Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
@Punter64: Cannaccord’s point was that the Development cost of Kouroussa can be fully funded from cashflow. The acquisition however, as announced in June, is to be funded from the issuance to Cassidy’s shareholders of 35m shares. As Elgor says there are restrictions on selling, but 9% dilution is really very small for the value of the asset (my view is 10p a share right now, rising to 20-30p), so the acquisition represents good value. I expect we got it for the price we did (which was a decent premium to the share price at the time the deal was struck) is because Cassidy’s shareholders could see we were undervalued. Even at today’s share price for the stake (and indeed much higher), the deal looks good. How HUM then funds development ($90m based on the existing FS) will be a combination of debt and free cashflow. Cannaccord say it could be done 100% from free cashflow. I would like to see a combination (say $50m of debt and rest from cashflow). I suspect construction won’t have started until well into Q1 2021, by which time HUM will have generated $60m+ of cash post 30 June 2020, so less debt may be taken.
https://twitter.com/trisseswe/status/1298636207702892550?s=21
[continued from below]
- Dugbe: This is a very good deal (per my previous notes). I do not believe that a sale would have netted a value that shareholders would have seen as acceptable - even in this gold environment. Value maximisation requires HUM to prove out further resource and demonstrate economic viability through a DFS. To deliver that requires a level of capital that HUM cannot and should not be deploying in the asset at this time. The board made the right decision to seek outside capital for this and achieved that while retaining control of the asset. I am not bothered about Dan and Tom putting their own cash into the deal - their cash did not deprive HUM of investment and it demonstrated commitment to the deal (which may have helped ARX and then VEIN secure capital). They have put their money where their mouth is, given the constant view given that Dugbe is a hidden gem and the terms were fair from what I can gather.
HUM board Mis-steps:
1) AGG acquisition - the failed takeover of AGG happened at a bad time for HUM as Yanfolila came online and investor interest waned. I felt this was a bit early to go headlong into another mine, but it was clear that the leak of the deal forced the board’s hand a bit too early. Looking at AGG now, I am not sorry we lost the deal and I think HUM backed out for the right reasons, not least the benefit of adding mines in different jurisdictions to avoid Mali concentration.
2) PR - some on here would like to see more RNS announcements promoting the business. I would like better written RNS announcements. The explanation of the Dugbe deal was very poor - the quality and value of the deal was not communicated properly and has led to persistent misunderstanding. Hopefully this improves as VEIN demonstrates progress. I do think some better sign-posting on working capital would be helpful as well - they made the analysis a bit more of a slog than it needed to be.
3) 1p options (but see above, this is not fatal)
I do not see the pit wall issue, bridge destruction, the coup, COVID-19 impact, the artisanal miner deaths as board mis-steps. They were very unfortunate operational issues mainly out of the control of management - that what happens in West Africa and have been navigated through. The only argument I can see is that supply risk due to single point of ingress to the mine by an old bridge could have been mitigated earlier, but that’s the benefit of hindsight.
Would appreciate other views. I have tried to be balanced in my ongoing assessment. Am I being too positive?
[...continued from below]
- Capital allocation: this has been a long-running gripe of mine. Not how the board has been allocating capital (I am happy with this right now - see strategy above), but rather how it signals its intentions and sign-posts its capital allocation policy. Every now and again there’s a hint of it, and a useful table of strategy linked to capital allocation did appeared in the AR, but I think they need to go further. At the very least, the next annual report (no reason this can’t be done sooner), needs to set out the flow of priorities and the framework for judging them: debt repayment, gearing tolerance (particularly as new build projects are developed), cash reserve / headroom policy, return requirements for new projects and capital return policy (eg long-term payout ratio if two mines running simultaneously). Setting some or all of this out would allow shareholders to judge much better when they will see capital return and how growth will be financed. This is the board’s responsibility and they should be more clear on these points. To be clear I am not expecting a dividend in the next 24 months and may be happy to wait defer further if other great projects at good prices keep landing - but I want to know how to judge future expectations.
- Board composition: the board is open to criticism from a corporate governance perspective given the father of the CEO is a NED. This is an understandable artefact of where the business came from, given Stephen Betts was a co-founder in 2005 alongside Dan and his partner. My understanding is that Stephen is well-respected and clearly knows the gold business. As HUM moves to its next phase of growth, I would question whether Stephen remains the best NED we can find for a multi-asset business. Clearly a healthy turnover of NEDs is expected these days, and given the unnecessary questions I think his continued appointment raises, it may be appropriate for him to step down at the next reappointment opportunity. Stephen Betts is in none of the committees and only 4 NEDs are needed. A suitably qualified female replacement would be appropriate. More broadly, the board does have the range of skills (audit / accounting, finance, strategy, mining / engineering / technical) that I want to see, so no issue on that front. [to be continued...]
@Adamsmithfreethi: your questions about the BoD are well put. My observations are as follows:
- I have been given no reason to question the ‘trustworthiness’ of the board. Disclosure is generally sound (some areas could be enhanced - though arguably that’s personal taste), but I have seen nothing to suggest to me that their ethics are anything but sound. Nonetheless, it’s worth considering the different aspects of a board’s role to judge HUM’s BoD performance.
- Strategy: well-timed pivot from Dugbe to buying a major’s non-core asset at Yanfolila; timely acquisition of Kouroussa and have kept the development team together for just this scenario; partnering on Dugbe - as I said on Friday, I think the Dugbe deal looks good (I have set out some more thoughts on this below). Delivering that into a rising gold price environment has to be praise worthy.
- Remuneration: I don’t like the 1p options. They don’t use options in the way that options are intended - to align interests through share price targeted incentivisation. Nevertheless, if one simply sees these as just a method of funding remuneration, then it’s really a question of whether the team is appropriately paid and whether payment in free shares vs cash is better at this stage of the company’s journey. Dan’s overall package in 2019 delivered $742k (c.£570k). That’s possibly on the high side for the market cap, but for operational size (and my view on real value - $90m EBITDA this year anyone? - it’s probably in the acceptable range, if at the upper end). Overall total options at the end of December were c.4% of shares outstanding, so it’s not ridiculous dilution. A further 7.7m options (2.2% of share base) were issued under HIPPO2020, but there are strict performance criteria on these (ie 2/9ths will not vest unless more than 125,000 oz are poured this year - that’s above the top end of guidance; a full 1/3rd won’t vest unless more than 120,000oz are poured which will be a stretch. Frankly I’d rather those oz were poured and the options vest - every 5k oz is another c.$4.5m of profit vs 850k shares at say 60p each is worth £510k...; 1/6th vesting for ASIC below $850 is again challenging, so I can see how c.50% will lapse unless shareholders do a lot better). [to be continued...]
9) Gold is at $1,965 as I write. If you believe that Mali will continue to want foreign capital to develop its mineral resource, pay tax and deliver foreign exchange, and that 280km distance from the capital nevermind Northern Mali provides reasonable insulation from trouble, then the current 36p valuation look like an absolute steal. Add mine life extension, Dugbe, Kouroussa, CORA, BH, tax asset and dare I say, some platform value, then there’s extraordinary value to be found. Certainly as the relatively heightened level of uncertainty around Mali continues to lift, HUM is well positioned for a significant re-rating. Good luck everyone and have a great bank holiday weekend. Otho.
7) Kouroussa: this appears to be progressing well. I would like to see the license granted and a more fleshed our timeline for construction / delivery as well as a resource statement, but this still feels like a tremendous opportunity to become a multi-asset business, taking an asset that was in the wrong hands and delivering it with HUM’s skilled and very experienced mining team.
8) Other - CORA and BunkerHill investments all seem to be paying off.
6) Tax - At 31 December 2019 HUM had significant tax losses (in the order of $150m I think). Although it wasn’t on the balance sheet, that’s probably worth $25m or so in tax shield. Malian tax code requires minimum of 1% of sales in tax irrespective of accrued tax losses, but that should all mean that HUM pays very little tax this year as it burns through the asset, and still leaving a bit of shield for next year. That’s worth quite a bit of value.
5) Dugbe: Gold Panda on SeekingAlpha is wrong. The earn in deal with ARX is not for only $10m, it’s for: $2m deposit, plus $10m exploration programme, plus running costs (these are Annually material, including the c.$1-2m of payments to the Government of Liberia for the exploitation licence) and the delivery of a DFS. That’s likely c.$30m+ over 2 years by my rough calculations, notwithstanding that HUM took $15m of cash from the Anglo Pacific royalty on Dugbe way back when. Now look where Pasofino (VEIN) - which ARX is backing into - is trading - c.$57mCAD (including the ongoing $10m raise, actually I think it might be higher for the shares being issued ARX) - so the read across for HUM is very significant (vs the $49m of NAV for 100% of Dugbe at 31 December). Once everything has settled down and ARX/VEIN start showing their progress (they seem like they will deliver CORA style rolling updates) then HUM will be able to tell a much clearer story on this in coming months. It’s such a big deal and not something HUM could have delivered standalone. There’s nothing in the share price for Dugbe today.
4) LOM extension: “successful” conclusion of KE drill programme and 75% completion of the overall programme. We know the drill results are strong - so while I expect assay results to be delayed due to COVID which may impact the timing of official reserve conversion, we can be very sure that HUM will maintain its 5+ year LOM mine plan. Remember - as Cannaccord say - 10p of value for every year and my sense is there will be another 5-7 years after the current 4-5 year plan in extensions (although they will delivered piecemeal for cash management reasons).
3) Production guidance: this is a really important one. Despite the 2020 Malian Coup, COVID-19 and the heavy rainy season, the company have kept their guidance (110-125k) in place. That’s the really big positive from the interims. Nearly two thirds through Q3, at the back end of the rainy season, HUM are still confident enough to reiterate output for the full year with only 4 months remaining. They hit it last year - despite market concern that they wouldn’t, so there should be reasonable confidence that they get into the range again. That’s a huge HUGE amount of cash flow in H2 - in the order of $60m EBITDA as HUM have said themselves, in addition to The benefit of some working capital unwind. Moreover, I expect to be net cash by end of September assuming no hiccups or major issues from COVID / Coup from here (which feel unlikely)
2) Inventories
- The increase in Inventories of $12.2m was higher than I was expecting, but if I had thought about it a bit more, then it’s really not a surprise if you consider what Inventories comprises, namely:
a) Finished Gold (“FG”): this was the unsold gold held at the end of the quarter. We knew there was c.4k oz at 30 June 2020, which would be valued at c.$1,750 at that date = $7m (increase of $2.5m from year end - mainly due to gold price rise);
b) Consumables: again, HUM has told us they have built up additional stockpiles of fuel, materials, reagents and spares. The year end balance was $2.2m; reasonable to assume they have invested a further c.$2m to 30 June (with the FG movement, that’s $4.5m of the $12.2m explained - so what about the other $7.7m?);
c) Gold in Process: this is where a little more judgement needs to be made, given no guidance. There was $1.2m in the system as at year end. That’s likely to gone up a bit given gold price and year end looking a little on the low side. Let’s say it’s $2.0m. That leaves us with c.$7m, which must be...
d) Stockpiled Ore (“SO”): this is the one to which I probably had not given enough thought. We know that June-August is the wet season in Mali. It actually started early this year and has been very very wet. I expect 2 things in anticipation of this i) HUM have been putting aside a greater amount of ore to ensure continuous throughput to the plant and ii) HUM have likely been doing more cut backs on the open pits to ensure safety while it’s been very wet. That will increase ore stockpiles. In addition it’s also been hinted that the mine plan has been adjusted, which may well have required an increase in cut back and an amount of lower grade ore to be stockpiled so they can get to some of the higher grade stuff later in the year. We don’t know exactly what the composition of these three elements is that has given rise to the c.$7m of SO (HUM don’t give an ore grade breakdown), but I think we can draw a couple of conclusions: firstly, the cash to the end of H1/Q2 is always going to be affected by a seasonal build up of working capital in advance of the rainy season. Second, that implies that there should be some level of unwind of that during H2, probably more weighted towards Q4 - we saw that last year as Inventories unwound, so safe to assume we’ll see it again this year - to the benefit of free cash generation. We should expect this annually. Third, the change in the mine plan, while a continually moving feast, although requiring more movement of lower grade ore in the first half, should mean that H2 benefits from higher grades - again possibly more Q4 weighted. I am encouraged by that prospect.
1) key question from the Q2 results was what had happened to working capital, given the cash balance had not increased in line with operating profit. I think that has been answered as follows (material items):
a) starting with the obvious, debt repayment ($14m of debt repayment in six months, of which $8m in Q2);
b) reduction in payables ($2.5m);
c) loan interest ($1.7m) - interest cost nicely reducing inline with the bank debt paydown; and
d) biggest movement in inventories ($12.2m) - I will analyse in a bit more detail.
Having now had the chance to review the interim results in detail, I have set out some thoughts. As should be the case, no game changers included, as the headline were already know, but useful detail that builds a much better picture of what’s going on. Happy to debate points set out in The following posts.
@Northman1: take a look at p80 of the annual report (note 16) for a breakdown at 31 December of Inventory. It is Finished Gold, Gold in process (GiP), Stockpiled ore and Consummables. We know that at 30 June they had 4,000oz of gold inventory worth $7m (at $1,750 gold price at the time), so compared to year end that’s a $2.5m increase. So the majority of the $12.2m increase in inventory (c.$9.7m) must be in the other categories. We know that consumables have been invested in to deal with COVID-19 (let’s say an additional $2.8m to take us to $5m vs $2.2m at year end), so that means c.$7.0m extra is in GiP and Stockpiled Ore. My expectation on that a) December 2019 GiP was a lot lower than December 2018 ($1.2m vs $5.6m), so assume that most of this unwinds to, say $4m, then b) the remaining c.$4.2m increase is in ore. That’s where I want more information. Arguably, this is preparation of ore for the rainy season, but it’s a big pile of ore at $14.5m sitting on the ROM pad, on which I’d like a breakdown - how much is low grade ore that’s being put to one side and how much is near-term throughput? How should we thinking about working capital from here? Perhaps optimistically, we may see a run down of GiP to year end, along with some net usage of ore through rainy season, so Inventory will release cash to Dec-20. Notwithstanding the high gold price to date and my expectation that HUM is effectively net cash now, there should be a lot of cashflow to the end of the year.
https://www.londonstockexchange.com/news-article/tidm/headline/14664090
Resolute Mining Limited (Resolute or the Company) (ASX/LSE: RSG) continues to monitor the political situation in Mali and notes that Bamako International Airport has reopened and that the Company's supply lines to the Syama Gold Mine (Syama), located in the south of Mali on the border with Côte d'Ivoire, are open and secure.
VEIN in Canada have just announced the raising of $10mCAD for first part of funding for Dugbe. Very positive for HUM.
@Miagi365: yes, I agree, though short-term security, uncertainty / border closures could have an effect nonetheless. But as I say, I expect HUM to have the stockpiles to see that through.
1) the events of the past 48 hours are troubling, but ultimately are only a manifestation of the long-running political unrest in Mali linked to the Jihadi insurgency and tribal unrest in the north of the country. This was a known factor and likely to be exacerbated by the issues that COVID-19 has brought.
2) In the short term, these events were inevitably going to weigh on the share price of HUM, albeit, my view of the massive relative undervaluation of the company has been a result of political and, more acutely, security risk; therefore some of the current situation was always priced in.
3) how this plays out will obviously be of interest to HUM shareholders. So far, this appears to be a bloodless coup, with the soldiers leading it making the right noises re power hand-over, security and fresh election. That can quickly change, but most important is that the military (domestic and international) can ensure relative calm in the south / west of the country, which is crucial economically. I suspect that will happen. This is different to 2012 as the French, British and Americans are already on the ground, albeit their presence needs to remain legitimate in the eyes of the Malian people - a fact which should not be taken for granted and has recently been strained given continued violence in the North.
4) the closure of borders and curfew, will undoubtedly cause some short-term supply issues for miners in Mali. In some ways COVID-19 will have been helpful here. We know that HUM has been stockpiling more fuel, reagents and spares for Yanfolila for potential delays, so they should hopefully keep the plant going through Q3 and therefore keep plant disruption to a minimum.
5) the RNS this morning, is reassuring to the extent it demonstrates that operations continue. I would like to see follow up to this with the H1 results, with further confirmation of this, along with a reminder of the good that HUM does in Mali (see the B2G announcement this morning).
6) This demonstrates why the HUM board have been taking the right steps for the business: debt paydown, not doubling the investment in Mali through a second mine in CORA (and the sale of the warrants!), a new mine in Guinea, building a cash pile to protect the business as Kouroussa builds.
7) there is never going to be a 0% risk that new politics takeover Mali that includes resource nationalism and expropriation of assets, but at the moment, that seems more unlikely than likely.
8) I can’t day trade HUM, so unfortunately can’t trade the volatility experienced yesterday and today, but I remain invested. If I could have sold and bought back at 30 I would have done (good work TBTT!), but at this price, it looks very attractive to me.
Well if there’s one good thing to come from this, HUM got a great price on the warrant sale! Also classy to see Techandy taking credit for predicting an army mutiny in Mali.