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» Western Areas lops 18% off South Deep reserve
» Anglo discounts Western Areas

Increased output key to Western Areas' success - RBC, Georges Lequime

In an interview on Radio 2000 @ 6:45 on 20 October 2005

[miningmx.com] -- The key for the South Deep mine held in the Western Area and Placer Dome joint venture is to lift production and cut costs so that it can start generating free cash flow and minimise the effect of it hedge book, said Georges Lequime, an analyst with RBC Capital Markets.

The more gold the mine produces, the more it can sell on the spot market and avoid the crippling effects of its unfavourable hedge book, Lequime said on the Moneyweb Power Hour.

"If we look at the key issues on the company, it is looking at production rates and getting the costs down. If you can do that you can generate free cash flow," he said.

"They got about 45,000 oz gold to the 62,000 oz that they produced in the quarter that they've locked in at around $292 an ounce. It's about 65% of their production that they're committed to. As they increase the production rate, they have more they can sell at the spot price which is R92,000/kg."

If the hedge had not been put in place, the company would have generated a cash operating profit of R50m this quarter, he said.
As they increase production rate they have more they can sell at the spot price
"The hedging loss was R51mn on its own on the call options. There's an option premium payable which works about $5m a quarter.

"That's another R32m that they lost on an outstanding balance that they owe against some of the call options they bought to offset some of their liabilities. They've got an outstanding balance of $215m."

As production ramps up over the next couple of years, the financial situation within Western Areas will improve dramatically, he said.

"It looks like in the next couple of years, they'll require a bit more funding before they start generating free cash flow," he said.