[miningmx.com] — EVERYONE’s hoping Ferdi Dippenaar and his management team at Great Basin Gold can get the alchemy right at Burnstone gold mine in Mpumalanga province, or whatever is required to make mechanised mining work in South Africa’s underground mining industry.
Remember Brad Mills, a former CEO of Lonmin, who struggled to impose his vision for mechanised mining at the company’s Limpopo province operations? It was a factor that contributed to his demise at the platinum miner.
In the case of Dippenaar and Great Basin, analysts Miningmx interviewed are keeping the faith mechanised mining can work notwithstanding market scepticism. Shares in Great Basin have fallen 30% from 1700c on September 21 to 1180c today at a time when gold producers are enjoying the benefits of a weak rand and strong gold price which have pushed locally received revenues to R427,000 per kilogram.
DRDGold, which has one underground mine, has recorded a 20% gain in market value since September 21. The gold index in general is up roughly a fifth since July when it was trading at 2,500 points to some 3,000 points today.
There’s pressure, no doubt at Great Basin. Earlier this year Dippenaar was compelled to drop estimated production for 2011 to between 50,000 oz and 60,000 oz of gold from the original forecast of between 85,000 oz to 100,000 oz.
Says Dippenaar: “We made a call earlier this year to change the way we developed given that build up was slower than expected. We’ve gone for bigger blocks which, while requiring a change in stoping method, will lower costs, mean less dilution and produce more tons.”
“I am extremely confident this will lead to delivery in 2012; in fact, I’d like to say risk of disappointment in 2012 is low,” he says.
One worry will be the cash burn factor. Great Basin has $14m in cash under its belt and the equivalent at today’s gold prices of some $11m from 7,000 ounces of gold locked up at the gold plant, to be sold shortly. “They probably will burn this cash,” said an analyst at RBC Capital Markets in London, a relatively sympathetic stockbrokerage to Great Basin in the past.
“That means the company will probably enter its credit facilities at some point,” he added, referring to some $40m arranged with Credit Suisse earlier this year. RBC Capital Markets still considers a first or second quarter free cash flow next year.
One thing that won’t happen is an issue of shares to raise cash, even though Burnstone is negative $5m per quarter after capital. “A hedge fund manager sent me a one liner (e-mail) in which he said: ‘how much (shares) and at what value?’ I replied with my own one liner which read: ‘Not in your dreams’,” said Dippenaar.
Still analysts are cautious: “We note operation risk has increased due to delays and missed targets,” said Imara SP Reid’s Percy Takunda who downgraded Great Basin to a speculative buy on the basis the company can get the mechanised mining correct. “Although some progress has been noted the group is still behind schedule and will require significant improvements in the coming quarters,” he said.
Said RBC Capital Markets: “The big risk in mechanised mining is the dilution. The stope widths have to be between 60 and 80cm”.
Once you get to a metre, the orebody is producing too much dilution and you’d have to question whether it is feasible,” he said.
