[miningmx.com] — DIVERSIFIED mining group Metorex faces tax and/or mining title problems in both Zambia and Congo (Kinshasa), but CEO Charles Needham did his best at today’s results briefing to allay investors’ fears on both accounts.
He said a letter received from the Congo Department of Mines on February 18 expressed concern on three issues: the equitability – read, adequacy — of government’s 20% free carried interest in its Ruashi project, the company’s social programme, and a request for state-owned Gecomines to be involved in day-to-day operations.
The letter called for a response by February 20. Needham said an extension to 30 days has been requested, but the company hopes to reply by the end of next week.
Taking the issues in turn, he said company models suggested that, when other direct and indirect benefits were taken into account, the state in effect has a 40% interest in the project. On the social front, Metorex has provided power and water to the local village and rehoused displaced artisanal miners.
He pointed out that Gecomines already has representatives on the Ruashi board, who attend quarterly meetings, and are also invited to the monthly management meetings.
The Congo government has classified all foreign mining companies. There are no A ratings, so with a B rating Metorex is effectively in the top, most favourable category. But while Needham is confident that it can satisfy the government on all issues, it may not be as easy as he would suggest.
The same may apply in Zambia, where Needham reckons new tax proposals would in practice more than double the current rate applicable to its Chibuluma copper expansion. He relies on the fact that, in 1999, the Zambian government signed a 15-year tax stabilisation agreement which is protected by international law.
On the other hand, he admits that envisaged copper prices were way below present levels. He believes the government is open to negotiation, and the mining industry as a whole is proposing a variable tax rate linked to the copper price. The industry would also like to see some of the additional revenue earmarked for local communities.
Again, though, recent statements by Zambian government spokespersons have been adamant that reform will proceed, and have not indicated much tolerance for negotiation.
These uncertainties are a pity, as in other respects Metorex looks at least as promising as its larger rivals Anglo American and ARM, which also reported this week. In the six months to December, mineral sales of R1.04bn were 31% higher than R791m a year before, and a mining profit of R362m was 39% up.
At HEPS level the gain was only 5%, to 53,8c (51,4c), but CFO Maritz Smith explains that this was held back by higher depreciation and the issue of shares in the CRC takeover to acquire assets that aren’t yet contributing to earnings.
As production from Phase Two of Ruashi starts to build up from next month, with other expansion at the Vergenoeg fluorspar mine, Sable zinc and Phoenix platinum tailings retreatment following, Metorex has a strong project pipeline until FY2011. It needs new ventures to continue growth thereafter, and on what Needham said, the prime prospects are the “most exciting’ Musonoi copper/cobalt prospect in Congo, Chifupu copper open pit in Zambia, and the Manica gold project in Mozambique, where a prefeasibility study is being completed, moving to feasibility by mid-year.
Given the production increases coming in and metal prices mostly higher than those prevailing in the six months to December, earnings should grow more strongly in the next few periods. In the year to June 30 2007, diluted HEPS were 107c, up from 47c in 2006. While the latest period saw a check in the growth rate, it should resume in the second half-year.
Perhaps because of the Congo and Zambian issues, to which Metorex is relatively more exposed than most of its peers, the share price has been weak of late, slipping from a peak of almost 3 000c at the beginning of November below 2 000c. And unchanged at 1 890c today, it hasn’t responded to Needham’s optimism.
Given the temporary earnings standstill, a heady historic earnings multiple of 18,1 isn’t entirely representative. Analysts who cover the stock are virtually unanimously positive.
