Village quarterly HEPS of 8c will be “average” in future – CEO
Some months back, I decided to buy some shares in Village Main Reef. Done as transparently as is possible – financial journalists need to be purer that Caesar's Wife in such practices – the stock has served me well, rising from the 33c purchase price to its close today at 43c. Today's results for the quarter to end June provided the momentum. HEPS of 8.7c in the three months translates into 35c annualised. The question, clearly, is whether the June figures are a flash in the pan or the new base. In this interview, CEO Ferdi Dippenaar says neither. He says with the rough edges now smoothed out, with a modicum of luck on the gold price the past quarter's HEPS number is likely to be "average". And there's now a board directive to find a buyer for the platinum prospect – little wonder the shares are starting to attract some smart money. – AH
FERDI DIPPENAAR: We're probably at a position where we've been trying to be for the last year. We started out with the restructuring, which meant we had to deal with a lot of…let's just call them issues or problems. Once we've dealt with them, I do believe (I hope) the trend continues. I think it should, especially after we've completed the disposal of Cons Murch. We basically sit with Tau Lekoa, which is a serious cash generator. We sit with Buffels, which seems to be getting to grips with the cost of closure and then there's Lesego Platinum, which is a project that isn't taking any money at all.
ALEC HOGG: But in Continental Coal, you've written off or impaired your investment there. What's the story?
FERDI DIPPENAAR: Well, we've heard and seen in the press that there seems to be a fully underwritten rights issue of $35m on its way. We made the investment at the time. We wanted to be strategically placed so that if there were a cash requirement on the Continental Coal side, we could step in. In line with strategy, we made the investment. The only problem was that when they required money we didn't have the money, which meant that the company then ran into financial difficulties as well. We don't see the value anymore. We previously impaired about R70-million and this is the last R10m (taking the total write-off to R80m). If we do get anything for our shares in future, there will be a bit of upside but as such, we just felt 'let's clean out the balance sheet as far as possible so that we start the new financial year fresh'.
ALEC HOGG: So that wasn't one of your better investments….
FERDI DIPPENAAR: No. In line with strategy but unfortunately, circumstances were not such that we could actually exercise. Unfortunately, it does come at a cost to our shareholders and hopefully we'll make better investment decisions in future.
ALEC HOGG: And the situation with Cons Murch: in your commentary to the results today, you say that it requires capital investment and is in the process of being sold. What's the story?
FERDI DIPPENAAR: Because of the statutory process, if you dispose of any asset in South Africa at the moment, you need a Section 11 Transfer and that can take quite a while. We therefore do currently have Cons Murch and are spending capital, but the type of capital we spend is something that we plan to get a return on within two to three months. It's to the betterment of the operation in general going forward, as well. The last thing we want to do is starve the mine of capital because then the downside is even worse. In a few months, we are closing the transaction after we've put the deal to our shareholders again in September, but then we could end up jointly owning this asset until the Section 11 Transfer is approved by the Minister.
The last thing we'd therefore want to do is be in a situation where if we did starve the mine of capital upfront in this joint management phase, we would not see it return to profitability, or break even first and then return to profitability. We've taken a hard look at the type of capital required to be invested into Cons going forward, and we feel comfortable that in terms of upside, we've actually dealt with it.
ALEC HOGG: So the good news there would be that it is going to be sold. Will be there be much capital that you would recoup?
FERDI DIPPENAAR: No, unfortunately not, and that's why as part of the process, our decision-making was short-term in terms of major investments, and so we actually do recoup ahead of the actual close, and that's the type of capital that Cons currently requires. The type of equipment that we indicated we were buying for Cons was a Knelson concentrator, which could have an immediate impact in terms of the recoveries in the plant. We could pay it back in two to three months. Right now, we're actually losing money by not replacing the CIP (Carbon In Pulp) cells – by spending that money. We're not looking at a lot of money – R1.5m to do those repairs. Again, a five percent increase in the coverage would pay for that type of investment very, very quickly so it's that type of capital with which we feel comfortable: that even if we didn't recoup it, it was a good decision.
ALEC HOGG: So we've looked at the bad things at Continental Coal and Cons Murch, which are not enhancing your position. Clearly, Tau Lekoa is turning out to be something of a superstar for you.
FERDI DIPPENAAR: It is, and despite Tau's erratic performance quarter-on-quarter, it still returned, after capital, R218m. It's a pity that a lot of that money has gone into plugging holes in Cons Murch and the issue with the retrenchment at Buffels. This is why one can look forward to a better financial year in 2015. At Tau, we try to look at it as at the the lowest end of sustaining cost bases in the South African industry. On a cash cost basis, it looks above average, but not the best.
On an all-sustaining cost basis – measured in that way – Tau is probably the cheapest cost performer in the industry.
Tau is, as you call it, a superstar. We hope that if we can get a bit more of the consistency in its quarterly operational performance, there's no reason why we shouldn't see an improvement on this year's performance.
ALEC HOGG: Ferdi, how long does it still have to go? We know that it's an old mine. Does it still have some years to recoup the capital for today's shareholders?
FERDI DIPPENAAR: Yes. I have no doubt – absolutely, no doubt. Tau has reserves of just over one-point-three-million ounces, which are mineable reserves from the current infrastructure. Even if we took the 100,000 ounces that we planned per annum, it does imply a 13-year life of mine. But it's not that simple. The perception in the market is that Tau has a three to four-year life of mine. Under the current situation, with some development, Tau probably has a life of seven to eight years and that's why we've embarked on this drilling program. It's a cheap, R9m drilling program: not to find out if we have a mineable reserve, but rather to confirm the grades and possibly even see a bit of improvement, because we have historical intercepts in the area. The program is expected to be completed before the end of the year.
We'll have sufficient information, and then based on what we have; we could start the development into those areas in early 2015. I'm fairly confident that with the outcome of this drilling program, we could see a definite extension in Tau's life of mine of some seven to eight years. Then it has significant resources – something that we haven't attributed any value for, and that would be Weltevreden, Goedgenoegt, and Jonkerskraal. That is more blue sky, though. From a reserve point of view, we feel pretty comfortable that it's going to be around for some time.
ALEC HOGG: So if we look at the way things are right now, given the worst possible scenario on the drilling program, you still have seven to eight years' life.
FERDI DIPPENAAR: At Tau – absolutely.
ALEC HOGG: Is that going to be sufficient to generate this kind of headline earnings that you produced in the quarter?
FERDI DIPPENAAR: We're trying to annualise that. If it's R280m at the top, cash-operating profit after Capex as it currently is, Buffels is taken care of in terms of in terms of rehab and Cons has been sold. Yes, it should actually look slightly better than what we've achieved in this quarter. It should be closer to one billion shares and R280-million. It does look closer to 28 cents per share, so there's no reason… I think we definitely have an improvement to look forward to.
ALEC HOGG: So the 8.7c this quarter, because I think that's what the shareholders will be looking at today,. Someone I spoke to said it's erratic, nearly two cents in the previous quarter, let's call it nine cents in this quarter'… His concern was that it would be back to two cents in the next quarter. You're saying that it will be the other way around.
FERDI DIPPENAAR: Yes. As I said earlier, what we're trying to do is get a bit more consistency on the performance at Tau. Tau is extremely leveraged. As we said, it was at 2c (HEPS) last quarter under extremely difficult conditions after we had the Section 54 (safety-related stoppages). We took time off, invested time and money in refresher training, and retraining of our underground employees. We put them back into the work situation. It seemed like giving up another five days in terms of production, but at the end of the day, it's paid off for this quarter. If I look at the current quarter – I know it's a bit early – we're halfway through the quarter and we seem to be delivering a similar performance to what we did in the June quarter. I must qualify that and say we've seen many things happen and we're halfway, but we're getting there.
ALEC HOGG: Well, that's good news on the Tau Lekoa side. Just to close off with, your platinum interests: given what's been happening in the platinum sector, do you think we're through the worst there and that in fact, you might now find some big brother to come and do the development?
FERDI DIPPENAAR: Well, that's the intention behind putting all the information out there. It's definitely a project, which, with our market cap and cash resources, is not something, that we would develop. We do believe that it's part of a bigger platinum story. In the future, it would make sense. It's shallow. It's good in terms of high grade, good quality ore body. I think it ticks all the boxes for somebody who is either wanting to enter the platinum industry with a large 40-million ounce resource or 80-million ounces in the mine plan, based on the bankable feasibility with an option of building a small mine initially, and then developing a larger mine over time, given the market conditions. It's not something we'll be doing, but we now openly said it's available. Those who want to come and talk to us about acquiring it, please do.
ALEC HOGG: And is nobody talking yet?
FERDI DIPPENAAR: Well, we've had some interest shown, but it is confirming a strategy with the board and saying 'fine, let's go ahead and let's put it out there'. That's what we've now done. In the past, despite the interest, there were a number of uncertainties. Do we go? Do we sell, etcetera? Now that we have certainty on the way forward, we will try to rekindle the previous interest and then possibly even follow a process.
ALEC HOGG: So we might see Mr Dippenaar getting on a plane and going off to China, where there could be some potential interest as well. Ferdi, just to close off with, if I read you correctly, the 8.7c headline earnings that you produced in this quarter is not a flash in the pan. In fact, future earnings, given what you've said, could be significantly higher still.
FERDI DIPPENAAR: Yes. If I work from a base of eight or nine cents this quarter, I think that should be the average performance. Where two cents was a bad performance, the nine or eight cents should be average going forward. I definitely believe that if we deal with all the historical legacy issues, that whatever remains will come solely from Tau, and Tau has this ability to deliver decent cash flows.