gindalbie under pressure at karara

Was just reading this, so I thought I would share ...

"FNArena News - September 26 2013

-Delays fracture Karara's outlook
-Ansteel option to raise JV stake
-Brokers call for sorting of JV finances


By Eva Brocklehurst

China's Ansteel has increased the funding offer for the joint venture with Gindalbie Metals (GBG) at Karara, Western Australia, but the announcement has opened a can of worms for brokers. The Karara project is running at reduced rates while work is being done to overcome bottlenecks in tailings management. The work should be finished in three months. These delays are stretching the joint venture's balance sheet. Hence, Ansteel has come up with more money, having already injected $200m in extra funding since the start of FY14.

This time Ansteel has stepped in with a US$230m offer which will involve a two-stage process. This includes US$100m in immediate cash and a US$130m term loan from the Bank of China.

Although Ansteel appears content to cover the funding shortfalls, brokers anticipate dilution of Gindalbie's equity. Negotiations for new debt or a re-financing are crucial but still up in the air. In Morgan Stanley's view, the future of Gindalbie is contingent on delivering the Karara project within the revised time frame , finalising additional funding from Ansteel and re-negotiating existing facilities or extending repayment terms. It all adds up to elevated risk and the broker has decided to downgrade the stock to Underweight.

JP Morgan thinks Ansteel should just buy out Gindalbie's stake and be done with it. The broker observes that Karara's net debt has increased to $1.9 billion from $1.2 billion and, while the extra funds alleviate the near-term cash flow problems more is probably needed, as Karara is yet to reach capacity. It appears to JP Morgan that Ansteel is prepared to value the project at $1.3bn. This is well above the broker's estimate of equity value to the JV at $350m, as forecasts of free cash flow barely cover the debt load. The new funding package could mean Ansteel raises its stake to 62% as the company has the option of converting the funding into Karara equity.

Ansteel has indicated that it is prepared to pay up to $1.3bn for 100% of the JV. This implies Gindalbie's share, assuming only 38% is held, is worth $490m. After removing corporate costs, this values Gindalbie at $380m, or 25c a share, in JP Morgan's calculations. Clearly better than the broker's base case value for Gindalbie at only 6c a share. Given Ansteel’s actions, JP Morgan believes it is appropriate to change the price target derivation to be 50% of NPV and 50% of Ansteel's implied value. This results in a June 2014 price target of 15c a share.

UBS also thinks it likely that Ansteel will take up the option to convert the funding to equity and increase the stake to 62%. The broker notes there is sufficient liquidity in the JV only until the end of FY14, according to Gindalbie's estimates, although the company did not provide the iron ore price or FX assumptions underpinning this estimate. Operation costs of $700-800m are estimated for FY14 and UBS also assumes a break-even iron ore price of US$92/t for the project if Karara meets iron ore specifications. The ramp up to 8mtpa of magnetite is still occurring and final commissioning should lift the iron grade to the 68% target. Karara plans to ship 15-2.0mt magnetite concentrate in the December 2013 half. UBS models nameplate production for the end of the March quarter 2014.

The funding of Karara has been messy. On 10 June 2013, Gindalbie announced that Ansteel would advance another $30m loan to cover Gindalbie's April share of the $60m that both agreed to advance. This increased Ansteel’s loan to the JV to $60m. The agreement allowed Ansteel the option to increase its stake to 52.16% by converting the loans to equity and diluted Gindalbie's share to 47.84%. This agreement removed the need for Gindalbie to raise further equity capital to support Karara's working capital requirements. On 2 July 2013, Gindalbie announced changes to the funding agreement whereby Ansteel provided an $84m bridging facility as a direct loan. Under this agreement, Ansteel did not have the option to convert to equity. This was for cash requirements over the next 12 months and again removed the need for Gindalbie to raise further equity. The company is waiting for Foreign Investment Review Board approval which would allow the return of the original $30m loan.

Gindalbie has other hematite projects which have been on the back burner while the focus on Karara. Morgan Stanley thinks clarity regarding the opportunities around these projects could be a potential catalyst for the company. Gindalbie finished FY13 with cash of $9m and no debt. The company's cash position may be tight but it is still net cash, and there is value in a fully ramped up Karara. For brokers, nonetheless, the proof of the pudding is in the eating. That won't happen until delays, working capital shortfall and debt negotiations are sorted."

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