Acacia Mining closes underground mine to preserve cash

Acacia Mining said it expects to return to positive cash generation early in 2018 after it stopped underground mining at one of its three Tanzanian mines amid an ongoing government ban on metal concentrate exports.

As a result of the planned reduction in operating activity at the Bulyanhulu mine, the FTSE 250 company, which has been reportedly coming under pressure of various sorts from government agencies in recent weeks after being hit with a $190bn tax bill in July, now expects annual production to be around 100,000 ounces lower than the bottom of the previous guidance range of 850,000-900,000 ounces, with costs guidance remaining unchanged.

Roughly 35% of production so far this year since a committee appointed by President John Magufuli slapped an export ban on the company in early March.

Acacia, which sustained $210m of cash outflow in the first six months of the year partly from the $15m per month of negative cashflow from 'Buly' and partly from higher government royalties, will incur $20-25m of one-off costs from the closure plus $35-40m of working capital and $15m cash outflows over three months by which time the underground closure should be complete.

The company expects to offset some of these costs through the retreatment of tailings, which produces saleable gold doré that is unaffected by the export ban at a rate of around 30-35k oz per year.

Meanwhile the other concentrate producing ming, Buzwagi, will continue to operate as normal and has begun a trial to test whether it is cash flow positive to move to solely producing doré rather than concentrate, which would reduce the amount of gold and silver recovered but if the export ban continues would enable it to produce saleable gold.

Management claim it is possible to make a similar change to the processing flow sheet at Buly due to the different nature of the ore at Buly.

With $107m of cash in the bank at the end of August 2017, with $71m of debt, directors are also mulling further steps to reduce cash outflows and protect the balance sheet.

"These steps may include a reduction in corporate overheads, expansionary drilling at North Mara, greenfield exploration activity and a gold hedging programme," the company said.

It added that discussions between parent company Barrick and the government of Tanzania are ongoing and that it remains hopeful they "will lead to a resolution to the concentrate ban and operating environment and enable the re-assessment of the operating situation at Bulyanhulu in the near future".

Acacia shares dived below 180p in early trading on Monday but by 0830 BST had erased some of these losses to reach 195.43p, a 5.5% drop on the day.

Analysts at Investec said the discussions between Barrick and the government "clearly appear not to be getting anywhere" and Acacia "has implemented a sensible holding pattern" where Buly can be restarted without significant effort, but the company moves into a considerably more viable operational and financial position in the meantime.

"We expect this to now move the pressure onto the president – if he actually cares."