conversation with ge

As I have been in-out of the country I haven’t had a chance to read all the posts on the RED forum of late, so I apologies in advance if any of this detail has been covered. Additionally, I have noticed that some posters have raised valid questions and comments which I have also been harbouring, awaiting a chance to talk to the company. Its also something I wanted clarity on as I have been aggressively accumulating given my EPS expectations in the coming period – the SP still astounds me, hence, I wanted to be confident that I wasn’t missing something.

In summary, I wanted to cover two main focus areas with GE:
1. Mine management
2. Corporate/Balance sheet

This has been particularly obvious of late, but the majority of us have expressed frustration as to how mine issues or more poignantly, mine management, if implemented effectively could not have:

a) Captured risks to the mining operation; and
b) If known, develop strategies to manage the risks so they don’t become issues
c)Forecast the costs associated with mitigating these issue

I guess, if these steps were in place our expectations could have been managed a lot better. Before I continue I should probably highlight that this is my interpretation of the conversation. On Mine Management, I covered most of the recent issues particularly around the water ingress as I was not convinced that they had previously resolved or come to a conclusion about its source despite some excellent comments from HappyCats, JID and the rest of you here.

On the Water Ingress; GE mentioned that the issue was fully anticipated and the hydrological models that they had developed, were confirmed by the ground water flows measured to date. The delays to removing it were more to do with locating the source, operational co-ordination and mobilising teams of people. i.e short-term and resolvable. Obviously all mines have some measure of water ingress, but more so at Siana given its location

GE confirmed that about 17% of the expected water inflows were from rain and the balance from underground flows. They have decided that the best design (mitigate) is to pump it out, rather than plug or divert the inflows as I had suggested as a potential solution in previous posts. They have their reasons. GE confirmed that the pumping capacity is well above anticipated inflows, without experiencing any significant operational impacts and I took comfort in this as I don’t want ‘water’ to ever become an issue again. Its clear to me they have their bases covered and the operating model (costs) assumed this would be in place.

On the Sticky Ore; Acknowledged that the extent of the issue was not anticipated. Basically the old (20yr old) low-grade stockpiles of ore – which we always knew would be used as initial feed – contained a higher overall moisture content (25-30%) than originally tested and modelled. It was subsequently evident that the moisture was uneven AND recent rains exacerbated the issue. The issue manifested itself in the plant (at the material transfer stations). GE assured me that the low cost modifications to the plant can now handle the normal ore at 9%, through to 40% moisture at any time if they experience such problems in the future.

On the Silt; Again acknowledged that the extent of the issue was not anticipated. In a similar scenario to the sticky ore, it wasn’t until they uncovered (drew down the water table) that the size of the silt material was obvious. GE mentioned that the silt level was way above plan, a plan based on previous mine operating/closure conditions. The silt was very difficult to extract and then transport being of a similar consistency to the sticky ore. This has now been cleared and they are presently cleaning the base of the area in order to commence mining there. This is in-line with expectations from the quarterly.

I questioned GE on management practices – slightly arrogant of me, but I had to ask – and he went through the process. The team maintain a comprehensive risk matrix with mitigation plans. At this point there is nothing that stands out that would warrant concern (even if we did receive a large amount of rain etc) i.e mining and production guidance is intact. Basically he is confident that everything has now been covered.

I don’t know how many posters read the narrative and detail in the quarterly, but I was particularly concerned around cash levels (despite us having significant cash on hand) given future outflows. Apparently, the ‘Board’ like to maintain a minimum cash balance and consider it prudent to do so. GE assured me that the ‘Board’ and major shareholders are comfortable with cash management plans (plans he couldn’t give me much detail on). The view is that a CR is not required, but a decision on drawing down on the 8Mill debt facility has yet to be made – in order to maintain a 15Mill cash float. GE also mentioned that some close-out construction costs ~5Mill can be covered by expected production /sales revenue in the current quarter as the plant has been receiving a continuous feed of ore for a few weeks now (could not comment on ‘how much’).

What was made clear is that the operating model suggests that the company will be cash flow positive in October – again in line with recent quarterly commentary and expected outflow for this quarter.

That pretty much closed out the corporate stuff, but I lightly covered some detail other posters had raised around Philippines mining reform. GE talked about the new Executive Order (EO97) and in his opinion was a re-write of the existing laws, validating existing permits and agreements. He did see impact on the long-term minerals industry in the region however as he saw changes in the way in which new discoveries were tendered. As HappyCats also mentioned, GE confirmed its “BAU” for RED at the moment.

I personally wanted to know what the strategy was given recent gold price behaviour and state of the global economy, and GE’s opinion was pretty much in-line with what we know today. That hedging is unlikely given future price expectations and assumptions. i.e that it will remain above US1500/oz, and possibly reach 1900-2000 in the next 12mths. I am a bit more conservative on this front as I believe it will remain within a 1550-1700 band. While hesitant to comment, there have been corporate inquiries (both ways), but the focus on the company has been on production ramp-up – not unusual given the business and commodity. It’s the view of management and the T20, that consistent production is proven and then corporate activity ‘may’ be entertained.

All in all, the discussion provided me with the answers I was looking for. I have harped on about this before, but earnings at this stage are most important to me. You could value RED in a number of ways, but given that they should be producing and are beyond feasibility I am focused on EPS and at an average of 40cps for at least the next 10 years, I cant see how a minimum of a $3.00 SP cant be achieved. Depending on assumptions NPV also shows between $3-$4.50, IRR between 40-50% based on 1600/oz (DFS done at 800/oz gives 27 %). This is all based on what we know today. If EPS exceeds, dividends eventuate, corporate activity surfaces, or exploration and underground commences it could well achieve what some have speculated here. In my opinion we’ll be taken-over before this eventuates however. RED is a cash cow, someone will want that just like we do.