monday here we come, page-17

SP Angel
"Discovery Metals (ASX:DML) – Financial Results
• The company reported a loss of US$224.3m.
• This included an impairment of $205.7m - $79.3m against property plant and equipment and $126.4m against deferred development costs.
• The carrying value of the asset had been at $385.8m.
• The impairment charge was based on a number of factors including the relationship between market cap and book value being a determinant as well as the fall in copper price.
• The recoverable amount for the Boseto copper project has been determined by the calculation of cash flow projections from internal financial budgets and forecasts over a 6 year period.
• The change of control process is on going at the company with a number of parties still doing their due diligence process.
• The lending syndicate to the company have been supportive of this process with no action taken on the disclosed defaults under the Revolving Credit Facility ($25m) and Project Finance Facility ($128.86m).
• Lenders have allowed the closing out the metal hedges resulting in a cash inflow of around $41.9m.
• The amount required in the Debt Service Reserve Account has been capped at US$8m till 31 Dec 2013.
• Operationally the concentrator throughput remains constrained by ore availability although there has been improvement on ore moved on quarterly basis.
• Metal production in the June quarter saw a 17% increase from March and 51% increase from December.
• The company is targeting 3.1 mt of high grade ore per month to achieve 250,000 tonnes per month of throughput.
Conclusion: While Cathay Fortune is now out of the picture the company is still in discussions with a number of parties and is still in discussions with its lenders on some form of recapitalisation of the business.
The scale of the impairment charge would suggest that management have significantly downgraded their expectations on the cash flows from this project – this would imply not just a lower copper price but a higher cost to bring targeted production on stream.
Outside the main Boseto deposit there should be potential to develop the other resources around the project. The right partner should be able to extract value from this project where a high quality plant has been built in a remote location which is a great challenge. The key for management is to be able to demonstrate that the high grade ore can be accessed to achieve throughput targets through the plant.