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.
