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Gramercy and Baiyin have a controlling stake in the senior notes due next month, therefore any refinancing deal for those notes, or any deal raising cash by way of a new forward sale or streaming deal on Namoya and Twangiza production requires their approval (as the mines are the assets securing the senior notes). Therefore, they were in complete control of the situation and had the power to block any deal. The only alternative for Baa management was to file for bankruptcy, which would have effectively handed control of the company to Baiyin and Gramercy, but with a court process they certaily preferred to avoid. This way, they have control of the company, and can retain their debt principal and interest payments.
Hi,
no the parties involved in the refinance do not see any higher value than I do in the equity of the company. If you read carefully what the terms say, they are actually acknokledging the equity as essentially worthless, in their offer to redeem non-participating senior note holder's bonds at 75% of face value. If the equity has any value, the bonds shold be tradind around par. As a bondholder, you would naturally accept to roll your notes at par value as offered, and take the stock award that goes wth that (a roughly 5% + instant bonus provided the stock still trades above 0.10$ at the time the deal closes, since you are getting 500+ shares per 1000$ of principal amount, so 50+$ at >0.10$ per share for every 1000$ of bonds), then if you want out, you sell the shares immediately and then trade your new bonds for close to par if they are worth that and the equity has value. Why would you take only 75% of par? This illustrates the fact that the main partners who brokered that deal consider that the assets are worth less than the debt, and the bonds are not worth their face value. They are actually telling you that the common stock is worth 0.
I said previously about the deal from last year that the most revealing piece of info about that deal would have been to know how much Baiyin paid Gramercy for the 40 million of bonds it bought from them. Anyway, here you can see that they are offering 0.75 on the dollar to whoever wants to sell.
The reason bankruptcy was avoided is because most likely the creditors want to avoid going through court and prefer to keep the company running smoothly to ensure their gold deliveries are met (streaming deals, etc.), which otherwise wouldn't happen as the company was about to run out of cash and without the new 45 million raised, would have had to stop its operations, and gold deliveries.
Also, Baiyin and Gramercy have achieved something very beneficial here: they have effectively taken control of the company's equity (the 2 of them will hold 60% of the float without even counting Black Rock) without having to cancel any of the debt principal (which they would have had to do in BK court). From now on, they are still due 200 million of principal with a cushy 10% coupon rate, while controlling a majority stake of the new equity.
The way they achieved that was by rewarding themselves in imposing the huge majority of the dilution to cancel the preferred shares they own (which are really not worth much) and not for accepting to roll forward the senior notes. Cancellation of the preferred shares will generate 600+ million new shares, while rolling the whole 200M of senior debt and avoiding BK will only reward the note holders doing it with a total of 100 million shares. Why is that? Because by doing it that way, Gramercy and Baiyin are mainly rewarding themselves with the new shares instead of paying the other note holders.
They had all the leverage in the negotiations, as Baa needed a deal to avoid BK and Gramercy and Baiyin controlling the majority of the bonds, their approval was required for any deal to go through, therefore Baa management could not negotiate with anyone else. The only leverage BAA had over its creditors was the BK card. All Baiyin and Gramercy had to do was offer a deal (any deal) that was marginally better than bankruptcy for management and its shareholders, which is what they did. As baa management, what leverage do you have when 1. you absolutely need a deal and 2. You can't negotiate one with anyone else?
To make a simple analogy, do you think a car salesman is going to give you a discount when 1. you MUST buy a new car and 2. you can ONLY buy it from him?
How on Earth is this holding 0.15$ is a mystery, but probably not for long and shows how clueless people are...
Anyway, as I've said before, the true value of this equity is zero, except for a little "time premium" that perhaps in the future it will have some value if gold rallies strongly and they manage to stay alive, but here I expect the stock to at least reach 0.07-0.08 on this announcement and most likely go lower in the future as cash keeps being burned at a ridiculous rate (prob. around 4-5 million per month going forward at current gold prices).
What is unclear here? 1. There is a 200+ % dilution, which does not improve the debt situation aka it's not even a swap, no bedt is being forgiven, it's all being rolled with 2-3 and 4 year maturities at a 10% coupon. Banro will still have to pay 5 million + of interest each quarter.
2. the new forward of 45 million has horrendous, gold is being sold forward for under 900/oz and it gets worse if gold goes below 1100. I anticipated that, as per my estimates, the company was going to run out of cash before the end of the quarter, and not only needed to extend senior debt maturity, but on top raise 40-50 million now to be able to maintain its operations. If gold stays around current levels, I anticipate the company will run out of cash again by December 2017-February 2018. With the new forward, cash flows will be even worse ater April that they already are now.
3. The bulk of dilution (600 million + shares) is only serving to cancel 43 million of preferred shares and no senior debt (yes, the shares are being issued at a value of ~ 0.07$, which is why I exect the price to rapidly converge to that value or under).
4. Interest gets worse if baa posts EBITDA of 100M+ over a 12 months rolling period, and will go from 5 to 6 million per quarter.
Anyway, why anyone would still hold this at 0.15, I don't get it. No debt reduction is being achieved here. In fact, liabilities are increased due to the new forward, and the float has been multiplied by almost 4 fold. Mechanically, the share price should also adjust by being divided 3-4 fold to the 0.05-0.07 $ range (yes, all of you probably think it was trading at a significant discount before due to BK fears, but that's certainly not the case). If you carefully look at the value of the assets, you will come to the inevitable conclusion that they are worth less than the outstanding debt, despite what the book says, and therefore the equity is worthless (except as I said for the potential that it will have some value on the future speculating on a significant gold price increase).
Not at all. I didn't neglect any of this.
First off, let me start by pointing out that TeamTOC's claims that the company had enough cash to repay the loan due yesterday at the start of Q3 are absolutely false! There is no way they could have paid this loan in full if requested yesterday, UNLESS they have raised additional cash by other means not disclosed (another loan this quarter, forward sale undisclosed, or disposition of an asset they wouldn't have mentioned, etc.)
Indeed, the company had 26.7 million of total cash and bullion inventory at the start of Q3 (see statement for yourself). That includes 8.75 million of RESTRICTED CASH that is sequestered on a separate account to be used only for the last coupon payment on the senior bonds on March 1st 2017. The company cannot touch that cash (Baiyin and Gramercy put management on a leash there and made sure the bonds interest payments would be made in full until maturity when closing the January deal).
So total accessible cash resources for BAA at start of Q3 were only ~18 million, way short of the 22.5 required for payment of the loan principal. And it is a certainty that the company had even less cash on hand yesterday (given its negative free cash flow situation), most likely 5 million or so less after October and November (the company in Q3 went from 32 million total cash resources to 26.7, including one coupon payment of 8.75 million, but also closing of a 10 million loan from Baiyin, so even excluding the interest payment which won't happen in Q4, they lost ~6.5 million over Q3 on their operations and activities in general). Now Q4 gold prices have been lower, so this is worse (however it is possible that improvements in Twangiza prod compared to Q3 would mitigate this a bit and limit the damage).
In any case, Banro was absolutely insolvent yesterday, should payment have been demanded in full (again excluding an undisclosed cash raise). It is likely they would have needed approximately 8-10 additional million to make that payment, and that would be with 0 left to ensure their operations after payment. So worrying was completely legitimate.
Regarding the senior 2017 bonds, however, it is true that no credit event related to those will happen before March 1st, as the last coupon payment is already covered and will happen at March 1st together with principal due, so they do have until then to renegotiate those in theory. But I find it extremely unlikely that refinancing was not a condition stipulated for extension of yesterday's loan. Now, nothing happened, so that's a relief I suppose, at least temporary. Maybe Baiyin and Gramercy decided to extend the loan to multi-years anyway, or maybe Baiyin decided to pay back Gramercy's half if they wanted out to save the day, or maybe (likely) they have agreed on a short term extension of the deadline while negotiations on a large deal that will cover everything including the senior debt are ongoing. Whether those negotiations will yield a reasonable deal, I don't know. Sounds like the IR is pretty upbeat ("bright future", yeah right, almost sounds like a commercial, but to his defense, that's what some of you seem to expect of him as you want him to promote the stock to potential buyers :) Maybe he's doing just that.
Anyway, sounds like a large deal of some kind is most likely on its way (or at least being discussed with Baiyin and co), however, I don't see how it could avoid an significant extension of streaming deals, or something of that nature.
I did make one mistake though in my post whenI quickly assessed how much cash BA burned throughout the first 3 quarters. I forgot the 10 million Dore Gold loan, so the balance is worse actually. They didn't burn 40 million, but 50!
I understand your perspective. I don't expect you to be in agreement with my assessment if you keep your shares of the company, and that you and other shareholders place more value than I do in the undeveloped properties and supportive role of Baiyin and Gramercy for the company, but let me explain my thoughts a bit.
I know Baiyin owns 50 million common shares, or 1/6 of the float, but that is what I view as a very small stake in regard of their overall exposure to BAA. It is worth 10 million at the current market price, and they paid less than that for it, while Baiyin has invested 87 million total in January (98.75-11.75), and also bought in addition senior bonds worth 40 million at face value from Gramercy as part of the deal. This stake in the common equity represents less than 10% of their overall exposure to Banro. Also, since they own close to 25% (a little less) of the senior notes, any restructuring will provide them with a very significant stake in the new equity issued, so they will benefit handsomely from a gold price recovery down the line if shareholders get wiped out. In fact, it is in the bondholders interest to get rid of common shareholders in order not to share future profits with them should the company's situation improve significantly down the line with better PM prices. The paper you hold as a BAA shareholder, in my opinion, is currently nothing more than an option on better future gold prices that is out of the money at the moment. Its only value is its time premium, so that's why kicking the can down the road with financing package after financing package allows the share price to keep some value due to that clock getting extended, but the moment the clock expires and no new financing deal can get inked (such as maybe now or around March 1st if it turns that way), that time premium evaporates and the share price will collapse. Baiyin and Gramercy may want to allow the clock to expire in order to get rid of all these annoying option holders (aka common shareholders) while their shares are worthless, rather than have to share profits with you down the line (although they might prefer to settle this out of court somehow I suppose).
Anyway, what do you think the last 98.75 million deal says about Gramercy's stance towards the company. First off, why were they even involved at the negotiation table as all the fresh cash came from Baiyin except for a small 11.75 million loan that expires today with some contingencies? It is because their agreement was necessary as they held over 80 million of senior notes prior to the deal, and no streaming deal on the mines can be signed without the bondholders' approval as that would violate the covenants (obviously, those deals significantly decrease the value of the mines affected, that are securing the bonds). This also means that any future streaming deal or forward sale must have Baiyin and Gramercy's approval, even if a third party came in and wanted to finance the company that way. I don't know what was said behind closed doors, but from what I see, it looks like it went like this:
BAA found the Chinese fund interested in a streaming deal on Twangiza, which required Gramercy's approval. Gramercy said ok, but only if you buy half of my bonds and preferred shares, and BAA uses the proceeds of the streaming to pay me back the forward sales + interest. In turn, they agreed to relend a small 11.75 million of the proceeds to the company, but with a safety check in November allowing them to exit if BAA doesn't succesfully turn its operations by becoming cash flow positive and refinancing its senior notes. The bottom line is today is Nov. 30th, the company has not refinanced its bonds as far as we know, and is still very significantly cash flow negative (it had maybe 26 million or so of total cash included restricted + gold inventory at end Q3, while it raised a net 65-70 million in January after you subtract the ~30 million used to pay back the Twangiza forwards, so it bled ~40 million in 3 quarters, and that was a higher gold prices than today...)
Gramercy's move in January was not an investment, it was a very significant net DIVESTMENT, where they unloaded a bunch of bonds and preferred shares on Baiyin, terminated the Twangiza forward sales, and then only reinjected a meager 11.75 million in the form of a short-term loan (extendable though) with strict conditions.
The most interesting piece of information in that deal would actually have been to know exactly how much Baiyin paid Gramercy for the 40 million of senior notes at face value, which was undisclosed. Anything less than 40 million, and that immediately tells you that both funds considered at the time that the common equity had no value (the fact that Baiyin bought 50 million shares for 8.5 million doesn't contradict that, it had the time premium of an option as I said that could pay off in the future, and I believe Baiyin didn't really want those shares, I think BAA pushed them to buy some as part of the overall deal to have a little more cash on hand).
Honestly, I think zero.
What the book says is irrelevant. What matters is the true market value of the assets, namely the producing mines (I don't think the undeveloped properties are worth anything, as all the investment has to be put in to exploit their resources and they are basically just a patch of jungle with a few exploration results. I doubt the permits to exploit the mines are worth that much).
Regarding the producing assets, I had previously done DCF analysis of the mines based on their expected production schedules at a 10% discount rate, in relation to an analysis already made by Deloitte for the company a few years back for Namoya, and the order of magnitude is that the mines are worth maybe ~200 million each at the current gold levels. But that doesn't take into account the DRC jurisdiction which is according to most rankings one of the worst places on earth to do business as far as corruption and instability go, so obviously that warrants a big discount to a potential buyer in an auction or else. It's irrelevant that Banro says on its books that Namoya is worth 400 million because that's what it paid to build it. What matters is what it is worth to a buyer, and that's a much lower number.
Let's say they sell the mines for 350-400 million combined. Then they have to withdraw the amounts necessary to terminate the streaming deals attached to them, which means 130 million or so with interest. You are left with 220-270 on a good day. Then take out 200 million of long term debt, some remaining forward sale and local loan to settle (a few million each) and then the current debt of the company (I forget where it stands today exactly but several tens of millions) and you are left with essentially close to 0 or a negative number.
Again, all depends on how you value the assets, but that's in my opinion the likely outcome.
Not sure what the optimism is about here...
Well, sounds like you are excited about the potential "refinancing" news hitting the wires any time (within one day hopefully) but I fail to see how the news could be that good, to be honest.
There's only a small number of possible scenarios imho and they are the following:
1/ Successful refinancing in terms of a new 175 million loan being issued to the company with a later maturity date of say 2020 or later, something of that nature. This is what most of you guys seem to be hoping for. Some even argue that the company will lower the coupon on these new bonds by a couple of points. I view the probability of this happening as 0. Okay, maybe 0.1% as there are no certainties in life. But if that was going to happen, the company would have secured this 6 months ago when it had more cash on hand left after the latest financing round, gold was above 1300, and it had some time to negotiate. Obviously, this failed, Jennings has left, etc. There is no serious financial institution that will lend 175 million to Banro in its current state. It is cash flow negative even now that its two mines have matured to steady state production, because as I have explained before in very much detail, the debt and streaming deals it had to sign to get there are essentially constraining its cash flow and unless gold rises significantly, free cash flow will remain negative for the foreseeable future.
2/ Outright bankruptcy. Well, I viewed this as likely but if your IR guy says that is not going to happen and no dilution is being discussed, then maybe option #4 will be the outcome. Anyway, there is clearly a discussion in the background taking place between Gramercy, Bayin and Banro, and this is the only card Banro can play if it cannot find a satisfactory agreement with them. It has virtually ZERO leverage in the negotiations, as these two control the senior bonds and the loan they can terminate tomorrow and that the company does not have sufficient funds to repay at this time.
3/ A massive debt for equity swap, in which the senior bondholders (especially Bayin and Gramercy who control more than 50% of those) would agree to cancel say half the debt or so (maybe 80 million) against a massive share issuance that would avoid BK, but would essentially wipe out common shareholders. The second half of the debt could be extended with a later maturity date in that case. But again, if no dilution is currently being discussed, then probably scenario #4 is your best bet.
4/ An amendment to the streaming deals already in place at Namoya and Twangiza, providing an increase in the delivery percentages to both Gramercy and Bayin in exchange for cancellation of a significant portion of the senior debt. You could see something like 8% additional at both mines for ~100 million, which would bring the debt down to about 100 million from 200 (175 + 22.5) and bring deliveries to 16.33% of Namoya prod. and 19+ % of Twangiza for the life of mine at 150/oz. Anyway, while this gives a little more time before sh$t hits the fan and kicks the can a little more, it will make the financial situation significantly more unsustainable going forward than it is already now.
Maybe I see a bit too much gloom, we will see, but objectively analyzing the situation at hand, that's how I see it playing out.
The misconception here is that Bayin ang Gramercy are your friends. They are not. They have a minuscule interest in the equity of the company and almost eclusive interests in secured debt, a loan that has an initial maturity of tomorrow so they can terminate it if the company doesn't improve its standing, and streaming deals that have been well negotiated on their side and are secured by the company's gold production. This does not exactly inspire confidence in the fate of the equity to say the least on their part.
To refinance or not, that is the question!
It's been quite a while since I haven't read what's going on here, but I keep taking a look at the stock and its developments once in a while (mostly for entertainment value) and it seems that the moment of truth is about to come, so we'll see what happens...
What I am surprised about though, is that no one seems to worry about or mention the loan that was obtained from Gramercy and the Chinese in January as part of the latest massive financing deal. However, it is clearly the reason Banro has to announce a refinancing agreement by Nov 30th. Indeed, before the senior bond maturity date of March 1st next year, the company faces a first maturity date of Nov. 30th for its ~23 million loan, that by the way it is currently unable to pay back if Gramercy and co decide to terminate the loan. If I recall correctly the deal, it said that it is mature at Nov. 30th, and potentially converted into a long term, multi-year loan if and only if the company meets certain financial requirements by then, without further precisions. So, I fail to see what financial requirements the company could possibly meet right now that would justify extending the term of the loan... Obviously, this must have meant at least successful refinancing of the senior bonds, which is why time is of the essence here!
Braised, thank you for your message.
I had a quick chance to glance at it before it was removed together with mine.
Best of luck with your investment.
It is clear that gold can go lower, and that's why there is a floor value of 1,100/oz to ensure Gramercy receives its money + profits, regardless of what gold does in the future. Obviously, it's still better for them if gold goes up as much as possible, but at least, as long as the deliveries are made roughly according to the expected schedule, they are guaranteed to be comfortably profitable on their investment. Incorporating a lower future gold price scenario in the hypothesis only favors Gramercy in the negotiation, by reducing the resulting value of that stream, and that is why they have included this 1,100 floor.
Now presently, with gold in the 1100-1200 window, is actually where the deal gets less bad for BAA and thus less good for Gramercy, as if it had closed today, BAA would have received less money than it did 6 months ago, while it does not have to deliver extra ounces as we are still above the 1,100 limit. So all in all, the deal looks a little better in hindsight at current levels, but obviously, it's still much better for BAA to see gold go up to maximize its profits and margins on the gold it actually CAN sell.
Anyway, I also wanted to post thoughts on Gramercy and how I view their decisions and moves as pertaining to their assessment of BAA's business and future perspectives, but I have spent way too much time on this today and am prob running out of posts anyway, so will do at a later time.
Nagoya, I would certainly welcome your constructive criticism regarding the info and calculations I have posted. Please do me a favor and point out the flaws in the logic I have used, or any inaccuracy in my hypothesis/numbers/calculations, etc. What exactly in what I have outlined is BS, as you claim?
And please, it would be helpful if you backed up your opinion with some solid facts and logic, not just a bunch of blabla like you just did. Yes, 2 producing mines, 2 undeveloped properties can be worth nothing if their current value to a potential acquirer is less than the debt and liabilities attached to the company. Don't rely on the book value to reassure you that the shares are worth 1.80 as the book claims. I invite you to check what the book value of ANR was (or still is) when it recently filed for BK (and ANV if you want to stay in the gold mining world). The current value of the stock clearly shows that investors expect to recover nothing, while the book says they should recover plenty. Why don't you buy that stock?
Seriously, I invite you to elaborate how BAA will make money with Twangiza and Namoya at commercial prod, considering the liabilities and payments it has to honor. I may be incorrect, but I firmly believe I have laid my points and calculations clearly for all to see and critique. Please do the same to convince me I am wrong.
Typo on Namoya deal calculation.
I noticed a typo where I inadvertently typed an extra zero, but the calculations are unchanged.
Where it says for the second case (inflation included):
110,000*0.0833*(1200*1.02^n - 1050)/1.1^n
it should clearly read instead:
110,000*0.0833*(1200*1.02^n - 150)/1.1^n
Sorry. However, this is a typo that does not affect the calculations and resulting valuations for the streaming deal's upfront payment.
Badge: no worries, thanks. I am glad you changed your mind and will post again if I have insight or ideas to share about the company, as long as I don't end up on the receiving end of too many insults or angry responses who question my motivations. Anyway, I'm only interested in sharing info and discussion as I said before. I don't have ulterior motives apart from refining my understanding of the stock and confront my views to those of others.
Jbolan: you sure are a strange fellow. First, you accuse me of being a basher/short seller who's only trying to crush the stock with his posts, then you thank me for my insight and ask me on what other stocks I have done research as you're interested in reading my analysis of other companies, and then on the same day you hope I disappear from this board. It sure seems like your opinion changes direction like a weather vane.
To answer your previous question, I do have positions in multiple other stocks, but don't necessarily post on message boards as they are either larger companies where it is difficult to make that level of due diligence, or otherwise small biotech companies where certainly I would enjoy discussion with well informed folks (that's my main area of expertise because that is what I do for a living), but was generally unable to find boards with any motivated and knowledgeable folks that are sufficiently active, at least for the stocks I am currently invested in. Hope that answers some of your questions.
How to value Namoya deal.
Since there has been significant discussion about how to evaluate the Namoya deal and its future impact, and decide whether it was a good deal for the company or not, I thought it may be useful to discuss how to come up with a fair value for such a deal, as I have made those calculations when the deal was announced and thought I would share this info for all who may find it helpful.
So, BAA sold an 8.33% stream of its Namoya mine gold production, for the entire life of the mine. What this amounts to is deliveries into the future of 8.33% of the gold produced by the mine, for 50M upfront, and $150/oz upon delivery. Since gold is highly liquid, this is essentially equivalent to a cash payment each year from BAA to Gramercy of: Namoya yearly production*0.0833*(POG-150).
Valuing the deal amounts to calculating the NPV (net present value) of those future cash payments over the life of mine. You need the following variables to do so: total expected gold production of the mine over its life along with expected production schedule, expected price of gold at the future delivery times, and finally discount rate to calculate NPV of future payments.
Here are the numbers I have used for this:
- Total production and schedule: 1.34M ounces total (I used a figure from 03/27/2014 press release for proven reserves) produced at 110,000oz/year (pretty much exactly the 27,000/quarter targeted) for ~12 years.
- Modeled price of gold at future deliveries: I included two scenarios: first, you price the deal as if gold will stay at the same price over the life of the mine, which was around 1200 when the deal was closed. Second: I considered the case where you would model gold as rising in price to match inflation expected to average say 2% yearly over the life of mine. Those assumptions give slightly different results, as you will see.
- Discount rate: I used 10%, which seems standard and the number Deloitte had used in its DCF valuation of the Namoya mine in its report available on the website.
Now, on to the actual calculation:
The 10% discount rate means that when evaluating the NPV of the gold delivery (=cash payment) of a future year, you divide that payment by 1.1^n , where n is the number of years into the future that the payment will be received, just as if the money paid today carried a yearly interest rate of 10% to reach the expected value in n years. Since the deal was closed approx. 6 months ago, and the mine is supposed to enter commercial prod as we speak, that means that gold delivered during the first full year of commercial prod. will be on average received 1 year after the money, making the multiplier for the first year payment (1/1.1), for the second year (1/1.1^2), etc. If commercial prod had started right at the time of closing, I would have used (1/1.05) for the first year (gold received 6 months after initial payment on average) and then (1/(1.05*1.1^n)) for the n+1th year.
So the NPV of the first year of delivery at time of closing was: 110,000*0.0833*(1200-1050)/1.1 = 8,746,500. I’ll skip all the details of each year’s payment, but you have to compute the NPV of each subsequent year worth of deliveries, for the assumed 12 years of mine life, and add them all to get the expected fair value of the 8.33% stream.
The result you obtain (feel free to verify this for yourselves) is: 65.5M (with gold stable at 1200)
Second case: if you consider that gold is expected to rise in sync with a 2% yearly inflation rate over the life of the mine, the NPV of the nth year of gold delivery is obtained as follows:
110,000*0.0833*(1200*1.02^n - 1050)/1.1^n where the 1.02 multiplier accounts for expected rise in POG while the 1.1 multiplier, as before, stands for the discount rate of 10%.
Next, do this for the 12 years of expected production, and add up the NPVs of each of the years to come up with the fair value of the stream.
The result you obtain in that case: 73.99 ~ 74M.
Conclusion: if you model gold at a constant price of 1200 (POG at closing), the fair value of the stream is 65.5M, and if you incorporate in your assumptions a rising POG at 2% yearly, that stream’s value rises to 74M upfront.
BAA sold this for 50M, so at a 20% or 32% discount depending on what the gold price expectations included in the negotiations are. Is this a good deal? Obviously not, and only a good deal for Gramercy, especially that BAA loses all upside to the gold price on that part of its production (only for Gramercy) while it also benefits from no hedge and keeps almost the entire exposure to the potential downside (since it has to deliver additional ounces to ensure a minimum price received of 1,100/oz by Gramercy). Add on top of that if any new ounces are discovered within a 20km radius and the mine produces more than currently expected over its life (which recent drilling results may suggest) and the deal becomes even worse for BAA and excellent for Gramercy.
On the other hand, keep in mind that this was the only option for BAA and there is still risk assumed by Gramercy in the deal, such as if the company had to stop or delay its operations for a while, or the mine produces less than anticipated and at a slower output rate than initially hoped for. So all in all, not a good deal, but given the circumstances and the fact that BAA had almost no leverage in the negotiation, as it seems Gramercy was the only serious bidder, it’s not that bad, and certainly preferable to BK.
I believe that unfortunately, management has limited control over what is going to happen. They are entirely dependent on the short-term outlook for gold prices at this point, over which they have zero control. On the plus side, management has indeed improved Twangiza operations significantly, and has shown more determination in avoiding bankruptcy than other miners have or may have, by trying to extend their life with multiple streaming and forward sales deals, while others may have given up and already engaged in a restructuring (eg ANV, which could also have attempted to sell a stream of its production but didn't).
However, I believe the Namoya situation and the spending has been out of control, and it is getting to the point where they are running out of time and options to generate the positive cash flows they must achieve to have a chance of surviving into 2017 and beyond with the same capital structure.
Fair enough, but you will note that I never said this would happen for sure. I never pretended to know where gold will trade next year, and actually have no idea where it will be, as I believe no one truly understands what moves the price of gold.
What I concluded is that I firmly believe that barred a strong gold rally to 1350-1400+ level within 4-6 months, and stable or higher from there, that is the outcome I expect as I see the company unable to generate sufficient cash to keep up its operations and deal with its long term debt approaching maturity fast.
Badge,
the article you are quoting actually only reinforces my point here. What it tells you is that it is difficult to evaluate the ability of a gold miner to generate cash flows using cash costs or even AISC, as it is a deceiving metric that does not fully represent the actual costs of outputting an ounce of gold. What it tells you is that you need not only to consider these cost variables as defined by the company, but also everything else (interests, dividends, admin costs, forward sales and streams) which can become complex and difficult for the common shareholder to do. That is exactly what I have done here. I have considered the cost of outputting the gold in terms of AISC as defined by BAA (each company defines it differently), and carefully added the effect of interest payments, stream, forward sales, admin, exploration, financing, dividend that are not included in the AISC (but I have counted them).
What the article you refer to says is that a shareholder can't estimate the future cash flows of a gold miner simply based on its official AISC (whatever they use to define it) and the current price of gold.
This is exactly what the cash inflow/outflow balance I established demonstrates. Based on AISC under 800-900 for both mines, one would think that BAA will generate cash as long as gold is higher than 900, while my calculation shows that even at gold around 1150, it will most likely lose money because of all the other expenses that need to be taken into account. This is what this author refers to when he says that the metrics used by the industry are deceiving, and the exact reason why everyone should not rely on those numbers, but do a more comprehensive analysis of expected future cash flows like the one I attempted to make to get a clear picture.
Hi Congo,
I am not an accountant or fund manager, nor a finance professional for that matter. I am an engineer/scientist interested in economics/the stock market on the side (hence my rather scientific approach to things), but I have researched this company as much as I could with the info available and certainly have a good understanding of numbers, but in no way do I pretend to be an expert in the gold mining business. But what I like about the mining business, especially a small producer like BAA with 2 producing assets, is the simplicity of the business, and the fact that it is much easier to fully comprehend its perspectives with the limited info available to common shareholders, as opposed to larger businesses where valuating a company is incredibly complex, and only professional analysts who spend their entire time on a single company can come close to fully understand it (and actually most of the time they are completely wrong in their price targets and only follow what the market says with up and downgrades months after the facts have already happened).
Regarding the Namoya deal, I completely understand your prospective. It is useful to try to evaluate the deal and whether it was a good, fair, or bad one for BAA and/or Gramercy, and what consequences it has for the stock and its shareholders. As you say, it is clear that it is less destructive than the dilution a share offering would have brought, while certainly it would not have been possible for BAA to raise that much cash by issuing shares (you can't dilute 200% like that and hope to find buyers for your shares, the stock would have instantly plummeted under 0.10).
I was simply trying to point that a stream doesn't mean an ownership stake in the mine, but is worth significantly more, and that you can't extrapolate the money received to derive a value for the asset. The value of a stream only depends on the expected production schedule and price of gold, while the value of the mine is directly related to the costs of mining and the gold margins, on top of the production schedule (at least if you value it by doing a Discounted Cash Flow -DCF- analysis). I will try to put together a post that explains how you would calculate the value of such a deal and negotiate it, in hope that it helps. Sorry, I haven't had time to do it yet.
Yes, as can be expected, and confirming what I mentioned in my response to Goygoy, it's essentially equivalent to pay in dollars or Congolese francs as the latter is pegged to the USD by the local central bank at ~920/USD (they actually introduced this peg to reduce local use of the USD in business and promote using the franc instead).
So the strong dollar provides no cost benefit to BAA, unlike commodity producers and miners that are located, say, in Australia for example.
Sorry, Congo, but your math (or evaluation) of the Namoya deal contains a gigantic error. Let me explain. You are reasoning as if what BAA sold is an 8.33% stake in the Namoya mine for 50M. That's absolutely not what they sold. They sold a stream of 8.33% of the life of mine production, which is much more valuable than 8.33% of the mine. If BAA had sold 8.33% of Namoya, I contend it would not even have obtained 20M for that, my estimate around 17M. The difference is that a percentage of ownership of the mine is simply the ore in the ground, that the buyer has to extract at their own costs. Here, BAA has sold 8.33% of the Namoya gold, extracted out of the ground at BAA's own cost, a massive difference. A stream of 8.33% is like selling 25-30% of the mine, not 8.33% (this depends on costs, margins, etc, but roughly that's what it is).
Based on your reasoning, Gramercy would have paid 50M for 8.33% of the mine, effectively valuing it at 600M. That's absurd. The mine is worth maybe 200M on a good day (to get to that number, I did a DCF analysis of the mine, but don't take my word for it, check for yourself the analysis done by Deloitte, available on Banro's website, that valued the mine at 250M with gold at 1200, without taking into account the Congo location, which warrants a discount to a buyer).
Also, ask yourself why BAA would be able to sell anything for more than its fair price to Gramercy, when they are desperate and Gramercy is the only bidder and game in town. Does that make any sense? When you want to buy a house, the seller is in desperate need of liquidity and forced to sell, and you are the only bidder, are you going to offer above asking?
I will explain in a different post how that deal should be valued, as it's not that simple, otherwise this post would be too long.
Of course AISC can be used. You are completely missing the point of the balance I am making. It is obvious that sustaining capital does not scale with ounces produced, and the more you produce, the lower that portion of AISC will be per ounce. I am certainly aware of that. But you are acting as if I started from an AISC seen for X ounces produced, and extrapolated to Y ounces with no change. I did the reverse. I started with an expected production figure for the whole year (based on management's expectations), and THEN estimated as reasonably as possible what the total cost of outputting each one of those ounces would be, based on current information. It is completely reasonable to estimate that it will cost 750$+/oz for Banro to mine 120,000 ounces at Twangiza in one year.
I could have presented things differently, separating cash costs and sustaining capital, but chose to bundle everything up in a single number for the sake of simplicity. I could have presented things as follows:
Twangiza will produce 120,000 ounces at an average cash cost of 650 $/oz, and spend about 12M on sustaining capital throughout the year. The result is the exact same, it means the company will have to spend $750 for each ounce of gold mined at Twangiza, on average. What this calculation does is exemplify in clear terms why under current circumstances, this company has virtually zero chance of generating any free cash flow, contrary to what most folks are thinking. They believe due to the low cash costs, the company will make money even if gold goes down to 1000/oz. They fail to project the impact of the Namoya stream and Twangiza forward sales, and that is what I wanted to illustrate.
Now on to your next objections. The fact that I chose to make a balance for a full year is a conscious choice that is designed to avoid the quarterly fluctuations in production (I can't pretend to predict the weather, etc.) and also makes it easier to account for interest payments, dividend, etc, which are not due every quarter, but the amounts of which, for a whole year, are exactly determined. Also, this is the entire time runway the company has to accumulate cash before the next impending massive challenge the market will turn its focus to: 2017 bond repayment.
Next: you are saying, even if they run out of cash, they can stop paying their suppliers and they won't say anything because they won't have a choice. You know, when debtors stop paying, usually you don't react by extending more credit to them, you simply stop supplying them until they pay you what they already owe. Also, is that a good investment? Investing in a company because, when it comes to that, they can simply stop honoring their obligations and paying their creditors?
Finally: fuel costs? Maybe a tiny bit of help there, but fuel prices were already extremely low in H1. Won't have much effect.
And African currencies weakening against the USD??? Seriously? Another huge factual error on your part. Are you aware that the Congolese Franc is pegged at ~920/dollar by the central bank? So tell me, what savings do you think BAA will have on their costs due to the USD bull market?
Regarding bonds, it is delusional to think BAA will have better terms on refinancing those. They are insolvent, practically out of cash, and still cash flow negative, outside of financing operations. They have zero chance of refinancing their bonds right now, otherwise, it is obvious they would have already done so.
You object that I cannot pretend to predict costs, production, etc, for a whole year that much in advance and extrapolate numbers. On the contrary, extrapolating and using your sense of analysis to try to predict future outcomes based on the current information at hand is the essence of evaluating a decision to invest in a stock. Why are you in the stock market if you don't think you can analyze or predict, extrapolate anything? That's the whole point. To make money, you need to know or see something that the rest of the market has not anticipated yet, and which gives you an edge. Otherwise, you are a gambler, not an investor.
Tex, sorry I forgot to respond to your message the other day.
I am indeed located in Boston, and you should certainly visit New England some day, although not in winter I would suggest. I am originally not form there though, and grew up in Europe. But it's a beautiful place.
Anyway, regarding your investment style and your daughter's, you seem to actually be doing the reverse of what most people do. It seems younger folks with more time usually tend to have a riskier approach in their stock picking as they can afford to ride the short-term volatility in order to get outsized returns over the longer term, while as you get closer to retirement, people tend to move toward "safer" investments with steady returns and dividends. But I like your style, it's more fun that way (although this can certainly backfire at times...)
~ 42,000 oz give or take a couple :)
Is there a prize for who guesses the closest?
bullforever, what are you talking about?
"a lot of mistakes in my calculations", really? So according to you I am confusing cash costs with AISC, and those include corporate and admin?
Do you have any clue about what you are saying or are you just pulling stuff out of your a$$?
AISC does not include admin costs at the corporate level. Do you think the CEO's salary is included in the Twangiza AISC? So why Twangiza rather than Namoya then, may I ask? Stop the non-sense BS, and take a look at the quarterly statements before embarrassing yourself. Note 27 of the quarterly report details the admin and general expenses, NOT included in Twangiza costs, and they were actually at 3.6M that quarter as I mentioned in my response to Goygoy. So my 10M yearly cash expense for admin/general is actually on the low end of what one can expect.
Goygoy, I am not way off at all my friend.
First, thanks for your comment, however I completely stand by what I said. You are absolutely wrong, and let me explain to you why.
Depreciation and amortization are NOT included in the AISC that BAA calculates (which it does on a sales basis rather than production BTW, complicating things a little bit when bullion inventories from a previous quarter are sold, or on the contrary when gold produced that quarter is not sold and added to inventories, but that's a minor point).
Anyway, back to your claims that depletion (which I agree is obviously a write-down of book value that doesn't correspond to an actual cash expense), is part of the AISC and must be subtracted to derive a true cash cost. That is not true at all. Please refer to page 26 of 27 of the second part of the last quarterly report (Q2 2015) as an example to easily verify this.
You will see there the following numbers under AISC:
- Mine operating expenses 28,068
- Deletion and depreciation (7125)
- Total cash costs 20,943
- Sustaining capital 4,074
- All-in cash costs 25,017
The AISC on a sales basis (35,665 oz sold) is thus 701/oz (as in 25,017,000 / 35,665).
So you easily see for yourself that depletion and depreciation, while subtracted from operational revenue for the purpose of calculating earnings (EPS) and don't translate to an actual cash expense, are absolutely not included in the cash costs, nor the AISC, which is only cash costs + sustaining capital expenditures. The sustaining capex here was about 4M, and corresponds more or less exactly to the "acquisition of property, plant, and equipment" that is a true cash expense recognized for the quarter under investment activities on the consolitated statement of cash flows.
So, the company had an AISC of 701 in Q2, and since it sold some inventory from Q1 on top of Q2 production, on a production basis, AISC would have been actually higher (around 720/oz). That is with a production at capacity of 34,000+ oz. When production falls back to the expected average of 30,000/quarter, AISC is likely to actually EXCEED 750/oz and be closer to 800. Obviously that depends on the sustaining capex, which can be lower some quarters, but can't be controlled that easily. When something breaks, you do have to replace it whether you like it or not. If the AISC had included the depletion and depreciation as you claim, that number would be 32,142,000 / 35,665 = 901/oz, much higher than the actual 701 reported.
Regarding exploration expenses, I did say myself in the post that this can be reduced if need be, but even then, the company will not make any cash and be at best neutral on its cash position. Also, I have been generous on only counting 10M of admin expenses (that quarter alone they were at 3.66M as you can see, and also higher than 10M last year), so the reality is likely to be worse than what I have painted if gold prices stay flat.
So, the bottom line is my assumptions are absolutely correct and reasonable, and certainly not flawed by having omitted to subtract depletion and depreciation or other non-sense.
I find it disgracious when people resort to their credentials to give more weight to their opinion as if they couldn't be wrong because they are X or Y. Well, you may be the president of the Congo for all I care, that doesn't make you less wrong. Since we are name calling, I hold advanced degrees from two universities in Cambridge. One starts with an M and ends with a T, the other starts with an H and ends with a D. This reminds me of what Noam Chomsky once said at a seminar I attended: "what matters is not people's credentials or who they are, it's what they say".
And yes, while I may not work in finance, I can read a statement, and do a simple addition and subtraction (or more advanced mathematical computations for that matter...)
Cheers
They may do another forward sale or amendment to the Namoya streaming deal to raise more cash and buy a little more time in their race against the clock to build cash reserves before Q1 2017 and bonds are due, but at some point, especially after you have reached commercial prod. on your 2 operating mines, you must demonstrate an ability to generate more cash from operations that your liabilities cost you. You can defer payments for some time, but at some point, you have to face the music and understand that you can't defer paying your debts any longer on the expectation (or hope) that gold will skyrocket tomorrow and solve all your problems in a few weeks.
At one point, it actually becomes counter-productive for the company to sell forward its gold or agree to a larger streaming deal, as it loses all upside potential on that part of its future production and makes its future outlook bleaker and bleaker. There is a point where it is in the best interest of the company to give up its fight and negotiate with its creditors to restructure, give out its new equity to the bondholders, and emerge as a stronger company with a lower debt load, and some potential to actually benefit from a gold bull market in the future without having given away all the future appreciation potential of its resources to the likes of Gramercy in the form of streaming deals and forward sales.
When that point in time comes for the company depends on what gold will do in the following months, but it is somewhere in the next year for sure. If the situation doesn't materially improve within six months, I believe management will have to give up.
To quote another comment that was made, "predicting bankruptcy in the next year is a very bold call". I don't think so. Assuming a $0.16 stock may go bankrupt is probably the opposite of being bold, and is what the consensus is telling you. The real bold call is thinking the company will magically recover, start accumulating cash, and trade at 1$+ within a few months (6-7 times its current price or higher). Now THAT's a ballsy call my friend. To make that call, you must be having some information or insight that the rest of the market hasn't seen or come to, and if you believe that this magic bullet is the announcement of Namoya going commercial, I believe it is a bit foolish. This has been telegraphed and anyone following this stock at all is aware of this.
Anyway, just my opinion. Good luck.
For sure, my assumptions remain what they are: assumptions. I do not know how much the company will produce, or what its costs will be, but I am certainly not being pessimistic. Management's own guidance for this year is for ~120,000 oz at Twangiza, despite the 70,000 oz produced in H1, so expect a drop over Q3 and Q4. Management's stated goal is actually to obtain steady production of about 30,000 oz/quarter at Twangiza, so I am just using that as a basis. Regarding cost, I don't think they will be much under 800 for the two mines on average. AISC was close to 700 in Q2 at Twangiza despite very strong production, and a drop in prod. of about 15% would bring costs up ~15%, so up beyond 750 actually. All this depends on sustaining capital etc., but I believe 750 on a yearly average is a reasonable assumption. As far as Namoya, it will most certainly be higher due to the lower ore grades being processed there.
But we will see. I may be wrong. This is just my best guess with the info at hand.
You're welcome. Happy that you find it useful.
I agree that the 116M raised this year obviously gave a chance for the company to turn its situation around, but it's the fact that this money is almost already gone due to an outrageously expensive Namoya ramp-up, and also that in the meantime gold has gone down, and not up, that now make matters extremely complicated for BAA, and I feel their window of opportunity to recover is practically gone because of that.
Regarding asset value, I believe that the 800M+ the book claims is extremely exaggerated. The mines are worth much less than what the book says, based on any reasonable DCF analysis one can make with the production expectations and current gold price, so in case of a liquidation, I sincerely doubt common shareholders would recover anything. But that is just my opinion.
As far as a buyout, one can hope, but I am very doubtful this is a serious possibility.
They can potentially refinance some of the local bank repayments to push back the maturities of the loans, but that won't change the outlook much and is only kicking the can down the road. On the 2017 bonds, nothing is negotiable. They need to post their interest payment son time, or will be forced into bankruptcy by the creditors for breaching their covenants.
I did take every oz of production into account though, not sure what you mean there. I assumed 220,000. I don't think that is being pessimistic. If you think BAA will produce 240,000-250,000 oz, then the situation is a little better, sure, but I think those assumptions would be too optimistic, and unattainable should there be any hiccup in production at either mine throughout the year. We shall see.
Good luck.
I had sold at 0.30 average in the relief rally post financing for an overall small loss. My error with this stock had been to establish my initial position early 2014 when the Namoya mine was already supposed to hit commercial prod in May last year, around 0.40.
As of now, I am waiting on the sidelines and have no intention of buying the stock given the current circumstances. This may change based on evolution of the situation, but I don't think so at the present time. Only a massive positive surprise on the production/cost side, or strong gold rally would make me change my mind.
For Q3, I expect the production report to be between 40,000-45,000 oz, so somewhere in the low 40's, and so possibly lower Q/Q than Q2, and I expect the co to have approx. 5-10M cash + bullion inventory left, including the 16M recently raised, possibly closer to the 5M figure, as I thought the company would be ~10M short in cash this quarter (that is if it did in fact go forward with its truck fleet purchase at Namoya and didn't cancel it).
Thoughts on BAA going forward.
In a previous post I mentioned that I do not see how the company can generate any cash at current gold price levels over the next year, and here is how I come to this assessment.
I see a lot of nervousness and disappointment regarding the delisting notice and possible RS, but honestly, if you believe in the company's fundamentals and prospects, you should not worry about that, it does not change the fundamental situation of the company and will only have temporary effects on the stock price that will be easily trumped by the company's operational performance going forward.
What you should worry about, instead, is the company's ability to generate steady positive cash flows once the two mines reach commercial production. It is a must, to obtain any chance of refinancing the bonds due early 2017. If the company keeps losing cash, or even stays cash neutral, it will not be able to refinance those bonds and will have to declare bankruptcy over the coming months, most likely shortly before one of its next couple of interest payments are due. A lot of folks assume that with both mines in commercial production, the Co will have no problem accumulating cash hand over fist. In my opinion, this will not happen. I see the company further draining its cash resources, even with commercial prod at both mines, because the liabilities accrued in terms of forward sales and streaming deal have essentially annihilated any chance to generate sufficient cash from operations at current gold price.
Here's a detailed balance for the calendar year 2016 with a few assumptions:
New forward sale for 7M to Gramercy: although we don't know the exact terms, I will assume approx. 7500 oz of gold to be delivered over 30 months or so. That's about 250 oz/months, or 750/quarter. Before that, the Co has to give already ~5,000 oz/quarter from Twangiza prod., bringing the total now to 5,750/quater.
The new 9M loan will start getting repaid in 01/2016, at a pace of about 0.5M/month, so overall 6M due back over 2016 + interest (~0.5M for the whole year), so let's say 6.5M total due on that loan.
There will be another ~7M previous local loans scheduled to be repaid in H1 2016 if my memory is correct. So total ~13.5M due to local banks over the whole year.
Production assumptions: let's assume 220,000 total production from both mines combined (110,000 at each mine, or 120,000 for Twangiza and 100,000 for Namoya), that seems reasonable. Costs: I will assume ~800/oz AISC for both mines combined on average, assuming about 750/oz at Twangiza, and 850/oz at Namoya. The AISC under 700 at Twangiza in H1 2015 was an anomaly due to production at capacity of 35,000 oz, but with prod averaging 30,000/quarter (management's goal), it will be higher. Namoya costs will be higher due to lower grades there. 850 is not a pessimistic assumption, but very reasonable.
Now, the calculations and balance of cash inflows and outflows for 2016 with those assumptions. I will calculate operational cash flows as if BAA sold all the gold produced, and then subtract the lost revenue due to gold given away due to forward sales and streaming (simpler that way). Also, I will assume 1,150/oz average gold price for 2016 (I'm being generous as this is higher than the current price):
Twangiza: 120,000 * (1,150-750) = 48M.
Namoya: 100,000 * (1,150-850) = 30M.
Total: +78M.
Forward sales: 23,000 oz * 1,150 = 26.45M lost (5.75 /quarter * 4).
Namoya streaming: 8,330 oz * (1,150-150) = 8.33M lost.
Total operational cash flows net of forward sales and streaming:
78 - 34.8 = + 43.2M net influx.
So, the company will only generate maybe a little over 40M of net cash flow form operations after you take out the gold given to Gramercy and Auramet.
Now for outflows:
- 13.5M due to local banks.
- 3-4M of dividend to preferred shares.
- ~10M of admin/corporate expenses not included in mine cash costs.
- 8M of exploration expenses (~2M /quarter, could be slightly reduced if needed)
- 17.5M of interest due on 2017 bonds.
Total outflows: ~52.5M.
Final balance: 43.2 - 52.5 = -9.3M.
There you have it. I believe even with the commercial production objectives reached at the two mines, running with no hiccup for the full year, with the reasonable cost estimates I have used, the company will not generate ANY cash for the entire 2016, but actually use close to another 10M! Even if you completely stop exploration activities, you would still lose over 1M.
Under this scenario, bankrupty seems inevitable to me, possible in February before March bond payment, or later before September.
If you assume that to have any chance of refinancing its 2017 bonds, the company must be able to generate at least 40M in positive cash flow over the whole year to show an ability to generate cash, and be able to repay a small portion of the bonds due, it must make ~50M more from operations than with the assumptions I have used. Since the company can sell about 190,000 of the ozs it will produce, it needs an extra margin of 50M / 190,000 = 263$/oz to get there, whether this is achieved by a cost reduction (not really possible beyond maybe 50$ max/oz) or a higher gold price.
This means that in my opinion, to survive, BAA needs gold to average ~ 1,400+ /oz (= 1,150 + 263) over the entire 2016 year. Possible but highly unlikely given the current outlook and in my opinion, not a good bet. This stock is de facto an option on a massive $250+ gold rally over the next 3-5 months. It seems to me there are better ways to play such an event. If this massive rally doesn't materialize, you are likely holding a stock that is worth ZERO.
I agree the RS news is no surprise but in my opinion, it doesn't really matter. As you said, the company had it coming after trading under 0.40 for over a year now, and I'm also more puzzled it actually took that long to get the notice.
However, while it's never good to have to reverse split, this is not the biggest problem this company has.
The major problem is obviously its balance sheet, and while there was a glimmer of hope they could make it after receiving the financings in February, I don't think that is possible any longer. Since then, they have spent way too much on the Namoya ramp up, and gold prices, instead of helping the matter by moving up, have gone in the wrong direction.
I don't see how the company can make any cash, at the current gold price, in the entirety of 2016, which it absolutely must in order to survive and have any shot at refinancing its massive debt due early 2017. I will write another post to explain why I come to this conclusion and what I think it would take for the company to be able to survive and turn things around.
To address your points:
A/ maybe the announcement of Namoya commercial would give a small boost (a couple of cents) but I fail to see why this would have a more profound effect. It has been telegraphed for months, and I believe that despite reaching commercial prod, the company will still be cash flow negative, or neutral at the very best, which is ultimately what will drive the share price.
B/ Whether it trades at 0.15 or 1.50, the market cap is the same, and it will be just as futile to do a share offering. They really can't raise more than 10 million that way, if they actually find anyone willing to buy the shares. It's like pissing in the ocean.
C/ Well, I think it's highly unlikely anyone would buy the company given the debt load and cash reserves. Also, the mines now have streaming deals attached that make a sale more difficult.
I unfortunately think that the most likely outcome is a restructuring within 6 months to 1 year at the most, and possibly sooner if gold were to get lower towards year end.
Finally! Thanks! That's exactly what I was looking for.
Now I'm very satisfied. You made my day.
Hopefully the stock hits 1.25 pretty soon and it will be my turn to kiss the floor.
I think they didn't offer shares to raise cash not because they didn't want to, but simply because they can't. The market cap being what it is, and given the fact that they would have to issue the shares at a discount to market (say 0.15), they would barely be able to raise 10M like this at the cost of crushing dilution. At this stage, they are confined to streaming deals and forward sales, and whatever local loans they might be able to renegotiate.
Now the next important pieces of info will be how many ozs were produced in Q3 in a couple weeks, and then how much cash they have left at end Q3 when the report comes out, prob in November.
What a classless reaction.
So I am not allowed to post and point out the fact that despite essentially being contradicted or discredited by everyone, I was correct?
Should I just post information and analysis of my own in an attempt to contribute to the discussion only to accept insults in return, and when it turns I was right, just shut up because I was only lucky?
The bottom line is things turned "my way" as you said not by luck, but because I analyzed the balance sheet and using management's own projections for upcoming production, etc, came up with the virtually certain conclusion that BAA was going to run out of cash this quarter, which it did. I also tried to assess its options for raising the cash it would need, and again was pretty accurate there.
So should I be sorry that my predictions materialized and keep a low profile? A more honorable reaction would be to acknowledge the fact that you were wrong about the financials and instead of listening to the word of the director of the board to reassure yourself, maybe pay a little more attention to the actual numbers. But I'm not holding my breath.
As I mentioned, management teams and executives lie all the time, numbers do not.
Anyway, I should stick to doing my own analysis and keeping it to myself. After all, what do I gain from sharing here? No real discussion has ensued, and I only have received insults and criticism from most folks for sharing my dd. What's the point...
A 16M cash raise. What a surprise! NOT
Well, it appears despite complaints/attacks that I was way off and/or had an agenda for posting non-sense negative comments about the company, I was actually spot on. As can be seen from my previous posts, I viewed as a virtual certainty the company would have to raise cash this quarter to make it to Q4, with at least 10M needed. I thought it would try to raise 20M+, given the potential liquidity concerns might come back very soon if it raised the bare minimum.
As can be seen from my last post, of the three potential scenarios I had outlined for how they would do this, scenario #2 is EXACTLY what the company did: a 10M local loan combined with a gold forward sale for 7M. I thought they would forward sell for 10M+ like in the previous cases, but apparently settled for the lowest amount they could get away with. I thought they would rather extend the Namoya streaming deal to raise a bit more cash, but I suppose they are trying to avoid this type of life-of-mine commitment until they can't do otherwise. This may be next if they need more cash in Q4 or Q1 2016 when the next interest payment comes up if gold languishes around current levels without rallying significantly.
The new forward sale (of which we don't even know the exact terms but can only be worse than the previous ones given the lower gold price), and the new local loan that will have to start being repaid in Q1 2016 at something like 0.5M/month will tighten the liquidity situation even more.
We also don't know when those deals closed. I suspect they closed before the interest payment on September 1st but the company waited on drilling/exploration news to have something more positive to pair the cash raise announcement with, in order to avoid too much embarrassment. When you claim you are fully funded for years, and have to raise more cash not even 6 month later, it doesn't look too good...
Thank you to those who have posted the responses they have received from IR.
After these comments, here's my take for all it's worth.
I maintain my view that they will most likely (if not certainly) raise additional cash this quarter in some way. The email actually does not exclude that: "As for the bond payment: we have flexibility to allocate capital and take other steps to ensure that financial obligations are met as we move through the rest of the year."
From my estimates, the cash shortfall is significant enough that while they may be able to squeeze by this quarter in some way by running up their accounts payable, I think it is too tight and they will raise cash, probably 20M+. They may be ok raising 10M through another forward sale like in April, but again, that may be just kicking the can down the road a couple of months, and I believe they will want to address the funding situation more definitively with something in the range of 20-30M.
The options I see and my best guess as to how they would do that:
1/ a stock offering: unlikely and very difficult at these levels. Raising 20+M would be very hard, and result in crushing dilution. I don't believe they will do that.
2/ if they can get another small 10M local loan, could be a combo of such a loan + one forward sale @ 10M as well to raise 20M.
3/ my best guess and what I would expect: an amendment to the Namoya streaming deal with Gramercy. This is what would allow to raise the most upfront cash. The previously announced deals (with GH and then Gramercy) initially planned for a 10% stream, which was then reduced to 8.33% at closing. The company was thus willing to sacrifice a greater percentage of its Namoya prod. With Namoya coming commercial if they are on schedule, I can see an amendment to the stream up to 12-15% range. I view this as the most logical place to go for additional funds.
This additional percentage may allow raising anywhere from 20-40M, depending on the payments negotiated on delivery ($150/oz before, likely to stay the same).
This is obviously pure speculation on my part. We will see. Just my best guess based on all the information at hand.
I don't know what "clear strategy" means in his mind. Did he send you this in response to direct questions about the liquidity?
The "strategy" certainly doesn't refer to the financials or the balance sheet. He's just mentioning the plan operations-wise.
In any case, if you care about my interpretation, this doesn't say anything. This is just talking to say nothing.
Here is how I see his statement:
"The Q2 results were excellent as was the press release." --> well, since the stock is down 25% since the release, we're lucky that they weren't bad because it's hard to imagine what the stock would have done...
"Management has a clear strategy – to raise Twangiza to steady state production at design capacity levels; bring Namoya into commercial production and reduce operating costs. Management has shown a proven ability to execute that stategy very well. It is a very positive harbinger for the future."
--> absolutely, the "strategy" of maximizing the output of your mines at capacity while minimizing your operating costs to rock bottom is an excellent one! I believe this is the "strategy" of every gold miner (or raw material producing company) in the world...
Anyway, in all seriousness, this is the type of response that I would expect. Just a general statement that doesn't really say anything.
Thanks for sharing his reply.
Yes, indeed. As I mentioned in a previous post, my messages seem to have the market moving capabilities of a Goldman Sachs downgrade. Today has proved this. What else could it be?
Maybe I should send them my resume :)
Sure, when things are good there's no reason to think management would not want to address their shareholders' concerns.
It's when the situation is more problematic that you can't expect them to be candid and telegraph their moves in advance. If they did, it would actually complicate their situation further. For example, Lonmin's share price is tanking as the liquidity concerns are mounting, and there's heavy speculation that they will have to issue rights to raise cash. But I bet if you ask them directly what their plan is, they sure won't tell you. Why would they want to tank their own stock and then subsequently make their life harder having to issue shares at a lower price?
But it sure doesn't hurt to ask, you're right.