. The company categorically stated in its 2007 annual report: "It is intended that CRG will begin gold production in early 2009 at an annualised rate of 100,000 ounces. This production rate is forecast to increase to around one million ounces a year by 2012". To repeat, the new target for 2010 is ten thousand ounces.

Stock exchange authorities don't give a hoot. To close the loops, incumbent Gold One CEO Neal Froneman was previously CEO at Uranium One, which has been saved by its uranium mines in Kazakhstan. By the latter parts of 2007, Froneman had for two years widely advertised that Uranium One's cash cost for uranium at Dominion, in South Africa, would be around USD 18.00/lb.

The first estimate of production for 2008 at Dominion was a huge 2.8m pounds, suggesting cash flow profits of about USD 200m in a year. In October 2007, Dominion's projected 2008 output was cut to 1.7m lbs and again in February 2008 to 0.55m lbs. Froneman stepped down as Uranium One CEO at that stage. On 22 October 2008, Uranium One closed Dominion down, and in the Uranium One financial statements for 2008, a USD 1.8bn impairment was taken for the debacle at Dominion.