One of the biggest concerns I had after the May 29th...

One of the biggest concerns I had after the May 29th announcements was whether KMS would find themselves in a spiralling cashflow crunch resulting from an ongoing "higher costs than revenue" scenario. This was particularly unknown because as well as the perfect storm of (1) lower final product yield than forecast due to OS (2) lower product pricing (3) higher costs, at that time we still had no indication whether ramp up would deliver full DMU throughput to remove throughput from being an additional variable that would effect the revenue side of the equation.

The fact that June DMU throughput was reported at close to 1mil tonnes is a big relief. Bruce reiterated that they don't see a reason why throughput can't consistently match, and possibly even exceed what was achieved in June. For this reason I have used 2.9mil tonnes of throughput as my estimated throughput for the Sept quarter in my below listed calculations (I have still applied an 85% final product factor to my production numbers). I wanted to see this particular set of information to give myself some comfort that cashflow and basic profitability are not issues that we need to be extra concerned about right now (as was the case for me in June).

I feel I have used optimistically realistic numbers (assuming that nothing comes out of left field, ie further pricing drops, mechanical breakdowns etc) to get a sense of where we will stand at the end of September in relation to cashflow, stockpiles and basic profitability, and I get quite comforting answers.



Product stockpiles are a variable that haven't received much focus. Even if some of the numbers I've assumed don't eventuate in the September Qtr (such as a reduction in stockpiles due to high levels of sales and shipments, or if the amount of sales not paid for in Sept is higher than the amount of sales not paid for in June, or if the amount of product sold in September qtr is lower than I estimate) these variable will indeed reduce the amount of cash at the end of the quarter but will instead be sitting in stockpiles which will be converted into future revenues down the track.

By my estimates KMS will be generating revenue ($80mil) which more than covers all of the corresponding costs ($62mil, including Interest and lease expenses). In a net cashflow positive scenario like this cash reserves will only continue to grow. If a capex fix of up to $20mil is required to address the OS problem, then it's quite feasible that KMS could internally fund this. This would be the case if some of the other variables which are effecting cash flow and profitability are addressed (product price, costs) and the cash reserves continue to grow as is indicated by the current cost revenue profile (note that they may have $33mil cash at bank in September with stockpiles of $25mil). If the profit/cashflow profile strengthens over the next few quarters KMS would be in a position to repay fund a $20mil capex requirement and fund their interest and debt repayments without relying on further partner contributions.

My feel is that 30c was about right given the uncertainty that was there in late May and June, but if the scenario I outline above starts to look like the lay of the land then 30c starts to look oversold in my books.