Once the re-finance arrangements are completed in October 2015 a...

Once the re-finance arrangements are completed in October 2015 a Tranche 2 payment facility becomes available to the company. This was identified in the most recent announcement to fund “debottlenecking” effectively adding an additional heap leach tank and additional electro winning cells to add potentially 30% more to production capacity of Kipoi.

For a while now based on some aspirational targets mentioned by Brad Marwood, I have been questioning the possibility of increasing production above the 25kt/pa nameplate figure, including utilizing the additional crushing circuit.

Once finance arrangements are in place, and given the stretching of financial terms for the repayment of existing facilities, the available free cash flow available to the company warrants analysis.

Past performance points to an expansionary vision, and this partly has lead us to where we languish today, but a lot has to do with the commodity price metrics, namely a depressed spot copper price.

So the things to watch over the next two qtrs are:

• Production levels
• Cash at bank

Here is a scenario.
At the completion of Sept qtr, where re-financing is entered into the company has 137.5mio on loan. It has the following commitments

• Monthly principal service $137.5mio/75mthterm = $1.83mio/mth principal repayment
• Interest repayment of 9.25%/pa = $137.5*.0925 / 12 = $1.06mio/mth interest repayment
• Taurus charge $USD50/tonne cathode sold, 2,083t/mth (based on 25kt nameplate) = $104,150USD
• Total monthly outlay (Principal / Interest / Taurus Charge) = $2,994,150, say $3mio USD

If reports are to be believed this upgrade could take 12mths but that was mentioned by the Todds in their recent comments on becoming substantial holders, yet to be confirmed by the company.

Now if TGS defer any expansion, to the end of the June qtr 2016 free at 25kt/pa production rate they will produce 18,750t and potentially sit on their hands accumulating cash, paying down pricinpal.
Revenue: 18,750 @ $5,500/t average price = $103.125mio
Less production costs of say $1.40/lb (assume grid power and regent savings lowers AISC from $1.75 by $0.35) = <$57.75mio>.
Less Re-finance service of 9mths = <$27mio>
Leaves them with additional free cash = $18.25mio (assumes no tax paid as the asset in the first 18mths of production is depreciated)

Lets say they hold cash at bank at $20mio at Sept qtr 2015
Add: free cash accumulated at eom June-16 =$18.25mio
Then assume they draw down upon the debottlenecking facility eom June 16 = $25mio
That’s $63.25mio available to debottleneck, OR maybe more……

If they draw down on the $25mio debottleneck facility, that adds another $252k principal and $192k interest = $445k/mth added load to service, $5.3mio/pa or on a yearly basis leading to a degradation of free cash to $15mio/pa. That gets them closer to the $110mio mark to do Stage 2, a cash shortfall of $30mio granted with a fully drawn out facility of $162.5. Remember that when we acquired GC stake we had debt, with the short term Taurus facility at $175mio. Also note if the company went for a fully blown stage 2 from eom June 2016 they would be committing to debt of btw $190-200mio.

Also take into account that if they commit to SXEW stge 2 from July 2016, based on say a 14mth construction timetable would see Stge 2 coming online by Oct 2017. Based on the current schedule of repayments in the re-financing deal 24mths of principal will be paid back at $2.082mio/mth = $49.97mio by Oct 2017.
This ignores the additional debt drawn, but I guess it points to how close even at depressed spot copper prices the company is in reaching its potential for a fully blown stage 2.  If prices go back up to $3/lb, then certainly this changes the equation dramatically. These guys would have certainly crunched the numbers, but just as events have conspired to make things harder, a move the other way dramatically changes the metrics.

So things to watch are production levels, cash on hand, and don’t be surprised if we even see by October a more robust plan to grow production, even above the 32.5kt staged production upgrade.
The more cathode they can pump out of the facility the more costs at a unit rate go down as you amortise fixed costs i.e. administration, O’heads across.
Gltah