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Sentula nailed by poor accounting
Brendan Ryan
Posted: Mon, 02 Jun 2008
[miningmx.com] -- Sentula Mining shares plunged up to 32% on Monday morning when the company announced it was revising its 2007 results and also forecast lower earnings for the year to end-March 2008.
The current price of around 1 200c compares with a 12-month high of 2 650c reached after Sentula (formerly Scharrig Mining) had teamed up with mining entrepreneur extraordinaire Sam Jonah.
Jonah - through Jonah Capital - had built up a stake of 14.38% in the company buying in at prices up to 525c a share by early 2006.
But Jonah Capital sold down its stake materially in March along with another large shareholder, Coronation Capital.
Jonah Capital dropped its holdings to 6% of Sentula while Coronation sold down its stake in the company from 9% to 3.9%.
The shares were sold at a price of 2 175c each raising R680m in total for Coronation and Jonah Capital
of which about R418m accrued to Jonah Capital.
The sales were made through a book build exercise carried out by Barnard Jacobs Mellet Corporate Finance.
Questions
The investors who took up those shares cannot be too happy about the present situation and, on the face of it, they could justifiably start asking questions about the motivations for the exit of the two shareholders as
well as the opportune timing.
Sentula said at the time that Jonah Capital and Coronation "had decided to realign their investment portfolios".
Jonah Capital stated it needed the money to fund its new Botswana coal ventures through Jonah Coal which is a 50/50 JV with Sentula.
Jonah was non-executive chairperson of Sentula at the time and still holds that position.
Coronation said the size of its investment in Sentula - relative to its general portfolio parameters, had grown "considerably" and Coronation had decided to partially reduce its holdings as a result.
The share price started trending down after the book build despite Sentula's apparently rosy prospects. In April, Sentula chief financial officer Deon Louw told Finweek magazine that there had been "a lot of uncertainty around certain aspects of the company."
"One was the number of acquisitions we made. There's always risk involved with an aggressive acquisition
strategy and I think that's affecting perceptions now."
"There's not much we can do but concentrate on running the business and let the results speak for themselves," said Louw.
It now turns out investors were right to be cautious because it's one of Sentula's acquisitions which is causing the trouble.
Monday morning's Sens announcement said the restatement of the 2007 results had no impact on Sentula's cash position.
Accounting
It did not specify the particular acquisition but CEO Robin Berry confirmed it was Benicon which was one of four companies that Sentula took over in that particular financial year.
Sentula paid R53.9m for Benicon which was a contract mining operator "with similar roots to Scharrighuisen Opencast Mining and complimentary client base".
According to the Sens statement, there were a number of accounting "errors" involved in the transaction "with respect to the appropriate application of
IFRS 3".
These included "an incorrect valuation of certain fixed assets on the date of acquisition" and an "erroneous conclusion as to the accounting effective date of the acquisition resulting in the incorrect measurement of the fair value of the consideration paid".
Sentula also announced that its headline earnings for the year to end-March 2008 would be between 74c and 89c a share. That means they will be well below the 98.4c a share reported for financial 2007 despite the booming conditions in the domestic and export coal markets during the 2008 financial year.
According to Sentula, this was due mainly to delays in concluding a number of acquisitions for which the company had issued shares so increasing its weighted average number of shares in issue by 33%.
The delays meant the expected contribution to revenues did not materialise resulting in diluted earnings per share on the increased issued capital.
The increased revenues
are expected to flow through in the current 2009 financial year.
There were also delays in the awarding of three new mining contracts to Sentula for which the company had invested heavily in working capital and capital investment in anticipation of the contracts being finalised.
The contracts have now been awarded but, again, the benefits will only come through in the current financial year.
Berry stressed that Sentula had entered financial 2009 "on a very good footing".
He denied that Sentula had overpaid for Benicon's assets: "What happened was an erroneous accounting for the combination of the businesses and we are now rectifying that error."
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