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KCM: Um, about that constant source of cash flow
Marc Hasenfuss
Posted: Mon, 01 Dec 2008
[miningmx.com] -- RECENTLY listed gem group Kimberley Consolidated Mining (KCM) looks set for a testing time after lurching R23m into the red in the half year to end August.
What shareholders might find particularly disconcerting is that the Cape Town-based group’s much mooted Bo-Karoo mine hardly appears to be the ‘cash generative’ asset presented in the pre-listing statement.
The interim results show that KCM’s turnover of R40m was dwarfed by bloated operating costs of R58m. The all important cash flow statement shows a negative outflow of R4,7m for the period. This meant KCM finished the interim period with cash of just R305,000, which is hardly sufficient for a mining company with serious exploration ambitions.
After this dismal interim performance, shareholders may well re-visit recent correspondence from KCM that reassured that Bo-Karoo was "a producing,
cash-generative asset which provides a constant source of cash flow to the KCM group".
According to initial projections, Bo-Karoo forecast production of 4,840 carats for the financial year ending February 2009.
Ironically the poor interim results follow a recent attempt by the KCM board to address the group’s weak share price on the JSE.
In June KCM reckoned certain individuals or groups could be "deliberately trading a portion of their KCM shares at a discounted share price" in a bid to manipulate the share price and the market negatively.
KCM said the original listing price of 100c/share was based mainly on KCM’s existing assets and did not reflect the blue sky potential of "various existing and new projects.
After analysing similar diamond exploration companies listed on international bourses, KCM’s directors estimated that the share should be trading "anywhere between 85c to 200c…"
At Friday’s close KCM was trading at 27c
– perhaps a realistic reflection of the group’s immediate prospects.
KCM CEO Hein le Riche said the new financial year started off well with good production from the Bo-Karoo operation.
But, production by sub-contractors on some sites did not meet expectations and the power shortages also lowered production for a limited period.
He said expenses escalated mainly due to the increase in the price of diesel with higher steel prices also impacting on repairs and maintenance expenditure.
Le Riche comments also betrayed some corporate naivety when admitting that the listing expenses had a bigger negative impact on cash resources than anticipated.
So now KCM – only months after making its JSE debut – is in the throes of restructuring its cost structures and has already ceased projects that have no economic viability in the short term like the Taung joint venture.
For now KCM will focus on the Bo-Karoo mine, limiting exploration
to the much mooted Carter Block project between Kimberley and Postmasburg.
With exploration activities scaled back the so-called blue sky appeal of KCM is somewhat obscured. But one only has to examine the balance sheet to grasp just how tight the situation has become at KCM.
There is a major liquidity issue with current liabilities exceeding current assets by around R14m. Quite simply that means that if monies owed by KCM are called in, the group does not have the ability to liquidate assets to settle the claims.
Not surprisingly Le Riche advises that KCM is busy selling off "excess, redundant and old" plant and equipment.
It would seem KCM’s total assets of R163m comfortably cover the group’s total liabilities of R65m. But almost R140m of the total assets consist of intangible assets and goodwill.
To put it bluntly, KCM simply does not hold a balance sheet that looks capable of sustaining mining and (even limited) exploration
activity.
KCM really has two choices – neither terribly easy under the circumstances. The group either needs to ensure Bo-Karoo starts spinning cash or goes cap in hand to the market to raise fresh capital from investors.
The difficulty of such exercises is highlighted by Le Riche’s dire observation that "the current status of the local and international economy has negatively influenced the availability of investor funds for exploration as well as the demand for smaller size diamonds…"
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