[miningmx.com] — A COUPLE of recent results show how dramatic the impact can be when a small mining company ramps up a major project – but equally the potential damage that can be done by South Africa’s electricity crisis.
When I last wrote about Petmin, I suggested that the market might want to see evidence that its Somkhele anthracite project is delivering before taking the price any higher from the then 342c/share.
Well, the interim to December shows six-month HEPS up 120%, from 2,96c to 6,52c, mainly thanks to the ramp-up of Somkhele, whose sales totaled 261,000 tonnes, and a better performance from its other anthracite mine, Springlake.
Petmin expects its current production and sales profile to be maintained until June, but warns that two export shipments totalling 70,000 tonnes may be delayed until after its June year-end due to power cuts in January and February.
Petmin is to spend R12m on diesel-fired generators at Somkhele to offset a possible 10% loss of Eskom supplies. Those should be commissioned by June and, we’re assured, should have little impact on operating costs.
Current plant capacity is 120,000 tonnes/month, equivalent to an output of about 1.45m tonnes/year, but the board is considering expanding that.
Some 223,000 tonnes of Somkhele’s sales were at contract prices of US$63/tonne. A further 327,000t must be sold under those contracts before Petmin can benefit from current market prices, which are 30% higher in US dollars, enhanced by the weaker rand.
Figure out the benefits of higher production, which should bring unit costs down, plus higher US dollar prices and a weaker rand and Somkhele alone could generate exponential growth in Petmin’s profits. On top of that is its interest in the Veremo multi-product deposit in the Eastern Bushveld.
It seems as if the market was expecting even more from Petmin, as since I last wrote about the share it firmed to an all-time high of 465c before slipping back to its current 430c. As evidence accumulates that Somkhele is paying off, market sentiment should remain bullish.
At least Petmin’s mines are mostly shallow and involve minimal beneficiation, so use relatively little electricity.
When that’s not the case the consequences of power interruptions can be far more serious. When Merafe, Xstrata’s empowerment partner in its South African ferrochrome interests, published its 2007 results it was tempting to make golden forecasts of what might be achieved this year. Only trouble is, Xstrata has had to declare force majeure due to electricity cuts – meaning that it’s warned customers that it may not be able to supply their contracted quantities – and has also postponed an expansion of its Lion Ferrochrome project.
Merafe’s share last year of the joint venture’s ferrochrome production rose from 239,000 tonnes to 284 000 tonnes, at an average price of 89c/lb (US) (2006: 70c).
This year its price has already risen to 121c/lb and Merafe expects it to increase further. That’s already a 73% increase in potential revenue.
That alone would have boosted Merafe’s attributable annual revenue by R1bn to R2.5bn. And with demand remaining strong (Merafe expects global market growth of 9%), plus the full commissioning of the Lion smelter, there would have also been a volume increase.
Instead, Merafe CEO Steve Phiri has warned that while the power squeeze lasts, production could run at only 75% to 80% of nominal capacity of 1,96m t instead of the usual 80% to 90% – and I suspect that’s a best-case scenario.
Of course, not all the increased revenue would have been straight profit. Merafe’s operating costs were around R1.2bn last year and could well approach R1.5bn this year, while depreciation, which almost doubled last year from R25m to R46m, will again rise sharply.
But the production shortfall will impact disproportionately on profits. Where Merafe might have been aiming for an operating profit around R1.4bn – which, subject to a wide margin of error, could have reduced to a net profit around R850m – production constraints could chop anything up to R250m off potential revenue and R160m off net profit.
Last year, HEPS rose from 6c to 10c. That should have been the year of the great earnings ramp-up, to at least 35c; instead, HEPS may be held back below 30c. Still, that’s at current product prices. I’m told second-quarter sales are being concluded at upwards of 150c/lb; if that holds for the rest of the year you can add anything up to another 10c to potential earnings.
Maybe that’s why the market doesn’t seem too concerned. After sharing in the late-January JSE weakness, which took the share down from its then all-time high just under 250c to around 155c, it rallied strongly to a new high of 269c before easing back 5c.
Though much can happen for both better and worse over the next nine months, that gives a single-digit forward earnings multiple.
That’s generous for the resource sector; though bear in mind the above-average uncertainties plus the fact that heavy loan repayments and capital commitments – including its coal joint venture with Sentula (the former Scharrig Mining) – will delay the onset of dividends.
