[miningmx.com] — AT a recent briefing, an old acquaintance taxed me: “Don’t you think you guys in the media have been too hard on Brett Kebble? After all, he did create two major assets in the Letseng diamond mine and South Deep.” Well, he may have had a point with Letseng. But the latest Western Areas quarterly report is hardly something to be proud of.
True, we can’t blame Kebble for major shaft closures or underground fires, though if he hadn’t been desperate, maybe he could have found partners who weren’t so – literally – out of their depth in developing an underground hard rock mine in South Africa.
But the forward sales contracts he was forced by financial stringency to conclude to meet his share of development costs are an absolute millstone.
With an average gold spot price of $632 for the quarter, Western Areas achieved only $408. Cash costs were $624, and total production costs a staggering $735.
And this, if anything, puts a rosy glow on the figures.
As Western Areas couldn’t meet its delivery commitments, the derivative structure was deemed to be inoperative for accounting purposes, and the relevant losses were thus transferred from gold revenue to a fair value adjustment in the income statement.
This bumped up the report received gold price from R59,000/kg to R94,000, but this is still way off the average spot price of R146.000.
Undecided about offer
Bad as this sounds, the fair value adjustments were actually less than in the June quarter, and helped by a R252m insurance credit relating to the underground fire – which hasn’t actually been received yet, but is expected by year-end – the pre-tax loss for the quarter fell from R675m to R299m.
As there’s again expected to be a production shortfall, similar items will appear in the December quarterly.
For what it’s worth, there’s a net liability under derivative contracts, extending to 2014, of R4.4bn.
That’s a moving figure, depending on gold price fluctuations, but a major challenge for whoever ends up controlling the company will be to try and reduce the liability.
Still, as Bernard Swanepoel pointed out at this week’s Harmony results presentation, South Deep remains a 50-year ore body whose intrinsic value is unimpaired, though the value of Gold Fields’ all-share bid for Western Areas has fallen, in line with declines in the Gold Fields share price. Swanepoel hasn’t decided what to do about the offer.
He hadn’t seen the formal document by then, but he still feels the offer doesn’t represent true value.
He may be right, but one can only hope that whoever ends up in control of Western Areas doesn’t find it a poisoned chalice.