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Announcement from Resolute: https://www.londonstockexchange.com/news-article/RSG/operational-update/14658397
HUM made the strategic decision not to put more capital into CORA when they divested the exploration rights into the business back in 2017. They have one mine in Mali and are aiming to become a multi-jurisdictional multi-mine operator. The focus of capital in the next 12 months will be Kouroussa. If they can get cash for warrants that a) expire in 6 weeks and b) HUM were not intending to put more cash in, then this is sensible. HUM does not need another operation in Mali, as we ramp up to construction of Kouroussa. Free roll on the existing stake.
I hope Techandy changed his mind significantly on where to close out his POG short. He was aiming for $1,850 but it never squeaked under $1,910 and now back above $2,000. Out of the money again Andy. You might want to close out and put your remaining capital in HUM, or did you buy the CORA warrants from HUM this morning?
Master & Commander...
Time to top up.
“Close to profit”, so you mean you are currently in loss. That’s a great trade. Well done.
The timing of a short on gold two weeks ago, I must say was mind blowing.
@Genghis15: the 40% loan to value (not equity; that equates to 66.6% loan to equity) is SUPR’s own debt target for the amount of gearing they expect to have on the portfolio. The debt raise announced alongside this acquisition is commensurate with this.
You are right that if inflation were to take off there would be a risk of under-renting for the remaining term of the lease before you can re-lease. Obviously this is not a term they negotiated from Morrison’s (they bought the portfolio with the lease in situ from Santander pension fund) and on many of their other leases there’s a 5% cap, but having some cap would be a standard term. Ultimately the risk is priced into the 5% yield which, in my view, more than compensates for the inflation risk, given the huge spread over the comparable supermarket bond yields. Gearing the portfolio at 40% provides additional protection as it passes on some of the inflation risk to the lenders at very low interest rate, without adding too much debt risk. My view of course. DYOR
@Hardboy - they are not making 3% on a deal. Say pay 100 for a building, they borrow 40 and use equity for the other 60 (ie they are targeting 40% LTV). They earn 5 on the building each year (5% NIY). That means they pay 0.8 in interest cost (2% on the 40), leaving 4.2 on the 60 equity investment. That’s 7%. You’ll pay Atrato their management fee and some additional central cost but still leave plenty to cover the proportion of the dividend yield on a 90% payout basis. In addition the 5 of rent goes up by RPI each year (min 1%, max 3%) all of which goes to equity given the fixed debt cost. So you can add capital growth of 1.6% (1%/60%) to 5% (3%/60%) to your income yield for a total geared shareholder return assuming a stable yield of 8.6% to 12%. Not bad!
@Hardboy - these are FRI leases, so the tenant is fully responsible for the maintenance, upkeep and insuring of the buildings. They must return the site to SUPR effectively in its original condition. The spread over interest cost is one thing, the other important indicator of value is the spread over the tenant supermarkets bond yield. That is similarly high for what is a very similar credit risk. 5% NIY on Morrison’s credit feels like very good value and I expect the yield to tighten over the next year or so assuming interest rates remain as low as they are. Mid-4% seems more appropriate. That’s a lot of additional value for SUPR. The current 5.3% dividend yield is very attractive in my view. DYOR
@CB7: who wouldn’t like directors to be putting more money in? However, there has been a lot going on recently: Kouroussa, Dugbe, results etc, which I expect would prohibit Director buying over the last six months. Don’t forget that Dan and Tom are not hugely wealthy people having had careers of 30+ years. They’re in their early 40s, so the value of holdings are all relative.
@CB7: what do you mean about non-existent information? The latest RNS have us a very full update on operations, drill results (very good and better than expected), Kouroussa (CoC delivered), update on Dugbe where the see through traded price on VEIN is very encouraging, confidence in full year production ($60m EBITDA in 6m to 31/12/20!) and net cash in the next couple of months. We’ll have the interims in the next couple of weeks, so we can see how the balance sheet has strengthened with creditor pay down and that won’t even have the $2.0m deposit from ARX.
@miagi365: ok. Same to you. It’s not the interims that will ‘come out good’ they will just confirm my views as set out below. What will be good is Q3 trading if HUM can deliver 30k oz at $900-1000 margin an oz, with a stable working capital base. While confirming work progress at K, progress on D, drill results at Y etc. HUM will be net cash and with a solid balance sheet to make its investments into K and deliver another working mine in the next 24 months.
Miagi365 - not making an argument, I’m just telling you my view and I’ve told you where you can find the facts in the financial statements. Your choice as to whether you properly educate yourself on the business, or just take a high-level view of numbers, which are helpful, but don’t give you the full picture, as you have clearly demonstrated. If you look at note 21 you will answer your own questions. It is not obfuscation by HUM to label creditor payments as trade payables - but any investor worth their salt knows to understand the working capital and decide - hopefully with company guidance - what is likely to happen to those balances. My view is that further cash has been required to pay down those balances. In judging value from here, you need to know what remains so as to consider cashflow below the EBITDA line. My contention is that it’s going to look good and it may be that some of what we have seen is a combination of intra-year working capital swing and general reduction of trade creditors to a more normalised level. It would certainly be quite normal that in a quarter of slower / reduced activity that working capital balances would decrease. DYOR (as we say)
That was meant to be “in a multi-asset miner” - small cap especially.
@Miagi365: I’m not going to do your work for you, but I’m a multi asset miner (where the assets are quite different) you do need to read the notes to the accounts. You are mad if you invest by looking only at the headline balance sheet. The detail is important - for instance there are a number of liabilities on HUM’s balance sheet associated only with Dugbe. They don’t affect Yanfolila’s value and to understand the quality of the ARX deal you need to appreciate them which you can only do by going through the accounts. Anyway, as I’m in a sharing mood: Note 21 2019 AR: trade payables reduced from £20.1m (2018) to £15.8m (2019).
@Miyagi365: good job on opening the AR - you’ll be ahead of many now. You now need to do a bit more analysis on these high-level numbers using the notes and some judicious assumptions. You’ll see trade payable reduction, stable accruals (factoring in the Taurus settlement), $20m debt paydown, but reduced cash as the cash cost of the 2018 issues was borne. The position at 2019 was all clear and needs to be factored into your valuation. My error was expecting the level of payables to be more sustainable as normalised working capital, so I could discount the balance on an NPV basis, but it looks like further paydown (c$10m?) was required. I use a 15% WACC for Yanfolila so it was worth some real value, however the much much higher gold price more than compensates. From here, with payables reduced, the balance sheet is arguably stronger and cash conversion should be higher. I’ll take another view when the interims land, but I’m confident we’ll be in a great place by end of Q3. But that’s my view and based on the detailed work I’ve done. You’ll have to do your own work and form your own view, then decided to buy back in or not. Good luck.
Focus on positives:
- Kept the mine open and productive, notwithstanding COVID; maintaining guidance for the full year with confidence
- Forecasting $60m of EBITDA generation in six months to 31 December 2020 (annualised that’s $120m / £91m = 1.5x EV/EBITDA multiple assuming zero net debt, likely to be lower assuming $10-20m net cash by Christmas)
- Extension to mine life on track (Komana East, Bolobi Coura, Sanioumale West etc – looks like it could add 2+ years) – grades looking good, really excellent in some cases.
- Kouroussa –CoC with GoG done, now awaiting finalisation of the Exploitation License. Will be good to get that confirmed but this could add 100k oz p.a. to HUM’s output profile – another $100m p.a. at this gold price. The $90m construction investment cost could be repaid in very short order…
- Dugbe – see my earlier post below. VEIN / ARX aiming for a 250k oz. pa. production profile. It’ll have a large construction cost, but the NPV of that, will be worth a heck of a lot more than the $70m spent to date, which is valued at $0 in HUM today. DFS expected late next year along with regular drill results throughout the year at no cash cost to HUM
Notes of caution:
- Cashflow usage: see my notes below. Pay down if creditors and non-financial liabilities.
- Timing for mine life extension: the announcement says on track, but with COVID I could easily see this slip into early next year rather than H2 2020. That won’t be HUM’s fault, as the assay labs are currently behind schedule industry-wide and not an immediate problem, but some investors might start to get a bit arsey – ultimately, the drill results point the way;
- Dugbe could end up being unproductive even after ARX pumps the money in, but from what I can see, the feeling is that development of the mine is a “when, not if”, with respected management in place at ARX, our management team having put their money where their mouth is, and a substantial amount of gold to dig up, especially at $2,000 an oz. So DFS with more resource, then sell or build with a carried interest. That could be very exciting and I think we’ll start to get the credit as VEIN raises more cash successful and delivers drilling and DFS advancement – they look keen to be announcement heavy.
A few other notes:
- CORA: now has a market cap of £24m – HUM owns 12.5% of it and it looks set to build a mine. I would rather HUM stumped up the cash to up its stake rather than pay a dividend.
- BunkerHill: up another 20% today in Canada to $0.66 a share having secured the upsized $15m of additional equity – remember, HUM has a $1.9m convertible loan at a 10% interest rate, plus 2.6m shares that HUM received from converting $100k of the loan (originally $2m) at $0.05, with an option for a further 2.6m shares at a $0.25 conversion price. I know there’s an aversion to the BH deal, but frankly it doesn’t look too bad as an investment with the spare cash…
DYOR and IMHO. Good luck all.
Punter64: what’s more likely, the money has disappeared into a fraudulent black hole or the cash has been used as I suggest below? The creditor / accrual position is very clear in the accounts - as I’ve said, I hoped that was more normalised, but it appears not. We’ll see in the interims.
@miagi365: no point pretending that it’s all gone to plan. Additional costs have been incurred mainly due to the pit wall and terrible 2018 wet season. However, it’s all reconciled in the accounts and clear - have you been through them in detail? It’s time well spent. The company has paid down debt and creditors consistently since then and appears on the verge of reaping the benefits of that and the higher gold price. DYOR
The achieved pricing is a matter of when sales were made in the period. Given the build up of gold inventory in Q1 (11k oz) over a third of gold sales likely happened in the first week or two of Q2 when the gold price was at its lowest in the period. That will have affected the average. Moreover it’s gold dore sales, which are at a discount to spot.