Mwana Africa plc Reports Profitable Mining, But For How Long?

A tunnel in a gold mineAs I suggested might be the case in October, beleagured African multi-commodity miner Mwana Africa plc (LON:MWA) is now mining profitably.

The firm’s interim results, published on 11 December, show revenues up 7% to $65m and post-tax profits up 88% to $7.5m. Granted, these aren’t big numbers, but the company’s position has been transformed since the summer, when it was laid low by falling gold and nickel prices and a shortage of cash to complete the restart of its nickel mine.

Thanks to in part to hard work and cost cutting, but mostly to a large, dilutive, infusion of cash from the group’s Chinese backers, Mwana is now operating stably again and making money.

Costs down but not far enough?

The results were generally encouraging and showed positive cash flow from both of Mwana’s producing assets, the Freda Rebecca gold mine and the BNC Trojan nickel mine.

I was a bit concerned to see that costs had risen at Freda Rebecca, especially as Mwana says that this is down to “lower grade and lower recoveries”. The head grade was 2.3g/t for the six months to 30 September, down 17% from 2.77g/t for the same period last year. Although the firm says that recoveries started to improve towards the end of the period, the falling grade is a concern.

However, Mwana’s gold mining is still profitable, which is more than certain much larger companies can say. C1 cash costs came in at $887 per ounce (H1 2012/3: $797) and C3 all-in sustaining costs were $1,098 per ounce (H1 2012/3: $993).

Nickel and dime mining

One of the reasons Mwana was forced to make a cash call earlier this year was that it had run out of funds to complete the restart of its Trojan mine, after a sustained fall in nickel prices.

The price of nickel has descended from a high of more than $18,000 per tonne this year, but seems to have found support at $13,000/t, and is currently trading around $14,000/t, which gives Mwana an adequate but unspectacular operating margin, based on its C3 all-in sustaining costs of $12,770 per tonne.

Copper & gold exploration

The other strings to Mwana’s instrument are its 2.9Moz Zani Kodo gold prospect, and its Katanga Copper project, both of which are in the Democratic Republic of Congo (DRC).

The Katanga project has backing from Chinese copper firm Hailiang, and exploratory work is proceeding, but Mwana stopped work on Zani Kodo during the last half, due to cost cutting measures and the falling price of gold. Although Zani Kodo seems promising in principle, this decision suggests to me that Mwana isn’t confident that Zani Kodo can be mined profitably at $1,200 per ounce.

Still, Zani Kodo is very close to Randgold Resources’ Kibali gold mine, in the DRC, so perhaps it will attract a buyer based on ‘proximity bias’…

Moving in the right direction?

Mwana’s latest half-year results are better than I thought they might be, and suggest that the business can sustain itself profitably, as long as gold and nickel prices hold up at current levels.

However, Mwana’s margin of safety isn’t big enough for my liking, especially as I’m a gold bear in the near term. I will be looking for further evidence of cost-cutting, and some improvement in head grade and recoveries at Freda Rebecca over the next six months — otherwise Mwana’s situation could rapidly get worse, despite its current $9m cash balance.

Disclaimer: This article is provided for information only and is not intended as investment advice. The author may own shares in the companies mentioned in the article. Do your own research or seek qualified professional advice before making any purchase decisions.

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