LON:WTI | 0.3p | US$3.6m | Under Review
Interim Results to December 2015
Weatherly International has announced its interim financial results for the six months ended 31 December 2015. Operational progress at Tschudi for the period was positive, with CY15 production guidance being marginally exceeded at 10,700t (vs. the projected 10,400t) and the operation now running at 17,000tpa nameplate capacity. The company announced a reserve and processing update for Tschudi in December 2015, with reserves now standing at 214,000t of contained copper at 0.85%, following 8,000t mining depletion. Pit optimisation has reduced the strip ratio from 7.5:1 to 6.5:1, and the company expects to cut C1 costs from the current figure of US$4,080/t to US$3,865/t Cu cathode; an opportunity has additionally been identified to expand Tschudi processing capacity by ~20% to 20,000tpa.
In terms of financial performance, continued downward pressure on the copper price, which fell from US$5,720/t to US$4,701/t over the period, drove Weatherly to an overall operating loss of US$6.7m. This was predominantly driven by US$5.2m losses at the Central Operations, which were converted to care and maintenance with a view to preparing for higher volume production on a recovery in the copper price. Meanwhile, losses from Tschudi totalled US$0.6m and group costs were US$0.9m. The company had cash of US$2.8m as of end-December 2015, plus US$3.7m of unpaid inventory dispatched to Walvis Bay, where over 3,000t of cathode inventory had been delivered at the calendar year end (against which the company received inventory loans of US$10m, which are offset against income when the cathode is aboard ship).
Subsequent to the period end the company also received US$2m of delayed VAT repayments (in the first week of January), and released its option on the Tsumeb tailings facility for a consideration of US$4m from Dundee Precious Metals. This will be settled with the company receiving a US$40/t discount on sulphuric acid supplied by Dundee for use at the Tschudi heap leach operations.
COMMENT: We highlight the above-guidance operating performance at Tschudi and outlined potential improvements, including a reduction in cash costs of approximately 10% and the scope for a ~20% increase in output, as positive takeaways, particularly in the light of the initial hurdles encountered during ramp-up.
Nevertheless, as acknowledged by the company, the main issues at the corporate level remain balance sheet-related. Following the draw-down of an additional US4m of debt in December, balance sheet debt and rolled-up interest, excluding the US$10m inventory loan, now stand at US$101m. Whilst initial repayments have been deferred until May, debt service costs are expected to average US$0.73/lb from start-2016 to the end of 1Q17. Including G&A and Central Operations care and maintenance costs, we estimate a breakeven copper price of around US$2.67/lb (US$5,880/t) would be required for the company to service its debt over the next 15 months under the current profile.
The company has indicated that it does not expect to generate sufficient cash to meet its debt repayment schedule at the current copper price of US$2.14/lb (US$4,728/t), and will therefore be dependent on the continued backing of Orion, who we emphasise has proved to be a highly supportive equity and debt holder to date. We anticipate that the company will seek to reschedule further its debt repayments with Orion to align more appropriately with predicted Tschudi cashflows, and pending this we keep our recommendation under review.
Most recent CY production guidance exceeded — The company has surpassed its most recent copper production guidance by 2% with 10,659tpa, which was in turn raised 4% to 10,400t in October 2015. The achievement of the 17,000tpa nameplate capacity by the year end is consistent with the guidance that has been maintained since May.
Tschudi Production Since Start-up in 1Q15
First full quarter of commercial production at Tschudi — Production for the quarter was just 4% shy of the nameplate run-rate, and with costs of US$1.85/lb, an operating margin of US$0.29/lb (US$648/t) should be achievable at the current copper price of US$2.14/lb (US$4,728/t).
Despite positive movement in opex and production, margin will still be eroded by debt servicing costs (plus corporate G&A and Central Operations holding costs) — We estimate that corporate G&A and the ongoing holding costs for the Central Operations are approximately US$4.5m, or US$0.12/lb, taking the total cost base, before finance, to approximately US$1.97/lb. If we account for the US$0.03/lb average reduction expected to be realised due to the US$40/t sulphuric acid credit received from Dundee (on the release of the option to purchase the Tsumeb tailings facility), this figure would fall to US$1.94/lb.
Balance sheet debt and rolled-up interest now total US$101m, excluding the inventory loan, with quarterly repayments scheduled to commence in five months’ time (May 2016) — We estimate that by the end of 1Q17 repayments are planned to total US$27m and interest charges US$7.5m. Repayments and interest charges are thus equivalent to US$1,604/t (US$0.73/lb) of expected production from the beginning of 2016 to the end of 1QCY17. The cash/unpaid inventory of around US$8.5m and the market cap of US$3.6m therefore give the company an EV of around US$90m.
The cost to breakeven at the corporate level is in line with most long-term copper price expectations, as mentioned above — Still, we anticipate that the company will seek to re-profile its near-term debt repayment obligations, awaiting which we continue to keep our recommendation under review.