Do or die for Anooraq

Ines Schumacher | Tue, 18 Aug 2009 15:25

[miningmx.com] -- IT’S do or die for junior platinum producer Anooraq Resources over the next three financial quarters after its acquisition of 51% of Anglo Platinum’s loss-making Lebowa mine.

“All eyes are on us. If we cannot run Lebowa cost-efficiently and make a success out of it, the market will lose confidence in us and we won’t be players in the platinum sector in the future,” Anooraq CEO Philip Kotze told Miningmx.

Anooraq acquired the controlling interest in South Africa’s third-largest platinum group metal (PGM) resource Lebowa for R2.6bn. It became a fully-fledged PGM producer 45 days ago, when it took control of the mine.

The Lebowa operation is struggling to generate positive cash flows at current PGM prices, producing at over R1,000 per tonne of ore mined. Kotze declined to be drawn on what Anooraq is targeting as a production cost.

“This is the launching platform for Anooraq. We will prove to the market that we deliver on our promises and can turn this mine around. The next three quarters will show our cost-cutting measures taking effect,” said Kotze, who used to work for Harmony Gold.

Anooraq plans to double production to 160,000 tonnes of ore a month after three years, lifting platinum group metal output 270,000 oz/year from the current 180,000 oz.

Lebowa could potentially lift ore production to 375,000 tonnes/month, which would give it 570,000 oz of PGMs, he said.

The company is also investigating future synergies between the Lebowa mine, which has two concentrators, and its neighbouring exploration property Ga-Pasha, which has the potential to produce around 270,000 oz per annum.

Anooraq’s second point of attack is to slash expenses. “There are some very simple things we can do to dramatically cut costs,” Kotze said.

One of the problems Anooraq has identified is the amount of ore left underground after blasting. Studies of Anglo Platinum’s reports over the last few years showed Lebowa processed 300,000 tonnes of ore a year less than it blasted underground.

Anooraq will therefore focus on vamping Lebowa, a process in which a team goes back underground to recover all the ore that gets left behind after blasting. “This is part of our ramp-up. We will technically be producing platinum at 30% of the cost it takes to blast it,” Kotze said.

Anooraq will also reclaim equipment, by reconditioning and re-using it for half the cost of replacement.

Financing considerations

Kotze does not foresee Anooraq going to the market for additional financing. It is fully financed through a nine-year term senior debt facility with Anglo Platinum of R750m, as well as a working capital fund of R120m.

Anooraq funded the acquisition of Lebowa through a combination of the debt facility provided by Standard Chartered Bank and a vendor finance facility provided by Anglo Platinum.

“Our first debt repayment is due in three years, but we will start paying the facilities back before then if we can afford to,” Kotze said.

Anglo Platinum has also supplied Anooraq with a kind of safety net through a cash flow shortfall facility of up to R750m, as well as a standby facility in which Anooraq can access up to 80% of cash flows from the Lebowa mine to service the Standard Chartered senior debt.

“Anglo Platinum has really gone a long way to make this a sustainable black economic empowerment transaction and has come to the table in a big way,” Kotze said.

The market remains sceptical of Anooraq’s ability to turn Lebowa around. RBC Capital Markets analyst Leon Esterhuizen said in a research note on Tuesday: “The new management team will have to act quickly and drastically to rein in costs.

“Otherwise, metal prices would have to rise significantly to enable the generation of sufficient cash flows with which to service Anooraq's debt. We believe it is only once this debt has been repaid that Anooraq's valuation will fully benefit from any metal price upside.”

RBC maintains its above average risk rating.

Anooraq shares have shot up in recent months after collapsing to a 12-month low of 270c in October 2008 from a high of nearly R34 in February that year. The share is now trading around 700c.