Sallies improves chance of success

[] — THERE are two basic differences between Sallies’ current rights issue and its two predecessors, investors were told at this morning’s briefing. The first is that the earlier capital raisings simply addressed short-term funding issues to keep the mine going, whereas this one will put it on a sound financial footing; and the second, by implication, is that Sallies therefore won’t need to come to the market for funds again.

Not, that is, unless it’s to finance an expansion or acquisition. Chairman Tom Dale referred us to the company’s new motto: “building a mining business.” It’s clear that when the existing fluorspar business is on a firm footing, Sallies will seek a broader focus.

And Dale and MD, Izak Marais, have nailed their colours to the mast. Dale said that, as recently as Februay, Sallies was in a much worse state than anybody probably realised. Marais was having to spend most of his time simply keeping creditors happy, ensuring that essential supplies were obtained, and couldn’t devote himself to improving operational efficiency.

But the meeting was not only assured that the mine will be operating efficiently from the start of the new financial year on July 1, it was given a forecast for the new year of a profit of R30m to R40m (both before and after tax, as there’s a big tax loss), equivalent to HEPS of 5c to 6.5c/share.

This forecast appears to be based on current mining and market conditions and a rand/US$ rate of seven. However, a key objective is to improve the quality, and hence value, of the product. Current prices range from $180/t-$220/tonne, depending on grade; and every $10 increase in the average realisation, we were told, is worth 2c in earnings.

That’s a high leverage, and explains the emphasis on this aspect.

Proven and probable reserves of 34.7 million tonnes should give a life of almost 20 years, in addition to which there are substantial tailings that may be retreated and areas of the leases where exploration is hoping to find further reserves.

At 110c, though well off the year’s high of 140c, the share price has regained the loss suffered when the rights issue was announced. A one-for-four rights issue at 60c gives a theoretical ex-rights price of 100c. On the company’s forecast, that’s a forward PE of up to 20, demanding, for a company with Sallies’ record.

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But the fluorspar market remains strong, and Dale seems confident that when 2008 contract prices are negotiated later this year, they will be higher. While about half world fluorspar production comes from China, Sallies is a major Western producer, with just under 10% of Western output, and is determined not to be just a passive price-taker.

Plus, the market may already be factoring in some future corporate activity.

I wrote before that this rights issue is Sallies’ last chance. That’s still true, but the latest information suggests that the odds of success have considerably improved.