The devil's advocate in me has recently gotten into the mind of...

The devil's advocate in me has recently gotten into the mind of what your typical seller at these prices might be thinking. For a bit of perspective on Conti that would not normally fit my bill, here goes a bit of a rant.

Botswana Delay

Alright, so we all know that these things take time to plan, but enough is enough!

Three and a half months ago (on June 1 to be exact) we were informed that a two phase, 60 hole, drill program would take place, commencing in June, and completing before the end of 2012. This has not begun yet! I am aware that a drill rig is being moved into position as we speak, but we are now running a very fine line with the March 2012 deadline. The drill rig has not hit ground yet, and we are planning to somehow complete an extensive enough drill campaign within the next 6 months that will not only give us a headline JORC resource for the prospect, but allow the company to work out what land they are going to give back to the original land owners. 60 drill holes to, say, a depth of 200m; an RC rig would do one of those a day. But we will also need some diamond core to define a resource, and these take upwards of 5-8 times longer to drill.

If we commence drilling now, it probably won't be completed until January at the very earliest. We then have to get these results assayed in the labs, and who knows how long this could take. Sometimes lab results can be delayed by upwards of four weeks unless the drilling company has a priority placement ready. So we are now up to February in the best case scenario, and we have not even gotten the JORC out yet, let alone begin to work out which parts of the prospect won't be needed in the future. If we commence drilling next week, then we might just scrape in with the time, but any further delays could leave our Botswana tenement up in the air. We wouldn't want the company to be making uninformed decisions in March next year because of a delayed drill campaign now would we!

Ferreira (ZAR4M Loss projected in FY13, mine life uncertainty)

Take a look at page 99 of the competent persons report, in particular the projected earnings for 2013 at Ferreira. A loss of ZAR4M is expected! If we can't turn a profit at a mine, then how can we possibly turn a profit as a company.

What's the deal here Conti? In your AIM preso you stated that there is the potential for Ferreira to continue operating via the 'bought in coal' strategy. Well you forgot to tell the consultants about this by the looks of things. We as investors deserve to see a strategy for Ferreira. When will the rehab commence on the mine workings? Do you have a long term source of this low quality coal that you can keep on buying? Right now, it feels like things are being made up on the spot as we go.

Very High Corporate Overheads

Speaking of money, and costs, lets have a look at the final report that was released about three weeks ago, in particular the table on page 13 which breaks down the costs into a little more detail. Last financial year we had over $40M spent on non-operational expenses (i.e. money spent outside of the mine). Now some believe that a majority of this was made up of 'one off costs' but I beg to differ. I have highlighted in red what I believe to be 'one off' costs, and what isn't highlighted still adds up to roughly $25M in ongoing overheads. This figure will only increase as we start to repay more interest on our loans, and we plug more cash into the feasibility costs for the second tier projects (these two are highlighted in green). By the way, check out the consultation costs. Over $10M for the past financial year! Was that money well spent? The costs of the CPR can be well justified, but where did the rest of that money go towards? Should we brace ourselves for another $10M in consultation fees this financial year? And what about the $5M 'other expenses' at the bottom of the table...anyone know what that was for?

De Witt (won't be producing for another 24 months)

Now we move on to slide 31 of the recent AIM preso. Did anyone notice that DW is forecast to not commence production until Q42013? What happened to the 'early 2013' story that we have been told. A delay, I can understand, but only when it is explained and justified. It is a little concerning that with still all of next year to get through (where delays could come thick and thin), the projected start date for DW has been pushed back by upwards of two quarters. Also take a look at how the BFS is now not forecast to be released until Q2 next year. And here we all were thinking that this piece of news was just around the corner...apparently not.

Other Matters

- Vanmag sale still not finalised
- Vlakplaats low coal quality
- Shocking market sentiment
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So there we have quite a few quite damning reasons to not hold Conti right now. Botswana is really running a fine line with deadlines and earnings projections for Ferreira look quite dull to say the least. Then we have the 'make it up as we go' look about the coal upgrade operation at Ferreira. Most importantly, we are seemingly spending no less than $25M a year in ongoing annual expenses, with that figure only going to grow as our interest repayments increase, and we fork out more for feasibility costs. Last but not least, De Witt, our stalwort project, is not going to commence mining for another 24 months as per the above timetable.

Jason and co, I know you read these threads. You do a lot of things right, but keeping to schedule is not one of them, and capital management certainly leaves a lot to be desired. We deserve full disclosure of where all the money is going. I'm sorry, but filing away $5M as 'other expenses' is just not good enough!

For Conti to move into a cashflow positive position, our operational profits need to exceed our non-operational expenditure , which could well again be $40M++ for this, 2012, financial year. Vlak turns in at most about $6M operational profit per annum, and Ferreira is seemingly expiring at a dire rate (relying more and more on bought in coal to keep to production targets). Penumbra won't get into full gear until this time next year. In other words, we are staring down the barrel of another financial loss for this financial year, and it could be just as large as the loss we made last financial year. What concerns me is that as we draw on more and more debt, our interest repayments are going to grow quite a lot. The more I think about it, the more it dawns on me that we may not move into a cashflow positive position until FY2014. That's another two years of losses to report unless we get help out of left field. For example, the saving grace could be acquiring, say, one of Anglo's mines in the region for a fair amount to bolster our cashflow position, but even doing so will require another debt facility, which in turn brings upon its own liabilities to the bottom line.

Now before you come back and tell me that the debt issues are understandable, save it. I get it. We take on debt to grow, and then pay it back later. I'm not faulting the strategy, because its the only way to expand as agressively as Conti is. It is this very way that the likes of FMG went from nothing to an iron ore powerhouse. I am faulting the false premise around here that we are making money just because we are turning a profit at the mine (I have been guilty of this). We are not, yet. We are losing money, and we will continue to do so for a while yet.

Ultimately the question is, do you suffer the mid term bottom line financial burden that is headed our way to reap the rewards in the long term? Or do you fold now and chase another hot stock? The way you answer this question(s) should ultimately determine if you are willing to hang around with Conti.

If you don't like where things are headed, then sell and move on. Simple as that. Just holding on and hoping is merely a sophisticated form of gambling. You must have a reason to invest, instead of just following what someone else does believing that they know what they are doing. If you are asking questions about why a stock is falling, then you need to do more research, because if you don't understand how a stock moves, then you are not fit to invest in in my opinion.

Here are my reasons to hold:

1. Botswana. Provided they meet the deadline, it is going to be a very valuable strategic asset for us, with a headline resource figure in the vicinity of 1.5Bt-2Bt.
2. Growth. Just as it is also the achilies heel of this company, it is also what will provide the catalyst for the share price to rebound with the backing of more 'aware' investors in the UK. I am willing to accept that we won't move into a cashflow positive position for a while, because I am taking a long term stance with this, instead of expecting overnight multibagger gains.
3. DT and JB. Never have I encountered two more comitted people to make something work. Sure, they have made some mistakes, but if effort counted for anything then Conti would be $5/share right now. Persistance will duely pay in my opinion.
4. Kenya. This could be a real dark horse. If we get really lucky and grab the C block then that would be fantastic, but the other 3 assets still breed potential for development.
5. Sovereign risk is paling. Malema is being put back in his place. The mines minister continues to slam any calls of nationalisation, and it seems as though some of the supporters over there of this radical action are slowly realising that it would criple the country's economy.
6. Production targets are met. We all know this is the case. If Conti sets down a production target, we can bet on them to meet it!

And my reasons to be wary:

1. There is still a while to go before the company goes cashflow positive.
2. Keep an eye on those 'other expenses'.
3. Hold management to their word. If they say something will happen at a certain date, you don't have to accept a missed deadline unless it is clearly justified. The Botswana delay, for example, is unjustified and we do not have to simply accept it and move on. We were led to believe that drilling would commence in June from an announcement in that very month, and we are now in September still waiting. Again, I repeat, this is an unacceptable delay.
4. Ferreira operations. If they have to decomission/rehab the mine because of limited coal reserves, then they should lay out their strategy for all to see, and the costs involved should be disclosed. If they are going to continue to make use of any space in the Delta plant, then they too should again lay out a strategy for this, rather than assume that shareholders are happy with them making it up on the go, because we are not. I was thinking that they could give the 'coal upgrade' operation a name (other than file it under Ferreira) so we are fully aware of what sales are being made from mining, and which sales are being made from upgrading.
5. Are we ever going to finalise the Vanmag transaction?

Let me finally stress that this post was not spurred on by a 'penny drop' moment. Since I bought the stock I have frequently come back to dispute the capital/time management of the company on HC and elswhere. However, I have also maintained all along that the advantages far outweight the liabilities of holding the stock. I still believe this, but it really is timely that management iron out the creases. If the board wants the company to be seen as a well oiled machine by instos and the stock market alike, they first and foremost have to run the company like one. Frequently failing to meet timelines is a practice saved for the lower tier producing companies who will never make it in the big time, so lets hope that Conti can write their wrongs from this point forward!

Tonight we list on the AIM market, and if the chat on UK sites such as this one is anything to go by, the poms have been chomping at the bit to grab some Conti shares. Let's hope they keep true to their word!

That is all. Cheers.