No surprise to see PEM today down scaling its operations to focus on high grade production. But before people leap to the conclusions that this is 'all good' please consider:
1. As I have previously stated in other discussions PEM states they had $77m in cash at June 30 2008. However $25m is reserved for performance bonds (can't touch) and $10m needs to be paid back for debt. So a net $42m for the company to play with as at 30 June 2008. (not taking into account any cash burn over the last 2 months)
2. Again as I predicted in previous discussions (cheers TTC) their hedge book had deteriorated subsequent to June 30 and they have managed to realize $60.3m in cash - In fact they were lucky to get that considering when they made the decision the book was only worth $48m. But you must net from this gain the cost of required production declines which enabled the hedged book to be sold. Also factor in the cost of ongoing CAPEX ie
Reduction in work force = $20m FY 2009 CAPEX = $25m
So from all of this (assuming no cost/capex blowouts) they net $15.3m ($60.3m hedge book gain less employee redundancies $20m less FY 2009 CAPEX $25m = $15.3m)
So adding this to their existing free cash position as stated in point 1. equals $57.3m. Some of you might argue "oh but if they close the whole thing down they'll get that $25m back" Yes they will. However if it cost them $20m to reduce the workforce from 760 to 320, don't you think the combined redundancy payouts plus all the other costs to put a mine on care and maintenance would eat the $25m up pretty quick?
3. This point is VERY important. PEM's recent production has been positively affected by their Hedge book been in the market. ie all their revenue was converted back at $0.82 etc etc. The hedging had the effect of reducing their cash costs and increasing the price they received. This is now removed. Considering the price they were receiving at current zinc prices WITH the benefit of their positive hedging was well below their costs, the effect of removing the hedging will put their existing operations more into the red. Sort of like robbing from Peter to pay Paul.
4. Finally PEM has a large fixed cost component with regards to its Mill having 2.8m capacity and them only utilizing 1.8m of it (that was the whole point of the CBH merger to get the Rasp mines additional production). With them now reducing production down to 0.95m those fixed costs are having to be distributed across only 0.95m of production (and hence increasing the fixed cost component).
So to conclude, one would have to take it "on faith" that the current change in mining plan will reduce the company's cash cost to a level that makes the company viable at current prices. They only have a cash backstop of $57.3m to keep the wolf from the door, and if their costs remain at levels similar to 2007 then that will be eroded in a matter of months with Zinc and Lead prices at these levels. PEM has limited ability to raise debt (who would lend to them?) and no supportive shareholders - Things could get rather tight in the next few months.
Mt oxide looks interesting but who is paying top dollar for mining assets in the current environment? (look at the multiples existing operations such as OZ minerals etc trade on)
I hope for all Zinc operations (PEM,CBH,OZL,JML,TZN) the aussie dollar continues to decline and the Zinc and Lead prices recover soon (after all the LME stockpile is only 160,000 tonnes and PEM's reduction alone will remove 40,000 tonnes). But in PEM's case they don't have much fat to live off and limited ability to source additional funds. Its all up to them getting their costs down to around $0.78 cents per pound where Zinc currently is (note they averaged $1.03 for FY 2008)
cheers
J.
PEM Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
