Debt is Anooraq’s Achilles heel

[] — AN URGENT priority for platinum junior Anooraq Resources must be to reduce the high level of debt which is the company’s Achilles’ heel.

That’s the assessment of JP Morgan Cazenove analysts Steve Shepherd and Allan Cooke. They have initiated coverage on the company, rating it a buy with a 12-month price target of R16.60 a share compared with the current price of 900c.

They described Anooraq as a “speculative and risky investment’ and a stock which was “definitely not one to be held by risk intolerant, “double-dip recessionists’. It’s a bull market winner; a bear market loser relative to all the other platinum stocks we cover, in our view.’

The analysts pointed out that Anooraq’s attributable debt/equity ratio was 245% at end-March. They commented that this “underlines the extreme urgency of restoring operating profitability through managing costs and maximising production’.

They believed there was considerable scope for achieving both targets at Anooraq’s operating Bokoni Mine (the former Lebowa Platinum), which it acquired from Anglo Platinum (AngloPlat).

The analysts said: “Bokoni is currently, by our estimates, the least efficient platinum mining operation in South Africa in terms of labour measures at less than five square metres of reef area broken in stope per month per employee costed.

“A mediocre level by this measure is arguably around seven. Considering the shallow and uncomplicated nature of Bokoni’s ore bodies, we believe there is exciting potential for improving this crucial metric which could profoundly impact mining economics to the benefit of shareholders.

“We caution though that “fixing it’ will take time since the problem is likely one of “culture’ – a tricky issue to turn around. Management’s actions so far clearly show that “sleeves have been rolled up’, in our view.’

The JP Morgan analysts suggested that Anooraq could monetise its 51% stake in the Boikgantsho prospect as one way of reducing debt. Boikgantsho sits immediately north of AngloPlat’s flagship Mogalakwena mine. AngloPlat owns the other 49% of Boikgantsho.

They said: “Boikgantsho might form a natural extension to this operation, offering AngloPlat even more growth at its flagship mine.

“It would be the only natural and logical buyer, in our view. We must stress here that neither party has, at this stage, made any comment at all regarding any kind of transaction of the nature we allude to here.’

The analysts said that their price target of R16.60 a share represented a 30% discount to their discounted cash flow valuation of Anooraq and was “the most penal we assume in our coverage’.

They said: “By dint of its balance sheet, Anooraq’s profits are the most geared of the platinum stocks we cover to the rand platinum group metals basket price.

“Its shares will therefore likely respond more strongly to movements in the rand and the underlying metal prices. Moreover, due to the current high costs, profits are also highly geared to production volumes though, post the June 2010 quarter, production does look set to grow strongly.’

The analysts also stressed the support Anooraq receives from AngloPlat, for which it is a key empowerment partner.

They said: “The world’s number one platinum producer cannot, in our view, allow Anooraq to fail or even just muddle along since this would possibly create uncertainty regarding its new order mining licences.

“Indeed, it seems likely to us that AngloPlat will do everything it reasonably can to help Anooraq succeed and grow – it must be in the group’s best interests to do so.

“We note in this context that lately government has been emphasising that BEE [black economic empowerment] equity ownership net of debt is one of its focus areas.’