Acacia Mining (LN:ACA) may have to consider operational shutdowns within its Tanzania-focused gold portfolio, after incidents this week suggested there would be no quick fix for a concentrate ban introduced in March that significantly affects revenues.
The government introduced the ban on gold and copper concentrates in March. Many had hoped for a near-term resolution but this week president John Magufuli accused the Acacia of export fraud, claiming concentrates 10 times the amount declared were discovered in containers seized in Dar es Salaam several months ago.
For what it’s worth, investment analysts say the claim does not hold water because the concentrate volumes reported by officials from 277 containers covering production over January and February, if accurate, would represent about three quarters of Acacia’s 2016 full-year concentrate production. Further, if the fraud was true, it would suggest a massive shortcoming in regulated export processes and have needed multiple government and private parties to collaborate.
BMO Capital Markets analyst Andrew Breichmanas said such a discrepancy was “difficult to reconcile”, while Numis Securities analyst Jonathan Guy said the accusation was not credible.
However, the facts around the matter change little for Acacia, which generates 45% and 55% of its revenues from the Bulyanhulu and Buzwagi operations, respectively, from concentrates. Concentrate sales were 30% of group revenue in 2016, meaning the export ban is costing the miner more than US$1 million a day, according to Breichmanas’ calculations.
“It now appears that a near-term resolution to resume concentrate exports may be difficult to achieve, likely forcing management to consider the suspension or curtailment of operations,” he said in a note this week.
Breichmanas said there may also be fiscal penalties to deal with on the back of the accusations, while the suspension of operations would clearly affect the miner’s valuation.
“Acacia may need to refund $22 million of advanced payments, and prepare to defend against demands for further royalty payments, taxes, or penalties,” he said. “However, given net cash of $196.2 million as of March 31, near-term liquidity appears unlikely to be of immediate concern.
“While [Acacia’s other major operation in Tanzania], North Mara, produces doré and is unaffected by the concentrate ban, Bulyanhulu and Buzwagi account for two-thirds of production and 75-80% of [the company’s net asset value].
“Assessing the stock solely on North Mara would suggest significant downside on a NAV basis.
“Our estimates now reflect deferral of concentrate sales into 2018 and we are downgrading our rating to Market Perform on fading prospects for a constructive near-term resolution.”
This most recent dispute is the continuation of a theme for Acacia, which has been fighting the government for an outstanding VAT receivable.
There is also disagreement over the company’s dividend payments and government pressure to shift 30% of Acacia’s local operating companies into local hands.
The fractious relationship had seen Acacia look increasingly toward West Africa in a bid to diversify its portfolio and, in January, it announced a merger with Endeavour Mining (CN:EDV), which has an operating and development portfolio across Burkina Faso, Mali, Ghana and Cote d’Ivoire. Acacia has also moved into Kenya.
Estimates had suggested a combined Acacia-Endeavour would produce 1.4 million ounces at an all-in sustaining cost of about $925 per ounce in 2017, rising to 1.7Moz at an AISC of some $830/oz in 2018.
The talks fell over in late March, with both companies citing “shareholder value” as the main concern, though the termination of negotiations came just weeks after the export ban was introduced, indicating Acacia’s move to diversify had come a little late.(Source: Mining Journal)
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