Hedge-afflicted Pamodzi in uphill task

[miningmx.com] — IF Pamodzi Gold’s disappointing March quarterly indeed triggered a palace coup, it’s ironic that the main victim seems to be the man responsible for injecting into the company its more profitable arm.

Certainly chairman Ndaba Ntsele’s reported remarks when he announced that Ken Steenkamp was to be promoted from CEO to non-executive deputy chairman (they called that “Stellenbosching” in the Boer War) didn’t come across as particularly gracious. To be charitable, however, some nuances intended to be humorous may have got lost along the way.

Although the published March quarterly report doesn’t spell that out, the accompanying presentation showed that the East Rand operations produced 661kg of gold for an operating loss of R5.5m after hedge costs of R20.9m. The target output was 900kg. However, at Middelvlei on the West Rand output of 76,8kg generated an operating profit of R2.1m.

Steenkamp, remember, was one of the promoters of Middelvlei and largely devised the structure for combining the two arms.

The residual cost of the hedge book – of 161,000oz at $350/oz – is R404m, equivalent to more than half Pamodzi’s market capitalisation of around R740m. No wonder Pamodzi is now “reviewing” that position. Simply, hedging is disastrous when gold is in a bull run as, despite inevitable fluctuations, it clearly is now.

Pamodzi’s internal targets for the second quarter are production of 710kg (22,800 oz) on the East Rand and 106kg (3,400 oz) at Middelvlei. Costs at Middelvlei will creep up from R123,000/kg to R124,000/kg, but on the East Rand are a little worse, from R128,000/kg to R136,000/ kg, probably due to increased development spending. That will take group costs from R127,000/kg to R134,000/kg.

Profits, of course will depend on the gold price. And that’s something no wise man will ever make a specific forecast of. But it doesn’t deter many from trying.

A little more flesh was put on the proposed R550m cash-plus-shares Orkney acquisition from Harmony. It’s repeated that production should be 150,000 oz/year with a life of eight years. Pamodzi says that will give it critical mass to become a 350,000oz/year producer and dilute the burden of the hedge book.

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But arithmetic suggests that Pamodzi still has a way to go to get there, as at least in the short run the combined output of Middelvlei and the East Rand is only just more than 100,000 oz/year. They’re still building up production, but I’m sure Pamodzi hasn’t exhausted its takeover ambitions.

While you may sympathise with Ken Steenkamp, the management changes will strengthen the company. New CEO Peter Steenkamp (no relation) has 22 years’ industry experience and at his most recent position with Harmony gained an intimate knowledge of Orkney, which may become Pamodzi’s biggest challenge over the next couple of years.