Acacia Mining cash shrinks in first half, staff detained in Tanzania

Acacia Mining has unsurprisingly shelved its dividend and may have to pause production one mine after seeing its cash balance shrink 45% in the five months since the Tanzanian government banned the company from exporting gold concentrate from two of its three mines in the country.

It was reported on Friday that two of Acacia's senior foreign staff had been interrogated this week by Tanzanian authorities before being asked to leave the country.

The arrests were related to the ongoing export dispute, Reuters reported, though management denied that staff had been asked to leave, though it admitted trouble renewing work permits for foreign staff.

Generously describing it as a "complex and fluid situation", the situation in Tanzania has seen the company accused of under-paying tens of millions of dollars of taxes and of mining illegally for several years, which has culminated in the export ban imposed in March and more recently a host of tougher new laws and higher government royalties.

As a result, Acacia's cash balances had fallen to $176m by the end of June from $318m six months earlier, with net cash of $90.7m, though this is much better than the consensus forecast for cash of $148m and net cash of $67m.

Gold production in the first half of the year increased 4% to 428,203 ounces, with agreed gold sales of 312,438 ounces, both more than most analysts had expected.

But while Acacia is still producing and selling gold doré from its mines it is stockpiling gold/copper concentrate due to the ongoing ban on exporting concentrate that has been in place since March, which has resulted in roughly $175m of lost revenue in the period and reported turnover down 22% to $391.7m.

In light of the "fluid" Tanzania situation, capital expenditure is now expect to be between $180-200m for the year as non-essential spending is deferred, though management is still targeting production guidance range around 850,000 ounces for the full year.

All-in sustaining costs (AISC) were $893 per ounce sold in the period and cash costs of $577 per ounce sold, respectively 5% and 10% below the same period last year, with full year expected AISC of $880-920 and cash costs of $580-620.

Full year cost guidance includes the payment of the higher royalties and clearing fees, which Acacia began paying under protest earlier this month.

BETTER THAN EXPECTED

Earnings before interest, tax, depreciation and amortisation shrank 13% to $161.4m, with leading to net earnings of $62.5m, equating to 15.3 cents per share. Acacia benefited from an $18.2m non-cash share payment revaluation, putting earnings per share for the second quarter at 8.7 cents versus a consensus forecast of 2.9 cents.

Chief executive Brad Gordon admitted the first half "posed significant challenges" but he was pleased with how the company performed in light of this.

“We continue to take steps to preserve long-term shareholder value and have served arbitration notices for our Bulyanhulu and Buzwagi mines and will work to achieve a negotiated resolution, which is the preferable outcome for all parties.

"In spite of the challenges we faced, we delivered the highest H1 production in the history of the company, with gold production of 428,203 ounces. ”

GOVERNMENT TALKS STALLED

Although Acacia's 63.9%-shareholder parent Barrick Gold and hardline President John Magufuli's government agreed last month to begin discussions to try and resolving the spat, Acacia said these talks are still yet to kick off but are understand to be "in the near future", though without Acacia's direct participation.

All three mines continue to operate despite the losses being incurred, predominantly at Bulyanhulu, though management do not believe this situation is sustainable beyond the end of the current quarter.

If Bulyanhulu was put on temporary care and maintenance, the company would incur around $30m of upfront costs to retrench employees and end contracts in addition to the natural unwinding of around two months’ worth of accounts payable with minimal gold production over the same period.

Monthly costs of $2-3m would be incurred to maintain the mine in good standing ahead of a future re-start, when the mine would then benefit from the initial build-up of accounts payable.

MARKET REACTION

Acacia Mining shares slumped around 11% by early afternoon on Friday, having already crashed from March's levels above 530p to around 280p earlier in the month.

Analysts at Investec assumed, in line with consensus, that the concentrate export issue will be resolved in the second half but with the new flash over Fridays arrests, added: "This certainly signal an escalation of the dispute by the government. While Acacia has a high level of skilled indigenous staff, we would expect the loss of expatriate staff to have some impact on planning and output."

On the results, Investec said the cash reduction was "frightening" but is a natural reflection of the $1m/day that is being tied up in inventories while the concentrate export ban remains.

RBC Capital Markets said production levels for the half were better than expected, driven by the Buzwagi mine where grades and throughput were substantially higher than it had estimated, having "wrongly expected Acacia would have at the margin ramped down on spending in country leading to a quicker erosion of production".

With Barrick's negotiations yet to start, Bulyanhulu to be placed on care and maintenance at the end of September if no resolution found on export ban, RBC said the company will lose about $10-15m per month and spend circa $15m in capital per month in addition to $20m or so of debt repayment and exploration spending due in the third quarter. "This limits financial flexibility should the export ban continue."

RBC said that if Bulyanhulu is shut down at the end of Q3 at a cost of $30m and with an RBC estimated payables draw down of about $50m, the company would be operationally cash break even.

"Acacia’s contractors are facing challenges getting expat permits and this, as well as a reduction in development spending to preserve capital could see more operational erosion through Q3," analysts from the bank noted, with the outcome remaining uncertain as Acacia has filed for international arbitration that "should allow for legal protection under its existing MDA, however the situation remains very difficult to assess".