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Dank & depressing

Marc Hasenfuss | Tue, 14 Apr 2009 09:42
[miningmx.com] -- SOME of my merry correspondents on penny stocks are building up a head of steam around SA Coal Mining Holdings (SACMH), which announced in late March it would cease operations for three months because of a weak coal price and operational challenges.

The suggestion is that SACMH - which boasts Royal Bafokeng Capital as a major shareholder - has been marked down well below its potential value by a market that refuses to recognise the fundamental long-term strength of the local coal market.

It's true SACMH has taken a pasting on the JSE of late. The shares have collapsed from a mid-2008 high of 490c to under 40c.

At the moment SACMH's market capitalisation of R166m is not much higher than the R106.5m the company raised by issuing shares at 400c/share in a rights issue and in a separate private placement.

What is likely to get the penny-stock punters in a tizz at SACMH is the prospect of bigger parties lining up small coal miners for takeover. This notion would have been duly reinforced by JSE-listed steel-maker ArcelorMittal South Africa's recent snatching of 16.3% of another junior miner, Coal of Africa, for R404.5m.

But I think wide-eyed punters ought not to get carried away by SACMH just yet.

For one thing, I'm not so sure that deep-pocketed corporate predators are ready to come knocking any time soon as it's patently clear SACMH has some serious issues.

And it would seem management - which recently called off a much-vaunted partnership with mining services specialist Fraser Alexander - have not exactly come to grips with these issues.

One just needs to recall that at the release of interim results in late September 2008, SACMH was spouting happily about improved profitability with the price for thermal coal sitting at the $138/tonne level.

That seems an eternity ago. The coal price has dropped and global markets have been shaken, stirred and unceremoniously stuffed. SACMH now looks to be occupying a dank and depressed space - although I suspect the fledgling coal miner's predicament is less of the market's making and more about specific operational issues.

I say this because at the time of the interim report, SACMH - which clambered onto the JSE via the old Yomhlaba listing - suggested new management, investment in infrastructure and improved mining plans could see a significant improvement in performance in the second half of the year.

It was under these happier circumstances that SACMH had the investment public eating out of its hand. In August 2008 a rights offer to raise R79m by issuing new shares at 400c/share was finalised, meaning that a grand total of R106.5m (including a private placement of some R27m) had been raised from excitable investors.

Irresistible lure of easy money

No doubt those excitable investors that pitched in for the rights issue were not taking heed of some market commentators' misgivings about the commodity cycle.

I attended a briefing by Allan Gray's Delphine Govender around that time about relative valuations in the stock market.

Govender pointed out that Allan Gray was (at that point) not too enamoured with the valuations of commodity stocks. By way of example, she said that based on the then price of about $177/tonne for thermal coal it would take a new colliery roughly nine months to pay back the start-up capital.

Easy money, and understandably at that stage the market was willing to chase the pants off new coal mining listings.

Govender noted that Allan Gray saw $62 as a sustainable price for thermal coal (which is fairly close to the current quoted price). She said a price of $62/tonne for thermal coal would mean a new coal mine would require just over four years to pay back the initial investment.

Methinks the markedly lower coal price has probably left SACMH up sheet creek with a paddle full of splinters. It's going to be hard work to stay in the profit stream with coal prices down by more than 50%.

Judging by comments on SACMH's full-year results to end-December 2008 (where, by the way, there was bugger-all evidence of a "significant improvement in performance") the company may well be looking rather desperately for a "white knight" (arise Sir Royal Bafokeng?) to bring new capital to the table.

If we look at SACMH's cash flow statement, we see that the company finished 2008 with less than R15m in the bank - and that's after accounting for the R106.5m raised from investors during the 2008 financial year.

Thankfully, SACMH won't have to delve to deeply into its cash coffers for the immediate future, other than for plant upgrade, with the mining operations shutdown for three months.

But the shutdown is quite surprising. Coal demand, one presumes, remains fairly strong - albeit not at last year's heady pricing levels.

Scary numbers

Surely there should be enough in the current coal price for a well-managed operator to make a fair turn? Coal of Africa, it would seem, is still going full tilt.

Perhaps then it is significant that the SACMH board will use the "care and maintenance" period to review the firm's operations. This will include capital requirements and cost structures "with a view to determining the future direction of the company's business".

SACMH's costs do strike me as an obstacle to attaining meaningful profitability at SACMH.

In the year to end-December, SACMH's revenue of R180m was just about wiped out by costs and expenses that topped R170m. That hardly seems viable.

The other - perhaps more urgent issue - is funding new capital for SACMH. In this regard directors are talking about "an externally assisted process to explore the recapitalisation of the business".

One could be forgiven for thinking that a company which only recently raised R106.5m should still be fairly flush. Not quite - current liabilities of R129m loom large over current assets of just R52m.

Tangible assets add up to just over R200m. This is a little scary, seeing that total liabilities exceed R370m - a figure that includes non-current interest bearing liabilities of over R100m.

All in all, I don't think the market has mispriced SACMH, which had a negative tangible net asset value of 38c/share at the end of December 2008.

If anything, the company's market rating may even be a little generous considering that SACMH's "external" endeavours to source fresh funds will almost certainly involve the issue of new shares at a discount to the ruling market price.



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