quarterly

Hi all,

Longer term holders will know that I did my shirt on SBM and sold out in August 08, based on my fears that they were spending too much money, too fast and would need another capital raising before Gwalia was finished and profitable. In this environment (and after what happened with the last raising), I found that prospect frightening.

I've been waiting for this quarterly, in order to see whether or not my fears were valid and, generally, to check up on the prospects of SBM. I still believe that, despite the scary cost of bringing it into production, Gwalia can make money over the medium to longer term at present gold prices. Therefore, once producing consistently, SBM has a chance at becoming a credible and profitable Aussie gold producer.

So, with that out of the way (and bearing in mind I'm just a mug punter who looked at their published material), I offer the following comments on the Sept 08 quarterly, purely for yours and my entertainment.

First, I'm not yet convinced that they can escape without a further capital raising (not as large as the last one), or some form of debt funding, within the next 6 to 12 months.

Consider the following (comparing the Jun08 and Sep08 quarterlies): cash, less enviro bonds @ 30/09 was $54m vs. $36m @ 30/06. They raised $21m from put option sales (included in cash), which means that after taking that figure out, essentially their cash position is unchanged.

However, they spent the entire retail raising of $54m which was received in July 08. They also spent $17m on equipment, via the GE funding facility. Bear in mind that they had spent the entire instututional proceeds (of approx. $60m) in the Jun08 quarter, almost before it was banked.

We are told that Gwalia is almost ready to pour. However, underground mines are notoriously expensive to get into profitability and significant cashflow negative development costs can continue until well into initial production. I may not be reading this correctly, but the Sep08 quarterly seems to be saying the total 09FY cap-ex for Gwalia will be $95m, of which $24m has already been expended, leaving a funding requirement of $68m. Note that they are also intending to spend about $19m on exploration during the year (which already pared by by about 40% since Jun08). Additionally, last year admin costs were $22m.

So, the $54m cash, less proposed exploration and admin costs, would leave about $13m for the year to put towards Gwalia's extra $68m requirement.

If, as SBM asserts, they could self-fund the extra spend, that leaves them with two potential sources: profit from Southern Cross, and profit from Gwalia. How realistic is this?

Regarding Southern Cross, they mined 37,000oz from it during Sep08 quarter @$862/oz cash costs. They are projecting a 180,000 - 190,000oz total result for 08/09 from that source. That would require an enormous head grade and/or throughput improvement over the balance of the year, amounting to the equivalent of 47000 - 51,000oz total ounces of production per quarter, or 27%-38% improvement on Sept quarter.

So, how do their historial projections compare? Well, in the Jun07 quarterly, actual production for the 06/07 year from Southern Cross was 171,000oz @ cash costs of $508/oz. For the 07/08 year, they projected production of 175,000oz @ cash costs of $505/oz. The actual 07/08 result was 158,000oz @ cash costs of $555/oz.

Now, things might have gone a bit awry at Southern Cross during the quarter, resulting in a big slippage in estimated production and a blow out in cash costs to $862/oz. The thing is, the improvement required for the remainder of the year is significant. Now, bear in mind that they estimate capital costs of $28m - $30m for Southern Cross for the year.

So, if Southern Cross can meet its expanded production targets and if the cash costs decline markedly or the $A gold price increases significantly, Southern Cross might be able to make some kind of profit contribution to Gwalia, after it has paid for its own $30m-odd capital costs. However, it will require significantly higher grades than the 2.4g/t mined in the Sep08 quarter and the 1.5g/t stockpiled on the ROM pad.

So, for the sake of argument, if Southern Cross contributes little or nothing to the extra $68m which Gwalia might need before 30 June 09, that leaves Gwalia itself as the source of internal funding. One would imagine you would need to be mining some pretty rich veins, in order to be making that kind of money. According to the Jun08 quarterly, Gwalia Deeps averages 9g/t. Not bad. Only problem is, between now and Dec08 when the main reserve is reached, mining will be from the West Lode at 2.9g/t and the Kallis open pit at 3.5g/t. Try as I might, I can't see that making the kind of money needed.

So, my conclusion is: if absolutely everything went according to plan, they might just scrape by without needing to raise either capital or debt. However, the more likely scenario is another funding requirement when the existing cash reserves are depleted.

How much and when, I wouldn't hazard a guess, but don't be surprised if such an announcement is forthcoming. I don't think I'll be buying back in, just yet.

As I said at the outset, I'm just a mug punter, so don't consider this investment advice, it's just my take on it. Feel free to criticise what I've said and please do your own due diligence. As always, the company has more info than I do, so if they say (and they do) that:-

The Company’s forecast capital expenditure will be fully funded from cash flow from operations, based on the Company’s forecast using a gold price of A$975 (US$772) per ounce and the Company’s current cash reserves.

then you should believe them, not me.