August 25, 2010
Focus Minerals Is On Course For Record Profits, Even If It Has Frightened The Horses With Its Toll Treatment Deal
By Our Man in Oz
If you really want to frighten Australian gold-stock investor, tell him that your cost of production has topped the magic A$1,000 an ounce mark. Thats what Focus Minerals did in late July, and it knocked 25 per cent off the share price. The tragedy of that event, though, was not the high cost of gold production for the June quarter, at A$1,034 per ounce, it that was the poor souls who sold down their holdings did so without understanding that Focus was actually performing much better than that single, admittedly alarming, number appeared to indicate. What Focus had not communicated to the market was that it had sold 33 days of milling capacity to an outside client under a toll treating arrangement, and shut its mill for another six days for maintenance. It got a fee for the toll work, but not having its own mill available for roughly one-third of the quarter meant Focuss own mines continued to generate costs, even though the mill was not spitting out any of its gold.
It sounds simple today, if you read carefully through what Focus has reported, but even managing director, Campbell Baird, acknowledges the mistake in not spelling out precisely why the company appeared to have suffered a cost explosion in the June quarter. Its my fault, is the candid mea culpa from Campbell. We understood inside the company what was happening, but we just didnt get the message out clearly. We misjudged the effect on our costs from the toll-treating arrangement we had with the owners of the La Mancha mine, and we didnt emphasise that point to the market.
Even now, the best part of a month after the event, shares in Focus remain discounted because of the confusion caused by the toll treating arrangement. Just how discounted Focus is, is the rather interesting bit. A survey of brokers who understand the story behind the wonky communications came out with a consensus value for Focus at around A8 cents, roughly double the A4.2 cents it closed at on the ASX on 25th August. In one succinct observation, Petra Capital from Sydney said: the sell-off in Focus is overdone in our view and represents a buying opportunity.
Understanding whats happened at Focus is easy, if you have the time and can find someone to guide you through the tricky bits. Thats what Minesites Man did this week, reading and re-reading the companys filings at the ASX, talking to Campbell, and testing the explanation with other people familiar with the issue. For most investors that might be asking too much. They dont have the time to probe deeply, and if a story is confusing they walk away, or sell, which is what a few people did in the week after the June quarter was released. One investor told Minesite after attending a Focus function in early August that he didnt understand the point about toll treating and Minesites Man knows why.
A year ago, when Focus mentioned toll treating, it was referring to an arrangement which is the reverse of what happened in the latest June quarter. Rather than being the provider of milling services, which is what its doing for La Mancha, Focus was buying toll treatment services as a means of generating early cash flow. So, when Focus talks today about toll treating hurting its costs outsider observers get confused. What was once a positive has flipped into the negative, albeit one that was entered into for the best of reasons to bed down the companys Three Mill Hill mill, and allow the more gradual introduction of its own material.
What does all this mean? Well, for starters, as some brokers have pointed out, it means that Focus is being valued on incorrect assumptions. Campbell understands this and has moved to finalise the La Mancha toll deal earlier than originally agreed. The current quarter will see the last toll treating. The December quarter will be the first with Focus-only ore going through the mill and, if Petras forecast is correct, the cash costs will retreat to a steady-state A$675 per ounce, roughly half the current Australian dollar gold price.
Campbell recognises the problems caused by the June quarter cash cost figure, and the limited understanding in the market as to what was happening. On Tuesday he lodged a fresh profit guidance report. This showed that Focus is expecting a record net profit of between A$10 million and A$11 million for the year which ended on June 30. The companys own gold production in the September quarter will be between 12,000 and 14,000 ounces. After that, quarterly production should rise beyond 20,000 ounces a quarter with the company on track to hit its target of between 80,000 and 100,000 ounces a year.
Once it gets clear air, and sole access to its own mill, Focus will set sail for its longer term objectives, which are built around control of the historic Coolgardie goldfield, and multiple ore sources and mine-development targets. It already has an impressive two million ounces of gold in the resource category and more than 200,000 ounces in reserves and stocks and all that with an active ongoing exploration programme which continues to expand the resource base.
The damage done by the apparent June quarter cost blow-out will take a few weeks to wash away. Local media in Australia has not yet bothered to explain the issue. You get that first on Minesite. However, it shouldnt take long for the market to catch up to whats happened - a series of events which are almost comical if they hadnt encouraged some investors to quit on a company for the wrong reason.
http://www.minesite.com/nc/minews/singlenews/...-with-its-toll-t.html
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