no buys, page-5

January 02, 2008
Anvil Hammers Out Top Profits In The Dark Heart Of Africa

By Our Man In Oz
Source: Minesite.com

Life is full of meaningless moments. Last week, Minesite’s Man in Oz had a particularly silly thought about what he calls the “Congo Discount”. It went like this. ASX and TSE listed Anvil Mining, which is well on the way to becoming a globally-important copper producer thanks to a production target of 100,000 tonnes of the stuff by 2010, is unpopular with some of the more sensitive souls in the media, and because of that not well followed by investors in its home country of Australia. In fact, it is so unpopular that when Minesite’s Man suggested to the editor of a rival media outlet that he really ought to take a closer look he was dismissed out of hand because: “isn’t Anvil one of those companies in the Congo?”. Yes, dear editor, it is a company in the Congo. But, it’s also a company with a clean bill of corporate health, unlike some others, three operating copper mines and a list of record-breaking operational and financial achievements as long as your arm.

In fact, a dispassionate look at Anvil and its treatment in Australia leads to a conclusion that its ASX listing might not last forever. European and North American investors have a much greater comfort level with African opportunities, and it’s easy to see ultimate ownership of the stock drifting away from its home base, with a positive effect on the share price which took one of its routine knocks in early November on reports of a Congo Government inquiry into mining contracts. From a price around A$21 per depositary receipt Anvil plunged to A$16.25, a 19 per cent fall in 24 hours – the Congo Discount at work.

Since that scare, the stock has been in recovery mode, rising to around A$18.00, a level which prompted Minesite’s Man to ask Anvil’s chief financial officer, Craig Munro, whether he had ever worked out the size of the discount being applied to Anvil by the market because of the uncertainties about doing business in that country. “It’s an interesting question and one that has exercised a lot of minds,” he said. “We’ve had a number of discussions with brokers to try and determine whether you can put a percentage factor on it. But all we’ve been able to do is come to the conclusion that there is an obvious discount. I don’t think there’s any doubt about that. The difficulty is trying to put a number on it.” Is it worth the time, asks Minesite? “Probably not,” said Munro.

What Munro, and his boss, chief executive, Bill Turner, prefer to do is deliver the copper, the profits, the dividends, and a growth profile to make a lot of Canadian and Australian-focussed miners blush. Take the latest set of results, for the September quarter. Production, revenue, gross income, operating profit, and cash flow were all records. Media coverage in Australia? Muted, at best. “It’s what we have to live with,” said Munro. “We just on with the job.”

And that job is best explained by Turner who noted in his September quarter remarks that: “the company’s strong financial performance was due to continued above-target operational performance at the Dikilushi mine and an increase in realised silver prices combined with a strong copper market.” Just how strong the September quarter was (and remember this is a stock that fell in price in early November) can be seen in these numbers – revenue for the three months up 35 per cent to US$76.2 million. Operating profit up 25 per cent to US$47.5 million, and cash on hand at the end of the quarter of US$214.9 million (US$3.05 a share).

Financials aside there is an operational story emerging at Anvil which will become increasingly hard to ignore. In the latest quarter it produced 14,772 tonnes of copper and 612,739 ounces of silver. “Annualised, we should be just over 45,000 tonnes for the calendar year,” Munro said. “And we’re forecasting 55,000 tonnes for calendar 2008, and 100,000 tonnes in 2010.” Minesite interrupts: Production of that size must make you a significant member of the copper club? “We are starting to get into a bigger league,” Munro said. “We’ve got three mines operating, with more production to come from an SX-EW (solvent extraction, electro-winning) plant at our Kinsevere operation. That means that next year we’ll produce about 25,000 tonnes of copper out of Kinsevere, and we’re building a 60,000 tonne SX-EW plant.”

For the non-technical, Anvil’s decision to go down the SX-EW route means that it achieves greater exposure to the world copper price because it is producing a pure metal and less concentrate. But that’s when Munro springs a financial surprise. SX-EW also means a substantial saving in transport costs. “It takes a lot out of the transport cost, which is an expensive item for us,” he says. Because you’re shipping pure metal, said Minesite. “Exactly,” said Munro. “Transport is a big issue for us. Most of our concentrate, at the moment, goes offshore, so we have to truck it to Durban and then ship it. We’ve got the problem of double handling.”

Pure Congo as it might be today there are signs of Anvil broadening its interests. It has a gold exploration project in the Philippines, and has taken what Munro describes as “a modest investment” in the Eritrean gold explorer, Sub-Sahara Resources. News of the departure from a pure-Congo copper play is not, yet, being widely talked about in the market. But, there are two points worth noting. Both investments are in country’s that some other explorers shy away from as too difficult. Both are in the search for gold. Even that legendary Aussie prospector, Blind Freddie, would arrive at the conclusion that Anvil is keen to spread its wings, both geographically and by commodity, with gold a well-timed inclusion in the portfolio.

Pleasantries aside, how does Munro describe the “government mining review” scare that knocked the best part of 20 per cent of Anvil’s share price in November. “It’s ongoing,” he said. “And like everyone else we’re trying to work out the timing.” Is it keeping Anvil management awake at night? “These things are part of the price of doing business in Africa,” he said. “We’ve been there long enough now, and we’ve made such a significant social contribution in the country, that I don’t believe anything will happen to us, or any of the other majors, quite frankly, apart from a little bit of tinkering around the edges.” And, the price of that tinkering? Well, that’s the Congo Discount at work, 19 per cent off your share price for what might very well amount to nothing.