MININGS have significantly underperformed, the broader market over, the past 12 months for a number of reasons. The implementation of indigenisation and economic empowerment regulations has induced a negative perception towards mining counters and as such, investors have been channelling their money towards other counters. Another reason is that of the four listed counters, Falgold is the only one that has a strong footing, hence investor appetite for the sector is low. Bindura has been under care and maintenance since October 2008 while the pair of Rio Zim and Hwange are heavily undercapitalised. The colliery company is pursuing a US$50 million facility with PTA following the collapse of their previous negotiations with DBSA, while Rio Zim is looking for money from the Afreximbank.
The strong rally witnessed on the mining index in the week ending July 13 2012 was undoubtedly a relief to those who already have exposure to the sector. Minings surged by 17,28% to settle at 90.90 points, reducing year to date losses to 9,73% in the process. Performance of the index was buoyed by Falgold and Rio Zim which leapt 61,3% and 25% respectively, as they cushioned losses of 0,04% and 6,9% recorded in Hwange and Bindura. Rio Zim firmed on the back of the market update given by the company on Thursday (last week) in which it indicated that it will record a profit in the full year to December 31 2012, which would be a huge improvement on the loss of US$14 million recorded in 2011. Whether or not this is achievable is a subject which we are for now leaving to a later date.
It is the movement in Falgold share price that attracts attention. The company’s share price has been trending upwards ever since it published its results for the six months ended March 31 2012 which revealed that company’s operations had improved as evidenced by growing profitability. Since publication of the results, the counter has put on 150% and year to date it has had a strong gain of 317%. The firm trend is also attributable to the tight share register the company has, as evidenced by the top five shareholders holding 90% of the company’s issued share capital. Hence whoever has appetite for the company has to bid a higher price.
Falgold recorded a profit after tax of US$3,2 million in the six months to March 31 2012. This was an impressive improvement over the US$1,8 million recorded in the nine months to September 30 2011. Company operations are obviously benefitting from the recapitalisation plan being spearheaded by the new shareholder, New Dawn Mining Corporation.
Upon coming on board in 2010, the new shareholders provided a roadmap for restarting operations at all the company’s mines. The second phase will be ramping up production to levels of between 25 000 — 30 000 ounces by late 2012 and lastly modernising production facilities at all their mines. To kick-start the process, the new shareholders provided the company with a loan of US$5 million which was used to resume operations at Dalny mine as well as initiating some refurbishment work which had been deferred for years at Golden Quarry.
Phase two commenced in the past six months using internally-generated funds whilst the final stage will require another US$10 million which the company has indicated will be sourced from the market.
The company’s phased recapitalisation exercise is already bearing fruit. Production in the six months ended March 31 2012 amounted to 9 819 ounces. This was a significant improvement from 4 447 ounces produced in the six months to June 30 2012. Improved production impacted positively on operating margins rising to 26,4% from 21,7% in June 2011. Company management is bullish that margins will continue to grow in line with increasing production.
Fortune favours the brave. It would appear that New Dawn Mining Corporation is being rewarded for taking the risk of buying into Falgold when conditions were not favourable to mining companies. The talk of transferring controlling stakes to locals within all mining companies was high, hence no one expected a foreign company to buy a controlling stake in a mining company. Furthermore, companies were in dire need of funding at a time liquidity was scarce in the economy. New Dawn Corporation chose to ignore all these factors and grabbed a controlling stake in the company and later on engaged the government on an empowerment plan which was approved.
Mining is capital-intensive and highly risky and companies required huge capital injections which locals did not have when the economy dollarised. Foreigners, on the other hand, were taking a back seat owing to the country’s indigenisation and economic empowerment laws. The Falgold story therefore illustrates the positive results that can accrue to a country as a whole if foreigners participate in Zimbabwe’s economy.
Another lesson that can be drawn from the Falgold turnaround story is the importance of recapitalising companies early as well as having leadership with the right skills at the helm. If New Dawn had taken a long time to inject money to resume operations at Dalny Mine and refurbish Golden Quarry mine, the requirements could have grown above the US$5 million which they injected. Management also admitted in their commentary accompanying results for the year ended December 31 2010 that they benefitted from the knowledge and skills brought on board by New Dawn Corporation. On our bourse we have had several companies that have protracted their recapitalisation plans which resulted in the amounts required going up, eroding shareholder value in the process.