Focus Minerals Is Trading At Well Below Cash Backing, But Is Working On A Revival Plan By Our Man in Oz
It’s not every day that you can buy £1 for 65 pence, or if you’re living in Australia A$1 to 65 cents, but that’s what you get with Focus Minerals, an Australian gold producer which has its most valuable asset of A$195 million tucked away in its bank account.
The cash, plus gold bullion held by Focus, compares pretty favourably with the company’s stock market value at the ASX of A$128 million which, in theory, ought to make the company an ideal target for a takeover bid, followed by a spot of asset stripping.
But that’s unlikely to happen, for a number of reasons.
The first is that Focus is controlled by one of China’s biggest gold mining companies, Shandong Gold.
The second is that Focus has developed an unfortunate reputation for being a high-cost gold producer, and the third is that the company is embarking on a fresh round of cost cutting and management changes designed to streamline its operations and turn it into a low-cost, high-value, goldminer.
What investors want to see is whether Focus can get it right this time. Because previous attempts to create a business operating two gold processing centres in two of Australia’s historic gold mining centres have not proved successful, despite the best efforts of local management which has had the use of Shandong’s capital.
The idea has been to secure a major ground position around Coolgardie and Laverton in Western Australia, centres which have produced some of Australia’s richest and biggest goldmines.
In practice, it has proved a difficult plan to execute, partly a result of lower-than expected gold grades and much higher costs caused by the hothouse economic climate which created during Australia’s resources boom years.
That boom is now over, and falling costs, especially for skilled professionals, drilling crews and general operating expenses, are coming to the aid of Focus which has suffered on the stock market after delivering five consecutive quarters of gold being produced at more than A$1,000 an ounce.
The most recent March quarter showed a budget destroying cost of A$1,893 per ounce – a number which can only be described in non-JORC code terms as being a “country mile” above the March quarter gold price.
How well the company performed in the June quarter will be known soon, though the big issue this time will not be costs but the gold price, which has fallen sharply throughout the latest three month period, meaning that Focus will have to work even harder and smarter to just break even.
Management, led by chairman and acting chief executive, Don Taig, knows there is a mountain to climb if Focus is to achieve its goal of being a major Australian gold producer - if, in fact, that can be done under its current structure.
A whiff of a potential dramatic change for the company came two months ago when Focus announced that it was mothballing its Laverton operations and considering switching its activities in that region to pure exploration.
The aim would be to grow gold reserves by drilling a number of highly prospective green-fields targets as well as exploring a number of other opportunities available,given what Don called “the company’s very strong cash balance and cornerstone shareholder”.
“We have a significant, highly prospective land-holding in the Laverton region surrounding four major mines with over 20 million ounces between them,” Don said. “We are not about to deplete our current reserves base just to break even.”
He added that Focus was in a strategically strong position with “one of the largest bank balances of any gold miner on the ASX and the backing of a major world gold producer in Shandong Gold”.
The strategic review which the company has been undertaking envisages a concentration on opportunities for large-scale, higher-grade ore bodies.
The same dramatic mothballing step that was taken at Laverton has not been taken at Coolgardie, the company’s original mining centre. But there is no doubt that Focus management has been disappointed by events over the past year, which is why there has been a wholesale changeover at the operations, including a new resident manager, mining manager and chief mine geologist.
Those changes occurred after the Coolgardie operations reported a staggering cash production cost in the March quarter of A$2,408 per ounce, with blame apportioned to “inadequate site processes and planning, in addition to continued permitting delays” leading to “unacceptable production and cost outcomes for the quarter”.
“The March quarter has been an aberration in terms of production and costs and compounded by the effects of the gold price fall,” Don said.
“Our strategic review is continuing in order to determine our best path forward in driving value from this asset for shareholders. We believe we will be able to get Coolgardie back on track providing the existing operations deliver the further productivity improvements required.”
One of the objectives of the many changes made at Coolgardie include a 20 per cent improvement in productivity. That’s a worthwhile goal but one which ought to be seen today in the light of the continued fall in the gold price since the 20 per cent improvement target was set.
No-one at Focus has spoken publicly about the company applying the Laverton “mothball solution” to Coolgardie but it might yet turn out to be best for shareholders if such a step is taken, providing a clean break from the high-costs which have proved very difficult to lower.
In a curious way, converting Focus into a pure exploration play to combine its huge tenement position with its equally huge cash balance might have the effect of boosting the company's share price.
As it currently stands, Focus itself faces the challenge of its gold mining operations being the biggest drag on what could become an exciting cash-backed exploration story.
FML Price at posting:
1.3¢ Sentiment: LT Buy Disclosure: Held
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