Hi Look plenty of people here with great insights I've reviewed...

Hi

Look plenty of people here with great insights

I've reviewed the SBM hedge-book again as I got asked to by a few ppl. I made noises when they restructured, this is the situation as I see it.

SBM does not actually have a hedge book in the traditional sense at all now

All forward contracts for delivery of gold from Atlantic have been closed during the last financial year.

SBM has 66010 European Options contracts - that is it, it now just has derivative exposure in the options market. at a strike price of CAD 2050

SBM SOLD these European styled options contracts as part of its Atlantic gold "hedge book restructure" (which was imo absurd and slightly misleading in its description )

CAD gold PRICE currently 2290

RESTRUCTURE IN GENERAL TERMS
SBM made an offer to buy atlantic knowing it had a truck load of gold forwards in place at c1759 which was below market prices at the time and which represented a long period of restricted forward revenue.
SBM ignored this fact and paid up big, saying it would increase production (fail)

SBM early on delivered some poor initial moves in production and with Gold price in CAD rocketing as it was in all currencies it had to do something.

SBM said it restructured its existing forwards at 1759CAD by a entering into options call contracts at a strike of cad2050, expressing it would increase the upside received.

OF course that really meant that it was receiving a premium

When you sell an options call contract you receive a premium

so sure SBM was sort of right, it got its c1759 in fowards, plus it received a premium for the option call contracts it SOLD.

Problem with that mess is that IMO it was badly restructured and a mirage to get people to think it had improved its position by being able to get upside in rising gold price.

When you sell options call contracts you are actually BEARISH.

So SBM were getting c1759 cad PLUS the option premium on Gold options contracts it sold.

Great except the CAD gold price was much higher than the strike price in 2020 and they have to pay the difference between the strike price and the expiry price, last year was a loss - so they must have given back more than the premium they received.

These losses occur in significant items, so they then say, look its a one off and we will exclude this terrible restructuring mess and put it below the line, and then claim underlying is fab

They actually made the problem worse imo

CURRENT POSITION

They have no forwards in place according to annual report now, closed all during the year
So for SBM I dont consider they have a hedge book in the traditional sense

what they do have is derivative options exposure, which they call hedging, but its not as it doesn't protect them from anything, its merely a trade now.

These option contracts will expire over time and will be cash settlement imo,

The have sold contracts remaining covering 66010 OZ at Cad 2050 for which they have already received a premium for , cash

Current CAD gold price is CAD 2290

Atlantic can sell its production this year at SPOT (it has closed its gold forwards)


GENERAL OVERVIEW

SBM Atlantic can sell gold at spot, current spot is 2290CAD

Current cost guidance for Atlantic is c1240-c1440 at .95 aud /cad

let use midpoint and say 1340cad ASIC for atlantic

So in theory atlantic, can produce an OZ of gold for 1340 Cad and sell it at spot for Cad2290
Gross margin $950 going forward

BUT

SBM has gold option contract it sold for c2090
With spot at 2290, it has to pay on expiry 200

(assuming everything remains as guided and gold price static)

So the gross margin gets reduced by cad$200

(yes there was premium received but thats in a past financial year, so there will still be an outflow in theory this year of $200, assuming these prices all remain static for the example), so margin will in theory be reduced by 21% at current prices because of this "hedging" left in place

The higher Cad spot goes over cad 2050 , the more cash has to be paid out at expiry to settle these gold options contracts, which in turn reduces the real gross margin achieved.

Alternatively if gold CAd drops it gets less on spot, less gross margin but pays out then less in settlement to cover falls from 2290 towards its strike price of 2050.

Whilst they received a premium in the past which went into their bank account, that was in the past, so Im ignoring the final P/L figure for the money and only looking at potential cash exposure going forward

So currently at all these prices, assuming it all stays the same they could be exposed to paying out potentially 13.2M cad in cash from its bank accounts going forward for the relics of this restructure (again assuming costs and spot all stay same.)

Its not much in the overall scheme of things but with guidance lowered and cash NEt debt where it is , capital requirements - imo it is not helpful. and its another potential drag on bank balances

When you look at the hedge book, its current write down of Atlantic and you then see that SBM has gone from a building cash balance (NO debt) with a major mine development underway, to a situation at year end where it breached its banking covenants with a Syndicated banking facility that has full security over its assets (except PNG) and had to go get a waiver according to notes in the financial accounts .

Hence appart from occasional short term trades I do not think its a buy or hold currently as there are still imo quite a few risks about in terms of cash and profitability going forward that will need more than a year to sort out, so Im no prepared to risk purchasing unless its at a much bigger discount to theoretical NTA 1.57) until there is a clear and sustained demonstrated operational and financial turnaround

Anyway - details of some data used in the above general overview - Good luck


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