minesite article

I no longer hold this one, but I thought it may be of interest to those who follow DRA. From minesite.com .
Cheers John.

March 03, 2005

Dragon Mining Survives …. But Only Just.

By Our Man In Oz.

If 1992 was the annus horribilis for The Queen, Dragon Mining will mark down 2004 as its own year of torment. Cost blow-outs, construction delays, and a bitter dispute with a construction contractor turned what should have been a time of celebration into a near-death experience. Rather than rejoicing in August with an inaugural gold pour at its Svartliden mine in northern Sweden it ended up re-negotiating debt, re-scheduling construction deadlines, and calling in a fresh construction crew while everyone from the chairman down spent every waking hour with fingers and toes crossed.

The full extent of the crisis is told in one number; 65 per cent. That is the size of the cost overrun at Svartliden, a project Minesite had the pleasure of visiting last May, just as the post-winter thaw was making life more bearable on site near Lyksele. Back then, Dragon management was full of confidence that its South African contractor would deliver Svartliden on time and on the budget of US$12.25 million. Wrong, hugely wrong, thanks to a few oversights such as some of the plant installed being so old that Swedish experts noted that there would be no spare parts available. And that was before it become apparent that a hot weather contractor had not the foggiest idea about what happens to a processing plant in the extreme cold of an address which markets itself as the capital of Lapland.

Without going in to the detail, partly because it is fast becoming a lawyer’s picnic, Dragon now confesses that “the Svartliden project experienced a cost overrun of some A$11 million.” Using an exchange rate of US72 cents to the Aussie dollar that infers a blow-out of US$7.9 million, to produce that 65 per cent cost increase. As compensation for shareholders, Dragon management says “the board and auditors will review the accounting impact of the cost overrun and the potential to recover costs from the contractor.”

In the meantime, while the bean counters and legal eagles have a field day picking over the remains of a failed construction deal, Dragon is getting back on its financial feet. It has restructured its balance sheet for the second time in six months, thanks to the support of Macquarie Bank which has agreed to an accelerated exercise of 36 million options which lift its stake in Dragon to 9.7 per cent. As well, Macquarie has agreed to a major debt restructure which should leave Dragon better able to service outstanding payments on Svartliden.

That, as they say, is the bad news. In the good news department the first point to celebrate is that Dragon has survived. Secondly, it is about to make its first gold pour at Svartliden which remains on track to produce 70,000 ounces of gold in its first year, and then ease back to 50,000 ounces. Delayed as it is, those targets are largely a mirror of the original plan, which has simply blown out in time. The real interest in the company remains its potential projects in Finland, acquired from the Outokumpu stainless steel group when it withdrew from mining.

In terms of future promise, and assuming Dragon does not stuff up again, the company should be able to hit its target of becoming a 200,000 ounce a year European-focused gold producer with production costs of less than US$250/oz. That grand plan starts with Svartliden, moves to the Vammala project in Finland later this year, and then on to the Pampalo project in 2007, followed by a pipeline of well-defined projects sold by the fastidious Fins, so it is reasonable to assume that everything is in order.

On the market, Dragon is slowly regaining its composure. A fall from around A35 cents last July to a low two weeks ago of A22.5 cents has been arrested with the stock closing on the ASX yesterday at A26.5 cents

Lessons: And didn’t our grannies teach us these. First. Never buy cheap shoes or sign up for a cut-price contract. Second. Never believe that someone from a hot climate understands the first thing about icicles on your nose or moose on the road. Third. Make sure there is sufficient funding in place to handle a nasty construction schedule overrun of, oh, say, seven months, and a cost blow-out of, oh, say, 65 per cent.