Zinc metals miner Kagara has described the 2011 December quarter as a challenging period for the company due to a continuing decline in both zinc and copper prices which has impacted significantly on its cash operating margins for both commodities and therefore cashflow.
Based on current commodity prices, KZL advises that EBITDA guidance for the full year will not be maintained. Cash operating cost forecasts and full year guidance is currently being reviewed and, along with EBITDA guidance, will be updated based on the various activity and cost management measures currently underway and reported in the half yearly results due for release to the market on 23 February 2012.
While zinc production exceeded guidance and copper production remains within YTD guidance range (Appendix 1), operating margins were eroded by ongoing falls in prices for both metals during the Quarter. Zinc prices have fallen by approximately 30% from their high of ~US$2,500/t in the September quarter 2011 to as low as ~US$1,750/t by the second quarter 2012. Copper prices have fallen by approximately 28% from their highs of ~US$9,600/t in the September quarter 2011 to ~US$7,500/t by year-end.
Despite favourable reductions quarter-on-quarter in site controllable operating unit costs of approximately 20%, the combined effects of decreased production and falling commodity prices for by-product credits resulted in a higher zinc cash cost of US$0.94/lb for the Quarter (US$0.82/lb for the half year). Copper cash costs increased to US$2.05/lb for the Quarter as a result of lower budgeted production (US$1.87/lb for the half year). Falling revenue and an increase in non-controllable costs had a negative impact on margins with the cash operating margin for zinc falling to -US$0.08/lb for the Quarter (US$0.12/lb for the half year) and the cash operating margin for copper falling to US$1.35/lb for the Quarter (US$1.87/lb for the half year).
Lead and nickel production decreased in line with budget during the Quarter. Lead production reduced as a result of lower grade; nickel production reduced because of lower tonnes processed, offsetting an increase in nickel grades.
During the Quarter, significant investment continued in exploration (up +A$10M for the Quarter), development (up +A$12M), and reducing creditors (down by +A$10M).
The ramp-up in exploration activity across North Queensland continued to generate positive results, providing strong support for the plan to grow KZL’s resource base to support increased zinc and copper production. However, as a relatively small-scale producer currently, Kagara remains exposed to short-term fluctuations in metal prices until it can deliver on the outcomes of its 5-year production growth strategy.
In light of the changed commodity price environment, Kagara has implemented a review of all its activities and costs to achieve further improvements to its cost base beyond those improvements already realised. These changes are designed to protect the Company’s cash position in the short-term without compromising the key elements of the 5-year production growth strategy. This means that Kagara will remain well placed to benefit from a recovery in zinc and copper prices – which, according to some market analysts, will occur in the second half of calendar year 2012.
