1. Regarding the NTA/Cash situation, the point I am making (and why I used the Ion Carbide example) is the assets of a mine that cannot produce positive cashflow and earnings are worthless, even though they maybe in the books at $1, $2, $3 a share. Remember when Pasminco went bust shareholders got nothing. I'm sure Pasminco had a great NTA before this happened. The $25m performance bond for PEM although an asset is tied directly to the broken hill assets, hence its value is negligible as they don't get any use out of it (apart from Interest presumably) and can't use it for working capital purposes. Hence once they have paid their debt for this quarter they've got just the $42m in the kitty to play with. Also their ongoing Capex will reduce this amount further.
I would place very little value on the sale of second hand machinery (I am assuming CBH will get bugger all from any sales that they do) in this environment.
2. Regarding the whole spot/sale price etc etc I agree there are a whole lot of variables due to metal prices and currencies with hedging thrown in to complicate it. But to sum up:
So the 17,996 of $3,655 AUD hedging becomes $3,242USD.
so the hedged amount sold would be:
22996 tonnes at $3,138 = $72,161,448 USD Revenue
The rest of the production ie 67,004 would be sold unhedged
So far this year Zinc has averaged $1,833.79 although the longer it stays at the current level ($1690 odd) the lower that average will become. Anyway
67,004 tonnes @ $1,833.79 = $122,871,265 USD
So total USD revenue for the 2009 year (ie the two $USD figures) for 90,000 tonnes of production would be roughly $195m or the price PEM would get USD per tonne including its Zinc hedging is $2,167 or $0.983 per pound. If you were to use today's spot rate for the remaining sales instead gives us $2063 a tonne or $0.936 a pound.
Now it gets tricky to work out the Lead/Silver credits but it would be safe to use the figure for the last couple of quarters and even they might be too high - why? Because PEM was getting the benefit last year of some well in the money currency hedging (260m @ 0.8282) and lead hedging (30,221 put options @ $2,740 USD) during 2008. This year they have only 155m @ $0.821 for the currency and 38,701 put options at the much lower price of $2,186 - so maybe assume $0.20 of credits.
So this gives you:
Average price received $0.983
Direct Cash Costs $0.96 By product credits ($0.20) Zinc Treatment Charges $0.31
Net Cash Cost $1.07
Cash Operating Margin ($0.087)
Now with these calculations I think I am been quite generous - if you used the average direct cash costs for 2007 ie $1.07 the cash operating margin would be ($0.197).
So these calculations imply PEM will lose $0.087 for every pound they produce ie 198.4m (90,000 tonnes) which means they will lose $17.36m USD or $19.66m AUD at the current rate.
If current spot rate for Zinc was the average for 2009 they would lose $30.1m AUD.
Now TTC this takes into account all the metal/currency hedging for 2009. So if you have only have $42m to play with (as described above) things are getting quite tight. Please feel free to knock holes in the above but considering I have simply put in existing data I think you will find the math compelling.
Still so keen on them?
I see in your answer you mention their sell price for the last quarter was still $1.04. But Zinc averaged for that quarter $0.9633. Zinc is now $0.7688! PEM sells 3 QUARTERS of its Zinc UNHEDGED! Can you see now why their sell price even with the hedging is going to drop significantly.
You then mention that their hedge position should have improved since 30th June to supposed metal price falls. Let me refresh your memory:
30th June
Zinc = $1903.25 Lead = $1763.50
Today 12th August
Zinc = $1690 Lead = $1925
So zinc is down $213.25(or further in the money) a tonne and Lead is ACTUALLY UP $161.50 (or out of the money). Why do I emphasize this? Because (and check it for yourself) PEM has a total of 23,111 tonnes of total Zinc hedging but 133,958 tonnes OF LEAD HEDGING - That hedging is now $161.50 out of the money compared to 30th June 08. To do a simplistic calculation of this impact:
So the value of the metal hedging has been reduced by a net $16.66m.
I hope these sums will illuminate you - I haven't done them again, merely gone into more detail.
To sum up all the hedging guff:
The value of PEM's hedge book will continue to reduce (back to negative possibly) if the AUD further depreciates against the USD and the lead price remains strong.
5. For sure the debt is there - although 4 years is a LONG time in commodity markets, but the most important thing is to be AROUND when the cycle picks up - that requires lots of cash, and good fund sources - CBH has both, PEM doesn't. I'm sure if Pasminco could have hung around for a couple of years they would have come out of it with the way metal prices improved but they ran out of cash and funding hence bye bye shareholders wealth.
6. See above discussion on how the cold hard cash at the bank could disappear in a matter of months
7. First part of the answer see 6. (about the cash). Second part see above about the hedges. Also they would be insane to sell their hedges if they keep full production - They then would be selling 100% of their production at around $0.77 but costing them $0.98 to produce it!
10. Yes they may get a bit of cash from the zinc still stockpiled but it doesn't take away from the fact that the whole operation is worthless at current zinc prices.
11. Forget about open pits (requires capex = requires cash). As for the reserves, doesn't matter if you're not around in a year or sos time.
12. A potential JV/predator is hardly going to pay top dollar from a distressed seller. Again (why do I have to keep repeating this) PEM only has $42m net (and who knows when they have to pay back the rest of the debt $14.2m)at their disposal. CBH has $125m. (with $200m to pay back in May 2012 a Long long long way away)
You say "I hope my comments have resolved your hedging mystery, Zinc/Lead prices were much higher than today, and today the hedges are worth much more than $80M."
Again you should have checked your sums as Lead in particular is much higher today than it was on the 30th June. You are correct on the Zinc but PEM has 5.8 times more lead hedging than Zinc. (see before mentioned facts on Lead and Zinc prices)
So for all of your punters out there the summary:
PEM is producing at a loss of close to 9 cents per pound at current metal prices. They will lose $20m if this is the case. If their costs are similar to 2007 then they lose $30m. They have $42m free cash with limited ability to raise debt or equity. Their $80m hedge book (30 June) is significantly less due to the appreciation of the Lead price since June 30 and the depreciation in the AUD/USD.
Thus is there any surprise the company slipped this into their quarterly?
"As part of the preparation of 30 June 2008 Financial Statements and the year end audit, the Board will assess the carrying value of the company's assets for possible impairment in accordance with relevant accounting standards. The outcome of this assessment will be influenced by the re-optimised production profile and reduced operating costs at Broken Hill as a result of the current planning process and prevailing spot metal prices. Furthermore, in light of the current liquidity issues facing global financial markets and the weak equity markets the Board will also be reviewing the realisable value of the company's financial assets, including the hedge book, commercial paper and listed investments."
TTC, note the bit about the company assessing the carrying value of assets for possible impairment? There goes your NTA......
Again, much enjoying the discussion, appreciate your thoughts but I think you will find the logic compelling.
Cheers
J.
PEM Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
