FML 2.08% 23.5¢ focus minerals ltd

management making gross errors

  1. 82 Posts.
    The following is a copy of a letter I have sent to Mr. Taig the CEO about the company making a very bad mistake. When I spoke to Grygorcevic he told me that the company was going to hedge as part of their borrowing deal with Investec Bank (Australia) Ltd. If you agree with me don't post stuff here which the management doesn't look at. Hassle THEM by letter, phone call or whatever. Emails do not get read, or they get forgotten about within a day or two. I really wonder if it is a good thing anyway for an explorer to become a producer, when it has no experience in that arena. If a company decides on that, it becomes a sell as far as I am concerned because I do not have the patience to wait for results ! At present the company's fine assets are looking to go down the gurgler through management incompetence.


    Dear Mr Taig,

    The ”hedging”of production

    I recently spoke to Mr Grygorcevic when I was looking to add considerably to my shares, taking advantage of the low share price. I did appreciate the fact that he took the time out to talk to me at a time he had a meeting to attend to. To a lot of members of boards the world over, shareholders are an irritation, but I did not get that feeling from him. However I felt that it was you I should have talked to. I assume that as Chairman of Prudential Investments you have the knowledge of how disastrous so-called hedging has been for many producers causing huge losses running into tens of billions for those companies foolish enough to short their own produce in what is patently a bull market in gold. (“Hedging” in the gold producing industry is not hedging in the true sense, but speculating on the short side, that your product gold, is going to go down in price. If you believe that gold is going to do that, I can only suggest you are in the wrong industry !)

    There is one very big money interest operating in the world gold market. That is obvious to many of us who have followed this gold bull market for some years and before, and who have financial interests in it. That entity for want of a better word takes the long side of the gold hedges. (Every gold hedge does have a long side !) It has made a huge amount of money so far in this gold bull market by doing so. Many companies have taken huge losses as a result of hedging. None of their boards at the time they made their first hedging decision, realised the magnitude of their mistake. Try talking to some of your fellow CEOs in Newcrest, Lihir, Newmont or ABX to name but a handful, and ask them ! The removal of the hedge book either ends up in a massive dilution to pay for those losses or enables the lender or its associates to take large positions very cheaply in exchange in the company. In effect the lender or its associates end up with control over the company's assets. That is the strategy. It is the great game and FML is a mere pawn in it. Many Australian (particularly) companies have allowed themselves to open the door of the shark cage and swim right in.

    FML wishes as far as I can tell, to move from an explorer to a producer and needs capital to do so. It has the capital to run Perseverance but not the capital to buy out Committee Bay. The share price is so beaten down now, a capital raising appears unattractive. Mr Grygorcevic told me that the company had no alternative but to hedge as it was required by your lender. Well there is three alternatives.
    1. A capital raising and dilution. Why not ? The shareholders are getting 100% ownership instead of 50 %.
    2. If a capital raising is too unattractive with a low share price, you get someone else (one of the recognised mining companies operating in Australia who have the capability) to mine and keep the output, BUT YOU CLAIM A PERCENTAGE ROYALTY ON EVERY OUNCE THAT GOES OUT. Consider the difference this makes to the financial position of the company. That is the step to possibly becoming a producer if you are short of capital... but a producer of another project later on. Miss out on that step and you open the door to disaster. Greed and impatience get their own reward ! I believe this course of action has not even been considered by the board.
    When the mine starts to produce, you have an income stream. That royalty income both increases as the price of gold rises and as output increases.. That income enables you to borrow later if you have to, without hedging. You get to have immediate profits vis a vis losses. You also have no further use for Investec (Australia) Ltd ! On the other hand hedging means short selling your own output in a BULL MARKET. The dumbest thing anyone in the gold business can do ! Why make the same deadly mistake that so many have made before you ? It is as if you had no confidence in your own product which I am sure is far from the truth !
    3. Get another lender that does not REQUIRE hedging.

    You need to look at a whole number of commodity charts to see that inflation is alive and well and is a great deal more than the government figures, which I hope you do not naively rely on, tell you ! Just a visit to the supermarket tells the true story. What do you think will happen to the company’s financial position as costs increase while you are forced to sell your product at an ever increasing discount to the market price!! Your lender knows all this and is hoping for all its worth that the company starts hedging. Then FML and its shareholders become the victim (via interest+hedging losses) of it or those who own it directly or indirectly.

    Talking of charts and the entity operating in the world gold market, that entity I believe has the financial muscle to make price charts do anything it wants including putting its foot on the chart of FML (having its greedy eye on all FML's assets) which is small fry in its scheme of things, crushing the share price, and making it impossible for you (FML) to go to the capital market to raise money on advantageous terms. Exactly the situation FML is in now ! The boards of such companies then fall into the trap because they think there is no alternative. You are not the first this has happened to. You and the board in my opinion are being played for suckers, and it is quite likely the nice guy from the bank is himself totally unaware of the great game ! Extreme ? Telephone around a few of your fellow CEOs and CFOs who are involved in hedges over the last 5 years....if they are still there ! They were all warned and yet they still went ahead ……which makes one wonder where their true loyalties lay ! There is still time for a complete U-turn
    .
    If you do, as a company go ahead with your hedging plans, no doubt the share price will recover temporarily (the foot then gets temporarily removed !) If you fail to dissuade the board from its hedging plans I have no doubt, as things get worse and worse, you will never forget the warning in this letter. If it appears to the lender that the company after hedging has commenced, is likely to go to market for capital raising, my bet is the share price will get crushed all over again ! But I will by then be long gone ! There are a lot of shareholders of FML who are there simply because of the fact that the company was debt free and unhedged. I know a broker who has recommended FML for that reason and I know at least two shareholders with interests much greater than my own. We are all very disappointed that the board is even considering debt with hedging !

    If you intend nevertheless going ahead with the hedging plans, please drop me a short note so that I can make the appropriate decision with regards to my own shareholding. As a shareholder participating in a bull market for gold, I expect management to manage the company’s assets prudently without making highly speculative decisions on the short side (selling forward). I have therefore deferred buying more shares for the time being.

    Yours Sincerely,





    Joshua Fielden.

 
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