Cheech - I agree, it isn't fair to the people that had jobs at...

Cheech - I agree, it isn't fair to the people that had jobs at the mine and stakeholders and shareholders. I found this on Kitco. It is a bit old now but worth a read.

Date : January 12, 2004



The Eyes Of The World Will Be In The Administrators And Receivers As They Go About Their Task At Gympie Gold.

Amazing how bad news tends to creep out during the Christmas holiday. Usually it is a deliberate ploy by companies with something to hide, but in the case of Gympie Gold there was no spin, just fact. And the fact was that there was a fire in its Southland Colliery on Christmas Day. Things like this happen in mining and in most cases remedial measures are taken and within a reasonable period production resumes. In this case, however, administrators were called in by its bankers within a couple of days and the shares were suspended on AIM and the ASX. To call this precipitate action is mild in the circumstances, but it should bring home to directors of mining companies that bankers and hedge programmes are a lethal combination made worse if investors are not kept totally up to date with mark-to-market positions.

In the case of Gympie the two bankers were HSBC and Fortis Bank and it is claimed that Fortis was in the process of retrenching its business out of mining and Australia. The fire, therefore, must have been a heaven sent opportunity to pull the rug on Gympie, get its loans back and take a profit on the hedging. At the time the company was hedging the Aussie dollar as well as the gold price. It was running a profit on currency and a loss on gold and the net loss on the two was A$5 million. Not a lot, one might think, but bankers who are already lending something like A$30 million dollars to a company may think differently.

At the back of their minds also will be the problems at Southland Colliery in September 2002 when poor ground conditions were encountered. The instability was caused by in-seam thrust faults which caused roof falls and the formation of cavities above the longwall mining operation. As if this was not enough the initial roof falls were made worse by the stresses that build up in the early stages of a longwall operation. As a remedial move the longwall was moved from the middle of the seam to the top until it had advanced over the bad ground. The idea was that the stone would be more stable above the coal seam and this would reduce the chances of roof falls. However it meant that the quality of the coal was adulterated by clay and the ground stability was affected as the machinery was standing on coal.

The contractors running the colliery, Thiess & Co, worked their way through the problem but it was not until March this year that productivity was back to 50,000 tonnes/week which was above the level reached before the roof falls. In the meantime, of course, cash flow had suffered significantly and the company had to raise more equity to top up working capital. Unbeknown to anyone the roof fall also left a legacy in the shape of a heap of broken coal below ground. Such heaps are spontaneously combustible. Just before Christmas heating was detected in this coal and when it burst into flames on Christmas Day a jet engine was in place to remove oxygen and other remedial actions taken to put out the fire. This was achieved in a matter of hours and damage to equipment is thought to be very limited, but a second dose from Southland was too much for the desk bound bankers and they leapt for the exit.

This may not be all bad news for Gympie shareholders though they may find this difficult to assimilate at the moment. The company’s rating has long suffered from being considered neither fish nor fowl. It is called Gympie Gold, but most of the profits come from coal as the gold is a fairly modest 50,000 ozs/year operation supplemented by jewellery manufactured out of specimen stone. Investors in Australia find this diversity hard to assimilate and, according to Our Man In Oz, they threw their hands in the air and gave up on the company as soon as the administrators and receivers were appointed. “Poor old Gympie was consigned to the trash heap of history. Brokers have moved on and are taking no interest in the matter as they are too busy looking for something else to sell.” It was particularly unfortunate that the fire happened over Christmas. By the time the investment community was back at its desks it was old news, and there is nothing as boring as old news.

The equipment was insured, but not loss of profits. Even now the company is drilling into the thick coal seams around the area of the fire to assess for damage. Life goes on and the sensible course would be for the receivers, Ferrier Hodgson appointed by administrators KPMG, to sell off the gold interests in which a number of buyers have already expressed interest. This should raise at least A$50 million which would be enough to pay off the banks and , probably, get the colliery back into production. London will be watching the outcome very carefully, as indeed, will Thiess & Co the powerful German company who are contractors at Southland with a 10 per cent equity stake for which A$11 million was paid. Had it not been for this second accident Southland would have produced between 1.5 and 1.8 million tonnes of high grade coking coal, with 2 million tonnes pencilled in for the following year.

There are not many collieries around like Southland. It produces Australia's lowest ash high-fluidity coking coal which permits steel producers to reduce costs by substituting Southland coals for some of the more expensive hard coking coals. It is also in demand by other producers shipping coal from the nearby port of Newcastle in order to upgrade their export products. China is key to demand and a rising price and the colliery currently has an infrastructure capacity of over 2 million tonnes per annum and recoverable coal reserves of 41 million tonnes. Coal should be the future for Gympie and this should be borne in mind by the receivers as they go about their job.