A tunnel in a deep mine

Restructured Mwana Africa plc Is Now Mining Profitably

A tunnel in a gold mineMwana Africa (LON:MWA) shareholders have had a torrid year. The African multi-commodity mining firm’s share price has collapsed and is 74% lower than it was at the start of the year.

As a shareholder, I’m regretting one of my more poorly-timed purchase decisions, but recent events and yesterday’s operational update confirmed that one of the core reasons for my original purchase — the firm’s solid Chinese backing — remains valid.

Indeed, China’s involvement could yet be the firm’s saving grace, as it has ensured the departure of two of Mwana’s most overpaid and underperforming directors, former FD Donald McAlister and Chairman Oliver Baring (I commented on the synchronicity of Baring’s departure and the arrival of new funding in a previous post).

The level of remuneration received by Mwana’s board is pretty shocking, considering the size and lack of profitability of the company, but that aside, let’s look at its chances of becoming a profitable mining business.

What’s new?

Back in August, Mwana was very nearly down and out. Its plan for the Trojan nickel mine was unviable, the company was out of cash, and the price of gold seemed to keep falling.

Luckily, that’s all changed. Sort of, anyway.

Firstly, Mwana tapped its Chinese backer, China International Mining Group Corporation (CIMGC) and CIMGC’s Chairman, Ning Yat Hoi, for a total of $6m through two equity raises. That was enough to meet immediate requirements and provide the funding needed to implement a revised plan for Trojan, that will see the firm mine only the higher-grade ore reserves, and thus become able to mine and sell nickel concentrate at a profit.

On the gold front, Freda Rebecca has returned to full capacity, and according to yesterday’s update, gold production rose to 17,536 ounces during the last quarter, up by 19% on the previous quarter.

The cost question

Of course, any fool (relatively speaking) can dig metal out of the ground. The challenge, as gold miners all over the world are currently finding out, is to do so profitably.

Yesterday’s update from Mwana suggests that the firm is also making good progress in this regard, and that both of its producing assets are now profitable at a mine-specific level. Here are the third-quarter average sale prices and C3 total costs for Mwana’s Trojan nickel mine and Freda Rebecca gold mine:

  • Average gold sale price: $1,330/oz
  • Gold C3 total cost: $1,053/oz
  • Average Nickel sale price: $13,787/tonne
  • Nickel C3 total cost: $10,390/tonne

It remains to be seen whether these promising figures can translate into profitable operation at a corporate level, but it’s promising, nevertheless, and suggests that the company’s management are working hard to justify the commitment shown to them by CIMGC.

Exploration assets

Apart from Mwana’s two producing mines, which desperately need to become profitable, the company also offers shareholders the two dangling carrots that are its key exploration assets, the Zani-Kodo JV gold prospect and the Katanga Copper JV, both of which are in the Democratic Republic of Congo (DRC).

Zani-Kodo Gold

Earlier in October, Mwana issued a resources update for its Zani-Kodo gold resource, increasing the JORC compliant gold resource by 13% to 2.975Moz and 2.43g/t, with a cut-off grade of 0.5g/t.

Zani-Kodo is not all that far from Randgold Resources’ Kibali mine, but whether Zani-Kodo shares Kibali’s potential for high-volume, profitable expoitation is not yet clear, although that’s clearly Mwana’s hope. Further work is being undertaken to expand the JORC compliant resource base, and this remains a reasonably promising work-in-progress that could yet become a big winner, depending on whether it can profitably be developed.

In my view, a gold price of $1,000 per ounce (as used by Randgold) should be the benchmark for any new gold mine, as anything more than this smacks of blind optimism, if not outright deception.

Katanga Copper JV (DRC)

The Katanga Copper prospect is being backed by another Chinese Company, the Zheijiang Hailiang Company, which is a large copper processor looking for its own source of supply.

Mwana says that most of the first round of surveys and geological mapping has been completed, and that a phase 2 work programme begun in July, which will include a certain amount of drilling, as well as further soil sampling and surveying activities (see here for full details). As with Zani-Kodo, this could one day be a big win, but it’s not something that small shareholders can rely on.

Is Mwana a hold?

Mwana’s share price has hardly reacted to any of the good news its released in the last two months.

This is a reflection both on the current state of the market and on the considerable future uncertainty that remains, especially for small shareholders who want a short-medium term financial return, rather than to secure a commodity supply, as is probably the priority for Mwana’s Chinese investors, who effectively control the firm (in itself, a risk for UK private investors).

Overall, I think that Mwana’s management is making decent progress and has a better-than-even chance of succeeding, on so I’m going to continue to hold and see what transpires when Mwana publishes its half-year results early in 2014.

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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