KCM needs fresh capital

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KCM needs fresh capital
Marc Hasenfuss
Posted: Fri, 03 Oct 2008

[miningmx.com] -- SHARES in recently listed diamond miner Kimberley Consolidated Mining (KCM) shed 11% on Thursday – perhaps not a surprising development considering the general weakness in commodity stocks.

But the drop in KCM also coincided with the long awaited release of the group’s annual report – which, to be frank, may have raised a few alarm bells amongst shareholders.

First and foremost is KCM’s "going concern" status with auditors Moore Stephens BKV Inc pointing out that the group’s current liabilities exceed current assets by a rather hefty R16.8m.

Without qualifying the annual report, the auditors noted that KCM’s ability to continue as a going concern was depended on directors "securing sufficient working capital to fund operations".

With this in mind, it is difficult not to notice several references in the annual report to the group’s Bo-Karoo diamond mine as a cash generative asset. In fact, CEO Hein le Riche points out: "when looking into the future, one should not forget the strong fundamentals being shown by our cash producing operation in Bo-Karoo."

The annual report shows that cash generated from operations was R13.3m in the 11 months to end February 2008. While encouraging, this cash flow did not cover the purchase of plant and equipment (R29m) and the acquisition of subsidiaries (R8.6m) during the reporting period.

As things stand KCM simply does not have the cash coffers normally associated with a company with serious exploration ambitions – remembering that the group declared bulk sampling at the Shone kimberlite pipe on its Carter Block concession as promising.

With Bo-Karoo expected to produce just over 5,000 carats in financial 2009 it seems reasonable to assume operational cash flows won’t cover exploration and development expenditure at the much mooted Carter Block.

So what does KCM do for bucks?

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The directors’ report reiterates the advisory from the auditors that the going concern status is dependent on securing sufficient working capital.

Directors claim the financial position has been "substantially relieved" after year end following good diamond sales – boosted by a 46 carat stone that fetched R11m in March.

But there have also been setbacks. The directors’ report notes that KCM Partners had an option to purchase 65m shares on the condition that they could raise funding.

The partners were not successful, and KCM is looking at a number of ways to bring in much-needed cash.

NEHAWU Investment Company has been approached to take up 65m shares (although at what price these shares will be pitched will be interesting considering the weak KCM share price).

KCM is also looking at a private clients funding initiative.

In the meantime, KCM has secured a R7m facility with Standard Bank on a sale-and-leaseback agreement with certain earth moving equipment, and is looking at selling off redundant equipment to the value of R14m.

There is also an attempt to tweak returns at Bo-Karoo by consolidating operations in a bid to reduce costs.

It does, overall, seem a little odd that an exploration company should find itself in such a bind so soon after listing.

The situation – particularly the weak share price in lieu of ongoing fund raising efforts – probably warrants close monitoring by shareholders. In this regard KCM’s upcoming interim report should make for very compelling reading.