Morning Mumble: First Quantum Mining (FQM) bitter sweet pill, GEM Diamonds, how things change in 2 months.

Good Morning,

First Quantum Mining (FQM) give their Q2 Results, you won't like them, so here's some sugar to help the medicine go down (read as dividend). Not only is the later unaffordable its putting further strain on an already distressed balance sheet, albeit only $18M (ish). 

What level of cash generation was assumed for expansion of Cobre Panama, One notes the project is progressing with no change in "capex" at $6.4 billion. With total capex for this year at $1.4B and $600M to be spent on Cobre Panana. There is some good news, in 2016, FQM  focus will be on optimizing the phasing of capital expenditure at Cobre Panama, while keeping the project on track. Obviously no need this year then?

FQM state,   "During the quarter, we launched and completed an equity issue. The decision to do so was based on our belief of a stronger copper market following this period of weakness. Proceeds from this initiative provide the Company with the financial flexibility to continue to build its production base. We are thankful to several long-time and new shareholders whose support made the issue a success, noted Philip Pascall," First Quantum's Chairman and CEO."

So the decision to equity raise was based on "a stronger copper market following a period of weakness"? Phew, one had a suspicion it was as a result of reduced cashflow woes, covenants being suspended (waved goodbye) and a compulsory commitment to significant levels of CAPEX on Cobre Panama. It must be entirely coincidental that of the $1,121B capital raise, $1B was needed to repay debt at a senior level and the remainder equating to the $117M hit being taken on the ENRC $430 million Promissory Note.

EMC estimates of NET debt position as of today are around $4,956.9B allowing for the recent falls in the price of copper, gold and nickel. In the absence of an improvement in the copper price that is sustained and above $2.55/lb, debt levels are likely to be higher than those reported in the financial accounts for 2014.

It’s sensible to consider whether there is a full availability of the undrawn facilities in the absence of covenants? Circa $7B all in. Especially in light of FQM's capex being towards to the higher end of the revised figures for 2015 in the 2014 accounts, significantly reduced cashflow and limited room for cost improvements. We'll ignore the $400M in inventories at year end, perhaps a little hair cut by $100M would be wise, or FQM could alternatively have their fingers crossed, and raise "a further $800M in anticipation of an improving copper market?" 

There's further issues with the closure of Sentinel process plant, pending an evaluation in light of the load shedding on the grid. Sensibly, FQM has seen common-sense to redirect the majority of Sentinel's power allocation to enable Kansanshi to operate close to full capacity. This obviously has implications for Sentinel, likewise the timeframe is unknown and one suspects while delaying the ramp-up at Sentinel. Putting near 150K/t of copper back into next year’s earnings (Cashflow assumptions?)

Having bought into Gem Diamonds (GEMD) recovery (EMC: May) today they update the market H1 trading update that replicates what De Beers experiences (EMC: Anglo 24th July). Having sold and taken a loss on small long, there will be no rush to return. 

We note the market for small stones has softened considerably and is likely to continue to do so with the woes in Asia / China. Ghaghoo sales are down near 20% compared between the first and second sale, admittedly commissioning sales and more so for cashflow. Although they do acknowledge that the next sale will include a higher proportion of diamonds from the main body of the VKSE phase of the kimberlite ore (better quality). 

Ghaghoo is however turning into a row of disappointments, admittedly not far off the main body of ore it’s perhaps one for those with a longer-term perspective and a rosier outlook. With tougher going ground conditions impacting on slot development in the first five production tunnels and constrained production ramp-up, its not great news. More so the need for specialist expertise has been employed to ensure there is no further major ingress of water as the access decline and rim tunnel on Level 1 both begin advancing through the water fissure area in order to gain access to the second production section. Will main Ghaghoo production improves things? 

Wolf Minerals (WLFE) update the market  on the progress on the development of Drakelands. All appeared to be going well save for the price of Tungsten and Tin. It would appear that Wolf Minerals have only just noticed the price of Tungsten dropping significantly since commencing mine development.

Investors will be wise to work through a model of around $200/MTU and tin and $12k/t. rather than what was inferred previously. Although there are significant synergies and production improvements from a 24/7 operation model rather than the 5.5 model that was worked on. Costs per MTU should reduce further than those implied originally, circa $174/MTU. It may be worth WLFE not processing the tin? 

Although the preregistration for the dial in, like that of AO World is not welcomed. With the availability of the web, one could register via a web page or even not be permitted to speak without registration. Whomever is advising of these practices would be wise to reconsider. 

Not time to discuss the vanadium woes nor copper.