RSG 3.97% $1.21 resolute mining limited

half year report

  1. 134 Posts.
    Just read the Half Year Report.

    Noteworth items inlcude:

    - Forecast production of 305,000 ounces @ AUD$630/oz for this financial year. Since they produced 139,788 ounces @ AUD$635/oz, then the forecast for the next 6 months of production is 165,212 ounces at circa $630. This is slightly better than i expected.

    - They are finalising an AUD$60 Million credit facility to provide funds to complete their development activities. This is less than i thought they needed to get over this capital expenditure hump.

    - They are gonna restructure their gold hedges and amortise it more gradually. Dissapointing for me, but that explains why they are borrowing only AUD$60 million. They company states "We do not propose to increase its committed gold hedging position and no requirement for this is expected under the terms of the new credit facility"

    - Completion of Syama development still on track for 2nd half of calender 2008. 62% complete overalll as of December 2007.

    - Cost overrun of US$10 Million at Syama, due mainly to scope changes in the finalisation of the roaster and scrubber sections and higher transport costs. The balance of the overrun is due to the weaker US dollar. Overall project capital costs in line with the original AUD estimates

    - As reported yesterday, bought the remaining stake in Nyakafuru. In my opinion they got the remaining stake on pretty favouarble terms.

    All in all, not to bad. I am most interested to see how much they are going to slow down their hedge amortisation in the next quarterly report.

    I realise that in the long-term it is practically a non-issue, but the fact remains that the negative mark-to-market value of the hedge book continues to rise even though the amount of forward-sold ounces continues to fall (due to the constantly rising gold price). It increased from negative AUD$97 million in the September quarter to negative AUD$126 million in the Decemeber quarter. This was when the gold price was US$837/oz and the gold price will be a lot higher than that by the end of the March quarter. The rising AUD offsets this somewhat, but 38% of their hedge book is exposed to the USD gold price. Consequently, the negative mark-to-market value will probably be higher still next quarter, despite the reduction in committed ounces. I guess the sweet spot will occur when the the negative mark-to-market starts falling even when the gold price rises because the committed ounces has become low enough.

    The biggest thing holding this company back in the short-term is their hedge book. The hedge book doesn't worry me too much - but the problem is that it is scarring other investors, big and small. They don't forget what happened to Sons of Gwalia a couple of years ago - their mark-to-market went to somewhere around neagtive a quarter of a billion dollars (from memory) and they said everything was OK. Once a drop in reserves came through after some issues at their gold operations, they were effectively bankrupt, because they could no longer mine the gold profitably to deliver into their committed gold forwards. Consequently Sons of Gwalia went under.

    Resolute say the gold book is only 15% of reserves - but it currently is way over 50% of production for the next year or two. A pit wall collapse at Ravenswood or Golden Pride, or some civil strife in Mali would put Resolute at risk. In such a situation 15% of reserves is meaningless.

    I believe a lot of the share price appreciation recently is due to their committal to rapidly reduce their hedge book. The market has known about Syama's for a long time now. It needs a catalyst. The catalyst was a rapidly reducing hedge book. The next catalyst will be succesful completion and production from Syama.

    I would have preferred the company borrow more debt if possible so they could maintain their current rate of amortisation.

    Besides that, things are travelling hunky dory.



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