afr article, page-9

jgroe
You won't find much information about KML in GBG's accounts because it is equity accounted. To get the full information you need to run the financial report from ASIC. I have not done this for the current year yet.

The concern is not the AUD/USD exchange rate, notwithstanding that production costs are is AUD.

Borrowings are in USD and sales are in USD. The problem is that as the USD continues to strengthen against all other currencies:

- the loan amount increases (relative to AUD) which is not an issue if the operating margin (ie operating cashflows) exceeds the interest and principle repayments; and

- the strengthening USD will actually result in lower commodity prices because everything is priced in USD. As you can appreciate the only reason that commodity prices have remained high until this year has been because of the weak USD. So to think that as the USD strengthens commodity prices will remain the same or increase is unrealistic.

The one I like to compare is the Copper price in AUD and USD

Over the last 6 months the AUD copper price has been quite strong as the USD has been strengthening. Over the same time the USD copper price has continued to weaken.

The other issue is that the asset (the mine) is located in Australia. I hear all the time that not hedging the commodity price is not an issue when the sales and the loans are in the same currency. What finance people forget is there is still currency risk. If the mine is in AUD has to be sold to meet a loan repayment is USD, and the AUD/USD is falling what this means is that there is a significant loss in equity as the debt balance rises. What they forget is the currency risk if operating cashflows are negative. But that is okay in this case because in 1Q 2014 KML should be cashflow positive.

In short, you have right to be concerned. But you points are a little off the mark, but on the right track.