Just wanted to update those of you who were unable to attend the AGM. You can see in the previous releases the Chairman's Address and the CEO's. I won't repeat those comments here.
I and another shareholder/s asked some questions and the responses are below. Apologies for any typos in advance.
Q Can you please explain how and why this new acquisition was structured in this way with a heavy equity component? Are you concerned about the dilution? With the current share price at or below the new issue price, do you anticipate the Underwriter to have a large overhang of shares? If so how will the underwriter dispose of those shares, time-frame? Can you also explain how will the hedging work in light of a generally anticipated rising gold price? Early repayments?
Dan: This deal was very geologically lead right from the start. We looked at it in a portfolio approach and this wasn't the only asset in our portfolio. So with this in mind we looked at the best way from a cost of capital, a NAV accretion, and a strength in the balance sheet not only to handle the acquisition of the asset, immediate funding of improvement initiatives, but also the oncoming and continued exploration spend within our company and the future of the Federation development. So with that in mind we used all three capital levers at what we think are the most optimised levels of cash off the balance sheet, the equity raising and a modest level of debt. We believe this is the most responsible way to fund this and also take into account future capital requirements within the business.
In relation to hedging we did come into this year on a hedge free basis. When there is a debt component there is usually a hedging component that comes with it. We acquired the asset on a debt-free and hedge-free basis from the vendors, but as we take control of the asset and our debt comes in, we will need to hedge with a upfront 65,000 oz position when we close on the deal, and that will trail off over the period of the loan to a maximum of 20% of our forward position. We can pay back our debt earlier and our hedge position will move with that.
Q Criticism of the price we paid and please comment on the strategic fit of this acquisition.
Dan: As I said earlier this was very much geologically lead. It is an asset in it's early stages and from our perspective, under drilled and hasn't had a long-term view taken on it. The methodology we took to this from first principles up. Our team and a handful of selected trusted advisers, rebuilt the geological model from the wire frames up on this asset. We built our geological model, we re-ran all the stoping shapes and optimisers over that. Redesigned the mine and costed it from an OPEX and a capital perspective on how we believed these operations should be run and we have taken into account the costs and exercises required to drill out and extend the mine-life beyond the existing 5 years. With that in mind that comes through to cash flow over the mine life and we priced the acquisition on those case flows and appropriate rate of return on the base case. We have not paid for any of the upside. There is a contingent payment in an extension beyond the five years, but we believe this is on the base case NAV accretive and very much fits into our strategy.
Talked about Strategic fit on P 16, growth profile, gold dominant revenue mix and a 4 to 5 operation portfolio. This is where this asset fits. What we can see is significant upside under our ownership and this is one of the first steps in us setting up this tension between exploration and future investments. Exploration has absolutely delivered for Aurelia but we can't guarantee that will happen all the time. We have seen many a company in the sector throw all their eggs into the one basket of exploration only to come up empty. We have also seen where people have wasted value by not focusing on exploration. Aurelia's approach is the dual prong where we will continue to explore and we will continue to fund that exploration particularly on our near mine targets and the tenements we own. But that tension being set up with M&A to ensure that we have longevity and durability in future cash flows and returns. Over this period of time it does assist and shift our goal to being more dominant or remain more dominant in our revenue mix to being north of 70% and also a significant improvement with the integration of this asset into the group and in an AISC perspective and an improvement in our reserve base within the company.
Costs for the gold mine include royalty? - royalty does sit in the AISC as how we assess the asset. The concentrate is sold as a concentrate overseas. In the future that can be reassessed but in the short to medium term it will be sold as a concentrate.
Q I would like the Board to comment on the way Aurelia Metals shares are traded on the ASX. The regular movement of significant shareholders, borrowing and returning stock between various institutional entities, the algorithmic trading that appears to be designed to hold the share price within a predetermined band. Are directors concerned about the lack of share price growth over the last 12 months and how the shares appear to be heavily manipulated by institutions.
Dan: I think it's fair to say we are not privy to the methodology of trading of some of our shareholders. We monitor the trading closely but we haven't observed anything problematic. The Directors, full board and management team are heavily focused on the future basis of business which has demonstrated on exploration success and how that inorganic growth through the acquisition of the Dargues Mine has come. Share price appreciation is key to the Board and we will continue to make the decisions that are the best for the company and shareholders to continue to achieve that.
All the best.
KKR
AMI Price at posting:
43.0¢ Sentiment: Buy Disclosure: Held
(20min delay)