Simmers needs Tau Lekoa badly

[] — THE sooner Simmer and Jack Mines (Simmers) gets its hands on Tau Lekoa the better – that’s the message from the disappointing set of results released on Tuesday for the year to end-March.

Steady and profitable production from Tau Lekoa looks like the only thing that will save the company while it tries to achieve financial stability, after a horrendous 12 months in which just about everything went wrong.

Gold production for the year is down 7% to 119,877 ounces (previous financial year – 129,376oz), while cash operating costs are up 16% at R267,703/kg. Simmers made a cash operating loss of R57m (previous financial year – R57m cash operating profit).

Having closed the number 8 shaft at the flagship Buffelsfontein mine and cut back at the number 12 shaft during financial 2010, management is now closing the number 12 completely as well as the number 10 shaft.

Simmers has also put its hugely loss-making Transvaal Gold Minng Estates operations on care and maintenance.

The net result is that gold production during financial 2011 will drop to 75,000oz at a cash cost of $1,050/oz, to be achieved during the last six months of the year.

Given that outlook, the prospect of ownership of the 125,000oz of gold expected to be contributed annually by Tau Lekoa at a total cash cost of about $815/oz must look to Simmers management like an oasis to a traveller dying of thirst.

The share price dropped 7% to 97c on the JSE in early trading after the release of the results on Tuesday, heading back towards its 12-month low of 90c compared with a 12-month high of 265c.

Simmers struck the deal to buy Tau Lekoa from AngloGold Ashanti in 2008.

It should have been finalised by the end of 2009, but was held up among other things by the feud between the former Simmers management led by Gordon Miller and the company’s black economic empowerment partner, Vulisango.

There was no way the Department of Mineral Resources was going to approve the deal with Vulisango opposing it – but that’s now over.

Miller has been replaced along with former chairman Nigel Brunette and former executive director John Berry.

New Simmers CEO Nico Schoeman told a presentation to investors in Johannesburg on Tuesday that Tau Lekoa’s mining rights were executed on June 3 and were now “awaiting registration’.

He added that Tau Lekoa extended over two provinces – North West and Free State – and a final document was needed from the Free State before registration took place.

He said he had hoped to be able to announce registration of the right to shareholders at Tuesday’s meeting, describing it as “tantalisingly close’.

According to Schoeman, registration is the final condition precedent with AngloGold for the deal to become final.

He said: “As soon as the registration of the Tau Lekoa mining right takes place, Buffelsfontein will begin treating ore from Tau Lekoa at its plant with immediate effect.

“The full benefit in terms of free cash flow will only be evident from the second month onwards, given the need to account for a gold lock-up in the first month due to the change in grade of the material being put through the plant.’

Tau Lekoa is expected to contribute R150m in free cash flow during financial 2011, assuming a gold price of R265,000/kg compared with the current gold price of around R300,000/kg.

Simmers’ other major challenge this year has been to save 37%-held subsidiary First Uranium from going under, after the financial crisis triggered by problems with the environmental permit for its Mine Waste Solutions (MWS) operation.

The permit issue has been resolved and MWS is in profitable operation, but Simmers now sits with the problem of repaying a R220m bridging loan to Rand Merchant Bank (RMB).

The board was supposed to decide at a meeting on June 24 on whether to go for a rights issue underwritten by RMB, or an alternative scheme involving a sale to shareholders of First Uranium convertible bonds.

Schoeman said the board had requested further information on the alternatives, which management was obtaining.

Asked about the possibility of a merger in future between Simmers and First Uranium, Schoeman replied: “The first priority for both companies is to achieve stability in their respective operations.

“Then we can look at how to put the two companies together.’

First Uranium CEO Deon van der Mescht told Miningmx that achieving stability for First Uranium depended on the outcome of the review being undertaken of the mine plan at the Ezulwini mine.

“Once we have satisified ourselves in terms of what we can expect Ezulwini to produce in terms of free cash flow over the next three years, we can plan for other developments, ” he said.

The writer owns shares in Simmer and Jack Mines.