Actually, having read the presentation now available on the Shanta website, this goes into more detail about the cash outflow. The shortfall in Q4 ($0.1m outflow) compared with Q3 ($11.1m generation) of $11.2m is largely due to the difference in sales (15,285oz v 23,426) (rather than production) but also contains a prepayment of $2m to suppliers and a $3m VAT repayment that can be reclaimed. It looks like the pre-payments to suppliers are due to the historic financial position of the company. As its credit rating improves with the reducing debt profile, they should be able to move to better terms.
I also note from the presentation that they have indeed (almost) got access to a line of credit should they need it. It would appear that the letter of credit that they have retired was to be rather expensive, hence the reason that it has been retired.
There is no doubt that the next six months as they move to underground operations is to be the most challenging over the next few years but they have put in place a number of things to mitigate the risk, not least the $15m cash balance, the 90k tonnes of good grade ore stockpiled (containing 13k oz - a substantial part of a quarter's production and worth $17m at the hedge price) and the access to an overdraft facility should it be required. Given that they have been confident enough to retire debt and pay for the new power plant through cash flow, they obviously feel that they have enough in place to mitigate the risks.
I agree that the increase in working capital should be more fully explained than "supplier prepayments and VAT on all capital and operating expenditure", the key being whether these are largely one off costs or indicative of an ongoing commitment (in which case they should be reflected in the production costs). Unfortunately I have not managed to go on the analyst briefing this morning but I will see whether I can get an indication as to what these costs are and whether they are going to be repeated. As they have paid down debt quite aggressively (implying confidence in future cash flow) in the last quarter, I suspect that they are one off but this should not be assumed.
Personally I suspect that the fall today is due to the production numbers. I believe that AIM investors tend to look at the headlines rather than the details.
Good morning. I wonder how many noticed that there was a cash outflow in Q4! Note the following:
"Cash used in operating activities of US$0.1 m in Q4, compared to US$11.1 m of cash generated from operating activities in Q3, reflecting lower gold price on lower sales at higher cost but also with increased working capital in supplier prepayments and VAT on all capital and operating expenditure;"
I don't see how they can use a lower gold price with higher costs as an excuse. This is, as we are regularly told, a highly cash generative high margin operation. Increased working capital etc etc requires further explanation.
I think the production numbers were already expected and factored in. So, overall no upside surprises but def a downside surprise regarding all important cashflow - hence the SP drop IMO.
I wonder how many will read the RNS and just see the headline production numbers? These could be construed as disappointing if you only pay cursory attention to the company even though they beat their full year target. They are also making sure that people are aware that this will continue into 1H 2017 so numbers will be low then as well. But AIM investors are fickle beasts with short term investment horizons.
I suspect that a lot will miss the parts of this that suggest confidence. Paying down such a significant amount of debt before moving to underground operations is one such expression even though they have $15m in the bank. Personally I would have preferred them to keep the cash but I suspect that they are confident of short term facilities should they require them.
I am impressed that they seem to have hedged at the last peak in gold prices! Should give them a nice basis to work from.
The next 6 months should be interesting and should lift production to a 100k+ rate in H2. Depending on the gold price, this may mean serious appreciation in the share price at that point if plans progress smoothly but there may be challenges as a result of the lowered production numbers, if there are disruptions to the move underground prof the price of gold comes under serious pressure (I would expect any such pressure to prove temporary).
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