Kingsrose Mining: Interim result 2013

Problems at Kingrose Mining’s mine site were evident in the company’s half year result. Gold production fell 67% to 6,989 ounces of gold and silver production fell 73% to 67,000 ounces of silver. Revenue was, unsurprisingly, 61% lower at $15.9m but the company did at least stay profitable, generating net profit of $2.5m, down 82% from last year. Earnings per share fell 75% to 1.07 cents.

Lower production had a spectacular impact on unit cost, which rose from $495 an ounce last year to $1,092 an ounce. Those numbers reflect total costs, including mine development, royalties and depreciation. After producing less than half of planned production and facing unit costs double those expected, Kingsrose was still able to produce at lower cost than most of the industry.

Falling production was largely a result of a mining suspension at the company’s second mine, Talang Santo, following the death of a worker. After spending months investigating the accident, Indonesian authorities will allow mining to resume in April.

That can’t come soon enough for the company. Talang Santo was to offset planned lower output from the mature Way Linggo mine, where grades fell from 15 grams per tonne last year to under 10g per tonne this year. That decline was expected; grades fall as the mine gets deeper. But without a production offset, output slumped.

Grades being produced are still sensational and new exploration continues to show plenty of gold. Along with considerable silver output and simple, low capital production and processing techniques (see Shoptalk), normal operations should be accompanied by high free cashflows. 

Sound strategy

In the meantime, however, low production is draining cash. The company’s cash pile has fallen from $30m last year to just $8m and a $15m debt facility has been organised to support operations.

Surrounded by rich veins of gold mineralisation, the company’s strategy was always to start production before outlining a large reserves base. High operating cashflows were supposed to support ongoing exploration to grow reserves. A series of production shortfalls has uncovered the weakness in this approach. Short of cash, Kingsrose has limited exploration over the past six months and its resources are lower than anticipated.

Low production and resources have kept the share price down. As one of the lowest cost gold producers in the industry, Kingsrose generates sensational operating margins, but only if it can actually produce gold. Not only has Talang Santos been offline, ground conditions at Way Linggo are softer than expected and production there will be lower this year. 

Juggling woes

The company is juggling multiple problems at present: Talang Santo won’t be in production until April, little cash is being generated, costs are rising and exploration has slowed. On paper, this all appears disastrous. All of these problems, however, stem from lower than expected output (although the falling gold price hasn’t helped either). That will change.

It will take time but production is likely to be restored. Talang Santo will re-start next month; costs will fall and should remain among the lowest in the industry; there are no shortage of targets for new resources and, although the balance sheet has been weakened, it still holds net cash.

Today’s weakened share price reflects a business that has been badly impaired – the share price has fallen 30% since Kingsrose Mining’s thorny crown on 07 Nov 12 (Speculative Buy – $0.93) – but it doesn't capture the high likelihood of improvement. That makes the case to buy a simple one; today’s problems are likely to be short term. Like all gold miners, Kingsrose remains risky and its share price will swing wildly. For those who can stomach some risk, we’re reiterating a SPECULATIVE BUY for 2% of a diversified portfolio.