16/05/2013 - 14:08

Miners trim costs as they await better times

16/05/2013 - 14:08

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It’s an old adage that some of the biggest fortunes have been made when business conditions are at their toughest.

With that in mind, it’s intriguing to see the high-calibre company directors that have joined up with Michael Fotios, the man who made a very tidy gain on gold miner Northern Star Resources.

Mr Fotios famously invested in Northern Star when it was a penny dreadful and sold many of his shares last year at 90 cents per share.

Since then, he has invested in a range of junior mining stocks, including Genesis Minerals, General Mining Corporation, Pegasus Metals, Redbank Copper and Swan Gold Mining.

Pegasus had a spectacular jump last week, after some impressive drilling results, doubling in price to 23 cents before easing back to 18 cents this week.

Redbank emerged from a trading halt this week, after a complex 18-month restructuring and recapitalisation.

Its stock was trading at 0.8 cents on Tuesday, which means Mr Fotios and other investors, including The Wylie Group, are well ahead on the $8.2 million they pumped into the company at 0.5 cents per share.

The stock’s run-up was helped by some upbeat comments from Mr Fotios, who was touting Redbank’s copper project’s “outstanding potential for growth on the back of numerous known targets and greenfields exploration in swathes of highly prospective surrounding acreage”.

“With the restructure complete, the company now has the cash and the access to people with the skills and experience to ensure this outstanding opportunity is fully realised,” he said.

An even more interesting prospect is Swan Gold Mining, which boasts one of the most impressive company boards in Perth after a quiet restructuring in March.

Mr Fotios chairs the company and has been joined by Azure Capital chair John Poynton, experienced company director and Allion Legal principal Craig Readhead and former banker and Oakajee Port & Rail finance director Wayne Zekulich.

Azure is advising Swan Gold on a $15 million capital raising, which is one of the final steps in another very long and complex recapitalisation.

Despite this high-calibre backing, the company this week was forced to extend the deadline for its capital raising a third time, to the end of May.

In the interim, it has entered a loan agreement with private investor syndicate Investmet, chaired by Mr Fotios, for up to $3 million for working capital purposes.

And Investmet has taken a big swag of extra shares, valued at $4.4 million, through a debt-for-equity swap.

But it seems other investors are wary of the company’s commodity focus and history.

Its principal asset is the Davyhust-Mt Ida gold project north of Kalgoorlie, which has been on care and maintenance since 2008.

Gold, like most commodities, is in the doldrums.

Combined with the slump in equities markets, there has been a sharp downturn in exploration spending and project development right across the junior mining sector.

More than half-a-dozen gold miners have closed mines, cancelled projects or gone into administration.

Many others have trimmed their spending, because they know how difficult it is to raise extra capital in the current market.

Amid all of the gloom, there are many companies pressing on with their growth plans, confident in the knowledge that mining is a cyclical industry and the next upturn will surely come.

One of these is Poseidon Nickel managing director David Singleton, who can see the benefits that will flow from the current round of restructuring.

“The difficult days are the times that create efficiency in a company, so that in the future they become a lot more powerful,” Mr Singleton said.

“People are learning to deal with less, and they are becoming more efficient, using their people more effectively, and as a result they are slimming down their operations, so that when the market does come back, they will be able to deliver some returns to their shareholders.”

Mr Singleton can point to a raft of expert analysis to support his view that the nickel market is set for a recovery over the next few years.

In a similar vein, Energy & Minerals Australia’s newly appointed managing director Julian Tapp makes a case for the uranium price to recover in coming years.

On the capital-raising front, Mr Singleton is confident the high-yield debt markets in the US will provide a funding solution for his company’s $200 million project.

That optimism was supported by the ability of mining contractor Barminco to compete a refinancing of its debts this week through an issue of high-yield notes in the US.

Barminco announced an offering of $US485 million of senior notes, with an interest rate of 9 per cent. In addition, it has negotiated a $A100 million revolving credit facility.

The company has needed to refinance its debts, after it withdrew from a $600 million initial public offering in 2011.

Fortescue Metals Group, Ausdrill and Aurora Oil & Gas are other Perth companies to have completed large financing deals in the US.

For many smaller companies lacking positive news flow, the only option has been to trim costs.

Gunson Resources, Hodges Resources, GBM Resources, Tawana Resources and Galaxy Resources are just a sample of the junior miners that have slashed expenses over the past month.

GBM said a review of its operations had identified initiatives to save up to $600,000 a year.

The initiatives include slashing salaries for executive directors and senior staff.

Gunson plans to cut board numbers and directors fees, following a review by Azure Capital.

The managing director’s salary and fees paid to the chief financial officer and the project manager on Gunson’s flagship mineral sands project will be reduced under the recommendations.

Directors fees will be cut by 25 per cent and payment suspended.

Tawana said chairman David France had tendered his resignation and would not be replaced.

Galaxy has cut four of its 10 directors as it seeks to complete a capital raising.

And on it goes.

The cutbacks have been less common but more significant among WA’s gold mining sector.

The company’s that have been hardest hit are the high-cost producers such as Apex Minerals and Navigator Resources, which are battling to remain viable following the fall in the gold price to around $US1400.

The shake-out in the industry has also put a spotlight on reporting practices, with more companies now prepared to disclose their ‘all-in’ costs rather than just their ‘C1’ cash costs.

The largest cost-cutting moves have been made by Saracen Mineral Holdings, which has suspended $62 million worth of development projects, including its Deep South underground mine and its Carosue Dam plant.

Saracen described these measures as a “back to basics” mine plan, consisting of a single open pit mine adjacent to an existing milling facility for the next two years.

Saracen managing director Raleigh Finlayson said: “We are confident that we have developed strategies for different gold price environments, even in an extremely depressed gold price scenario, that will ensure we remain cash flow positive and operationally robust.”

The company said its cost-cutting measures would reduce its ‘all-in’ cash costs from $1600 per ounce in the 2013 financial year to $950/oz in the 2015 financial year.

That would take it close to the ‘all-in’ cash costs reported by market leader Northern Star Resources, of $935/oz.

Other junior gold miners have suspended mining operations, with Kentor Gold stopping its only WA operation at Murchison, Focus Minerals suspending its Laverton mine and Tanami Gold placing its Coyote mine on care and maintenance.

On the suspension of the Laverton mine, Focus chairman and acting CEO Don Taig said these measures were for the protection of Laverton assets for shareholders.

“We have a significant, highly prospective landholding in the Laverton region surrounding four major mines with over 20 million/oz between them. We are not about to deplete our current reserves base just to break even,” Mr Taig said.

These cuts and suspensions have rippled through the industry over the past few months, with more than 450 jobs cut across the state by junior gold miners who are experiencing high production costs and a falling gold price.

The largest loss was at Navigator Resources, which cut 200 jobs after going into administration earlier this year.

This was followed by Newcrest Mining, which cut 150, mostly administrative jobs, saying in its March quarter report that when presented by a challenging environment, “Newcrest continues to review all its business activities, particularly those related to higher cost, current or future production”.

The highest-cost producer for the quarter was Apex Minerals, which produced gold from its Wiluna operation at $2193 an ounce.

In its March quarter report, Apex cited “lower than anticipated grades and reduced tonnes” as the reasons for the high figure.

It was quick to point out, however, that the March quarter total mine operating costs were $4.4 million, an improvement over the previous quarter’s $6.4 million.

Apex also stated that it is “currently reviewing the detailed underground production schedule for Wiluna, which has been completed through to June 30 2016 to continue to identify areas for cost reductions and efficiency gains”.

New projects

While some miners are cutting back, others are in the process of bringing new mines into production, after committing to developments when the gold price was more buoyant.

By far the largest new mine to enter the industry this year will be the Tropicana project, set to start production by the December quarter.

The $830 million development is a joint venture between AngloGold Ashanti (70 per cent) and Independence Group (30 per cent) and is set to produce 480,000oz/pa for the first three years.

According to Independence Group, this would make the Tropicana project the fifth-largest producer of gold in Australia. 

Silver Lake Resources’ Murchison project will now cost the company $91 million, following the resolution of its dispute with project management and construction contractor Pacer Corporation.

A similar project, Millennium Minerals’ already completed Nullgaine project, ramped up production this quarter producing 17,089 ounces of gold at a C1 cash cost of $826/oz.

The mine, which had its maiden gold pour in October last year, had a 43 per cent increase in production compared to last quarter.

Doray Minerals’ Andy Well project, set to commence production this year, received a boost to its estimated 3.7-year life expectancy following the discovery of another lode, which, according to the company, increases the project’s resource inventory by 30 per cent.

Other companies are pursuing smaller projects.

These include open pit mining expansions like Norton Gold Field’s $40 million Enterprise project, which is set to produce 110,000oz/pa for five years.

Ore taken from the mine will be processed at the company’s Paddington Mill, which is 38km from the site.

In a similar vein is Reed Resource’s three-stage Meekatharra project.

The first stage, which has commenced already, consists of low cost open pit mining within 6.5km of its Bluebird processing facility and is set to cost the company $35 million.

Stages two and three consist of a combination of open pit and underground mining from a wider range of sources.

But the hardest times in this economic climate will likely be felt by those companies which are seeking funding for their first gold production project.

In an environment of rising costs and lowering prices, the likes of Mutiny Gold, Gascoyne Resources and Southern Cross Goldfields will likely have a tough time raising the necessary capital to bring their proposals into reality.

Mutiny Gold’s managing director, John Greeve, recognised the difficulties small miners faced but felt confident the company’s Deflector project would go ahead following a $US2 million purchase of the company’s shares by Canadian firm Sandstone Gold.

“(This comes) at a time when global financial markets were facing historically difficult times and project funding had almost dried up for small miners, to have put together this deal with Sandstorm Gold was a major success story,” Mr Greeve said. 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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