Hi
@BaliHai, thanks and glad you tagged me in actually, was sitting here wondering if and what to post about the sea of misinformation SFX is drifting in. Don't want to be that guy always inserting my warnings into threads, but it's all following the usual script once the SHTF...
I think Bridge St have the right of it with the BOO lease payments, even if they are hiding it somewhat. There are two separate payments combined with a BOO Lease... the capital and interest component of the physical plant bought on a 'hire-purchase' (eg DMU) and the operating costs to run that plant for the company including performance bonus/fees.
The capital/interest component is treated as an asset on the balance sheet to match the liability on the balance sheet, and the asset is amortised over the life of the liability hire-purchase as a non-operating expense. This new ATO rule was brought n 2019 to avoid companies swapping capex items and depreciation into operating expenses. If DMU cost $20M, that is a capital item right, just that KMS would rather not have to stump up that capex for FID (equity and debt), so pushed out payment into a long-term lease structure (debt only). The ATO rightly wants the cost and treatment of capital items to stay in capital items...
The 'Operate' portion of the Lease deal is an operating expense. Workers, consumables, repairs etc are all operating expenses and so should be placed into Operating Expenses in the C1 cashflow calculation. SFX were the ones to "define cash cost calculations as reported" in their Qtrly, so it's sloppy and misleading not to properly define what part of Lease Payments are C1 and what go into C3...
What is the split and how was/should it be treated? Below is how Bridge St did it... ~$3M of Lease Payments was transferred to C1 Op Costs and ~$5M was left in non-C1 cash costs (but not actually shown in their cash flow table). Grab a calculator check yourself, there is $5M extra cash expenses every Qtr than tabled after revenue is subtracted from change in free cash...
March Qtr was actually -$48.5M because Int & Lease Pmts of $10M were no included in their table.
Sep Qtr was actually -$26M including Int of $7.5M, or -$32M if the extra $6M in P&L C1 costs stuck in Acc Payable is included. Of course those $6M of P&L C1 costs were not paid, so they don;t show up in the cash flow statement... yet.
Dec Qtr Rev $$76.1 less $59.1 Op Costs less $2M Capex = $15M positive cash, yet the table shows $10.6M... which imo is the 'non-operating' asset capital lease payments certainly not included in operating costs (keep in mind the vast majority of lease payments are for capital items like cars, trucks, machines etc).
Complicated right... I'm no accountant, but I've had to come up to speed over the years because that's the first place companies in trouble start obfuscating reality. Time will tell, but I think KMS were already in desperate cash saving mode from mid May (as Bruce said in webinar) and the opportunity to defer works such as OB removal, defer capex and non-essential expenditure, defer some invoices until 1st July are the first place to go in a cash crunch. make no mistake, despite Bruce and his corporate advisor/advertiser Bridge, KMS are in a cash crunch now and for the next 2 Qtrs imo...
Check out Bridge's thumb on the scale of concentrate sales and revenue for example. LOM NMag-con to Mag-con ratio is between 26.5-28%. Last 2 Qtrs were 26.5-27.5% ratio, Q1FY26 is 27%... yet miraculously they have Q1FY25 to Q4FY25 up at an unheard of 30% NMC to MC ratio for some extra revenue. Only a few million extra, but that's the shit that now goes on to calm the market. June Month was running at only 25% ration FFS, yet up goes zircon production
Take the previous update report in June when things weren't so dyer, table (Top one)... they had the ratio at 26.5-27% for Q3FY25 to Q1FY26, but desperate times meant lifting Q3&Q425 up to the magic 30% ratio to juice cash flow for their clients...
Include $7.5M Interest payments and reduce revenue by a few million each Qtr and no, cash levels are not building from here!
Time will tell, but we will get the Ann Rep end of Sep for the Acc Payable, and then the next Qtrly in Oct to see what the cash out and free cash flow is. I agree it's not flowing out fast enough to require a CR for operations, so long as there is no significant production downtime, but mark my words right here I'm confident SFX are in trouble and heading for a $30M spend on a new DMU. Whether or not they can convince Piacentini to fund the new DMU with another BOO lease or it requires an equity payment who knows... but I think they may want a little more security than the first time.
Operations are clearly constrained by the DMU, and then the WCP and CUP in that order. The DMU is consistently delivering ~30% OS in the slurry to feed prep scrubber and the DMU was running close to nameplate capacity for month of June. All this talk of lifting RHF to the spirals above 75% of design by vibrating the >12mm OS on the DMU screens for longer to liberate more fine HM is a reach around to make you feel better. Think it through... will some more rubbishy <12mm feed processed in the DMU and into the slurry pipe, replacing running sands because the pump and pipes are full, change the >2mm OS coming out of the scrubber attritioner?
No, the ore has been mixed with water and pumped under high pressure in slurry for into a scrubbing plant which will break down the <12mm and liberate any fine HM that can be liberated. The "very constant 75% of expected undersize in the spiral feed" is because the ore simply has a large amount of gritty indurated sands >2mm that will not break down further, probably into poor quality if it was physically crushed at high expense. unless the orebody changes, the deposit has lost 25% of its ore to OS and ~20% of it's contained VHM per tonne of ore mined... all while costs have risen strongly and the NMag-con price is way below expectations due to poor quality/recover by downstream processors.
Simply lifting DMU throughput by 25% to 93.75% of RHF design might equal BFS concentrate production, but that won't be good enough. KMS need to squeeze everything out of the plant to make some money and justify the large investment in a Stage 2 expansion as the grade drops. Given CUP limitations, they need to lift DMU throughput by ~35% to max out the spirals and CUP to maximise production and revenue form the cost base. The idea that you can add a few components onto the DMU and suddenly it will pump 35% more slurry is another reach around... DMus are a complex bit of kit with every part matched to the others to achieve a certain average throughput rate. Not just would it require a full rebuild if possible, KMS would lose more than $30m in the downtime to do it. Makes no sense...
The only thing makes sense to me is confirm Sep Qtr as another nameplate ~3.1Mt Qtr, while confirming internally from sonic drilling and various test work that the deposit is higher OS than design, thatthe only solution the market will swallow while going backwards on cash is to build a new DMU with 1750t/h capacity, and try to cheaply tweak the CUP if possible to max out production for minimum capex.. and hope NMag-con payability improves and prove to the market that TB makes enough cash consistently to risk another large investment to Stage 2 expansion...
IMHO, DYOR, happy to be proven wrong, happy the market is back on the bid with volumes to provide liquidity for htos who want it.... GLTAH
KMS DMU in action
Another similar size DMU from different angle
(20min delay)