HGO - Chart, page-371

Hi Mr Wilson.

Things are looking very positive.

I was a bit concerned to hear Lachlan talk about mergers and acquisitions earlier this year.

It's very encouraging however that our new managing director is an underground Mining expert and hopefully not an Empire Builder. It will be great if he continues to have a focus on operations and hopefully making the most from existing assets before getting side tracked by mergers and aquisitions.

I have seen that send potentially good companies down the drain.

* Hgo's foray into Indonesia wasn't too flash.
* SBM's expansion into the Solomon Islands and New Guinea chewed up all the cash flow that Gwalia was generating and turned a top 200 company into a small cap. What a great opportunity that turned out to be, in the buy when the Intos are selling mercilessly game, when there was a clear path back to profitability. It was pretty obvious what needed to be done.
* MLX's multi acquisitions including Nifty that demonstrated how cheap assets that don't have a dog's hope in hell of coming good aren't really cheap.


I'm hoping Bob Fulker and the board will stay completely focused on building the business they have and making the most out of the existing assets and that:

* filling the plant will be their first priority until that job is done.
* exploring the near mine targets to put a long mine life ahead will come a close second
* then exploring the more distant ELS to develop a multi mine operation will be their next focus. .




Will there be room for dividends along the way with $260m of tax losses and $ 17.6m of franking credits.

It's also interesting that our new MD comes from Evolution Mining which has a distribution policy of distributing 50% of free cash flow when possible.

IMO Paying unfranked dividends in a company that has enormous growth potential is wealth destructive because it involves electing to pay unnecessary tax.

It also makes good sense to fund the critical path to filling the plant as priority number one.

The first $260m of free cash flow that is tax free and should easilly emerge over the next few years should be way more than is necessary to fund the Cap Ex requirements and a 2.5c franked dividend.

Which will of course be just the beginning of regular franked dividend payments going forward as franking credit balances rebuild.

Dividend reinvestment plans.

Worth noting that paying dividends whilst raising capital to fund expansion isn't crazy in companies that have franking credit balances. It's very much the done thing to attract the vast pool of investment capital that only invests in dividend paying stocks.