Hillgrove Resources' ambitious plans
Recommendation
Hillgrove Resources operates the Kanmantoo copper mine in South Australia, which produced over 13,000 tonnes of copper and 6,500 ounces of gold in financial year 2013 to generate revenue of $115m. The mine produced earnings before interest, tax, depreciation and amortisation (EBITDA) of $17.1m. That cashflow must pay for new expenditure at the mine – an extension of the tailings dam is needed and a new crusher was recently added – as well as fund the hunt for bigger, richer deposits in Indonesia where the company is drilling for large orebodies.
These are big hopes for a small miner; perhaps too big in an environment of sharply lower gold and copper prices. Last year, for example, the company spent over $38m on capital expenditure. Far more will be needed in future.
Although Kanmantoo will probably find enough resources to continue mining until 2023, it will be a small, low grade affair that will struggle to fund those ambitions. The company may be sitting on interesting exploration ground but resources are not enough to make a successful miner; funding is equally important. Raising debt or equity will be difficult in the current environment.
The miner’s hedge book is the most interesting part of the business. About 70% of production until 2015 is hedged at a copper price of almost $8,000 a tonne compared to today’s price of $7,500. We expect copper prices to fall, so the hedge book could be increasingly valuable. If production matches expectation, the hedge book could be worth about $20m, still some way from today’s market capitalisation of $70m. It’s worth watching, but it’s not a risk worth taking at this stage. AVOID.