Petmin to seek upside in spot market

[miningmx.com] — PETMIN is about to ditch its policy of locking all sales into supply agreements, saying it wants to cash in on higher spot prices for the anthracite it produces at its Somkhele mine.

Reporting interim figures to end-December on Wednesday, the stronger rand contributed to Petmin receiving on average less for its anthracite sold during the period under review; down from R822.46 per tonne during the six months to end December 2009 to R767.02/t.

“Our prudent marketing and sales strategy of locking in medium-term supply agreements and protecting the balance sheet has enabled Petmin to provide stable earnings during the past 24 months and to survive.with virtually no gearing,’ said Petmin chair Ian Cockerill in a company statement.

While the policy enabled Petmin to go through the financial crisis unscathed, it also meant that the company couldn’t derive maximum benefit from the substantial increase in demand and price for anthracite.

“With the expansion at Somkhele set to more than double the operation’s capacity and reduce the unit cost of production, negotiations are under way to ensure that the company locks up some 65% to 70% of its sales in price per volume-related, medium-term contracts,’ read the statement.

The balance would be sold on the spot market, said chief operating officer Bradley Doig.

Cost of sales also increased significantly, with profitability per tonne anthracite sold down 27% to R198.84. Doig said this was due to costs associated with mining at deeper levels. Also, the Somkhele mine’s Area 2 which boasted a stripping ratio of 2-to-1 was mined out, with the remaining Area 1 having a stripping ratio of 4-to-1.

Doig said the overall stripping ratios of the mine should improve again once new areas came into operation. An R80m expansion project to double Somkhele’s production to 1.1 million t per year by the first half of 2012 remained on track, said Doig.

During the period under review, Petmin also applied for a mining license for Veremo; its magnetite joint venture project in Mpumalanga. Doig said the application had been accepted, with the partners now awaiting final adjudication by the department of mineral resources.

The JV, in which Petmin holds a 25% interest, approved an exploration programme with the aim of defining a 40-year inferred magnetite resource, based on the production of 500,000 tonnes of pig iron a year. The initial exploration results are expected to be published towards the end of 2011.

Petmin also clinched an agreement with Hummingbird Resources for an exploration project at Mount Ginka in Liberia. It invested an initial $500,000, with another $1,5m possible should key objectives be met.

Doig said Petmin would continue to diversify its portfolio through JV’s in early stage exploration projects.

“We’ll get in with a partner, especially when it’s in a country we don’t know, trying to finance the development out of available cash flow,’ he said.

The group has cash on hand of R270m and undrawn facilities of R65m. Doig added the company wouldn’t be geared higher than 25%. He also confirmed that the group would stick to its dividend policy of paying 20% of headline earnings.