Platinum Australia has to deliver

[] — PLATINUM Australia (PLA) has produced a positive prefeasibility study (PFS) for its Rooderand project, but the company’s immediate future will be determined by what happens at the operating Smokey Hills mine.

PLA is listed on the Australian Stock Exchange (ASX), where the share price has dropped more than 50% this year from around A$0.85 in January to a low of A$0.40 earlier this month before recovering marginally to current levels around A$0.42.

The collapse can be ascribed to the non-performance of Smokey Hills – which delivered another disappointing performance in the March quarter – combined with tough times for platinum producers generally, which has caused a drop in platinum share prices across the board.

Dollar revenues earned by the platinum producers are being constrained by the strong rand, while mines are being squeezed by soaring cost increases.

These include basic requirements such as power, water and diesel which are beyond management’s control, while labour costs are being pushed up by militant unions at rates well above South Africa’s ruling annual inflation of about 4%.

Eastern Platinum has just settled wage negotiatons with a deal amounting to a 10% annual rise in cost to company.

The National Union of Mineworkers (Num) has just tabled demands for the next round of industry wage negotiations. These include pay rises ranging from 14% to 25%, coupled with a 45% increase in workers’ living out allowance.

According to RBC Capital Markets analyst Leon Esternhuizen, PLA now faces a financial crunch by end-August and the Smokey Hills mine has to deliver to avoid it.

He pointed out PLA had an available cash balance of some A$28.5m against which were liabilities of A$30m through to end-August, while the Smokey Hills mine “is projected to consume some A$18m in the current quarter’.

“By implication, Smokey Hills has to deliver to the order of A$20m or more per quarter to cover the cash consumption and create enough to cover the shortfall against liabilities.’

Esterhuizen believed this could be done because Smokey Hills is predicting significantly better performances and because the debt could be re-financed.

But he warned: “The entire focus has to be on the company’s next two quarterly results. Of these, the first – to June 2011 – undoubtedly carries the burden of proof.

“A failure to deliver positive cash flow from Smokey Hills could lead to a further dramatic sell-off in the shares.

“Against this, though, we believe a positive result will have an equally strong positive impact on the share price as the market gets confirmation that the company will not need to raise more working capital and that Smokey Hills can and will work.’

Rooderand is situated just west of Platmin’s operations, immediately north of the Pilanesberg in North West Province.

According to the results of the PFS, Rooderand would produce an average of 115,000 ounces of platinum group metals (pgm) annually over a 16-year life and would generate a net cash flow of $563m at current pgm prices. The cost of developing the mine was estimated at R968m.

PLA now has two new projects on the cards – Rooderand and Kalplats which is a JV with African Rainbow Minerals.

Kalplats is the most advanced – because a feasibility study has already been completed for it – but Esterhuizen reckoned Rooderand is more likely to be developed next and highlighted that PLA owned 70% of Rooderand but only 49% of Kalplats.

In a recently published research report, Esternhuizen pointed out PLA would only be able to start real construction work at Rooderand by about mid-2012, given the time taken to get the mining right granted.

He said that implied a fund-raising by the company early next year rather than this year.

Esterhuizen said: “This works out rather well, since it will coincide with what we expect to be the time that Smokey Hills will be doing its best-ever production and cost numbers.

“We believe the capital raising could be split 40% equity, 60% debt which would imply a future equity raising in 2012 of roughly $55m.

“Given the current depressed share price, this would imply an issue of some 125m shares or an implied dilution in the order of 35%. “

Esterhuizen pointed out a recovery in the PLA share price assuming Smokey Hills generated sufficient positive cash flow would result in less dilution because “significantly less shares’ would need to be issued.

He concluded that “of course, such an equity raise will simply not take place unless Smokey is proven to be working and generating positive cash flow on a sustainable basis.

“We believe that there is no reason to have any concerns over the possibility of a capital raising for Rooderand, but that the entire focus has to be on the company’s next two quarterly results.’