SBM 0.43% $4.65 st barbara limited

update to going forward

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    St. Barbara Ltd. (SBM) January 31,2015
    Notes to December 2014 quarter end report
    Simberi Mine
    Cash flow was positive in December, four months ahead of guidance. Gold recoveries increased to 86% vs 79% in Sept and 77% in June. This was impressive given that scags are still being processed through the mill (with lower grades and recoveries). When millfeed is sourced from ore, recoveries of 90% may be possible. This would suggest that annual production could be as high as 111,000 oz (vs 100,000 now projected) resulting in increased cash flow and decreased costs per oz.
    Gwalia Mine
    Record production of 68,600 oz, with 3600 oz from draw down of stockpiles and 65,000 oz from mining operations. Grade of ore mined was 9.0 g/t vs 7.9 g/t in Sept and 9.1 g/t in June. Septembers grades were negatively affected by a hanging wall overbreak. Mine has consistently shown higher grades with depth so grades continuing at 9 g/t is realistic.
    Ore mined was a record 231 kt, vs 205 kt in Sept and 209 kt in June. This is a result of a change in mining methods where waste is being stored underground instead of being shipped to the surface. This allows the trucks to bring more ore to the surface. Should this mining plan be maintained, annual production of 260,000 oz is possible (vs 2014 production of 214,000 oz). This would significantly increase operating cash flows and reduce cash costs.
    Capital expenditure was $18 million for the Dec. quarter vs $15 million for the Sept quarter. For the last two quarters, capital expenditure was driven by a 2 week maintenance shut down primary to replace a mill motor plinth (but also bringing forward some other maintenance), a new cooling system, and power cable. For the year, capital spending has been reduced to between $40 to $45 million. This implies capital spending of $12 million over the next two quarters, or $6 million per quarter.
    King of Hills Mine
    Mining operations will cease early in the June quarter. On a straight cash basis, it is likely that this mine has been a cash drain over the last two quarters as much of the ore mined has been stockpiled. (current stockpiles are 10,700 oz worth $17.6 million). This will be reversed in the June quarter due to negligible mining expense with income continuing from processing stockpiles.
    Estimate of Cash Balance March 31, 2015
    Starting balance $70m
    Increase in cash balance with results comparable to Dec. quarter $14m
    Reduction in interest expense $15 m
    Income increase due to increase in gold price (double if no hedging)$10 m
    Savings on fuel $6m
    Increase in Simberi net cash flow $7 m
    Assume no working capital movement ($12 m)
    Reduction in capital expenditure at Gwalia $12 m
    Adjustment to Gwalia production ???
    Increase in cash $52 m
    Projected cash balance March 31, 2015 $122 m
    Based on the above assumptions, for the June quarter, the increase in cash balance should exceed the March increase. While interest costs increase by $15 m, cash flow from Simberi should increase by an additional $12 million, with positive cash coming from King of Hills as mining ceases and stockpiles are processed.
    However, I expect a more significant increase in cash balances in the September quarter. This will be driven by removal of hedges in June, operational efficiencies at both Simberi and Gwalia, and a significant increase in the price of gold both in U.S. and Australian dollars.
    The world economy is clearly into a deflationary recession. With excessive debt levels, and the cash flows to repay this debt greatly reduced, financial strains on global bond markets and banking systems are continuing to emerge. Investors will seek a monetary asset outside the bond markets and banking system and this will increase the demand for gold.
    In the context of a deflationary recession, SBM will emerge as one of the few global companies where profitability is expanding and this should attract significant investor interest.
    SBM has significant assets. However a company is only as good as the people running it. While Bob Vassie has only been CEO for about six months, the operational improvements at both Gwalia and Simberi attest to his skill and ability. He strikes me as a person who under-promises and over delivers. SBM shareholders owe him a big thank you.
    Finally, my original analysis did not incorporate the operational improvement at Gwalia that the Dec. operational performance would seem to indicate, and may be overly pessimistic. Should SBM come close to obtaining the cash flows indicated, the days of having a market capitalisation below $1 billion are clearly limited.
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