African Minerals may need to take on more debt

City analysts reckon African Minerals has little room for error and it may need to take on more debt or look at alternative finance options, after it revealed rising capex costs at the Tonkolili project.
Thursday morning AMI revealed that its phase one capex costs, to develop the world class Tonkolili project in Sierra Leone, had increased by almost US$300 million. In total the phase one development will now cost over US$1.3 billion.
These extra costs are in part due to the fact that Tonkolili’s capacity will now be 15 million tonnes per annum (Mtpa) rather than 12 Mtpa. AMI said that this expansion accounts for around US$132 million of the additional costs. The rest has been incurred so that AMI can complete the development of its transport infrastructure before Sierra Leone’s rainy season.
The company also revised its sales outlook for the mine’s ramp up period. It now expects to sell 1.2 million tonnes of direct shipping ore this year (cut from 2.5 million tonnes) while next year it expects to sell 12 million tonnes (up from 10 million tonnes).
Crucially Tonkolili is still on course to deliver its key development milestone, of first ore on ship (FOOS), in the fourth quarter of this year. To achieve this AMI expects to commission its rail link from the mine by the end of September.
While there are positives to take from Thursday’s update, the most obvious being greater output in the longer term and ultimately greater revenues, some of the City’s mining analysts are concerned about the group’s depleted cash position.
AMI Thursday confirmed that as a result of increased capex, slower production ramp up, and revised sales forecasts, it now expects to have cash headroom of US$20 million rather than its previous expectations of having US$71 million.
“The company now has little room for error, as more project delays are very likely to result in the company requiring further external funding,” warned Collins Stewart analyst John Mcgloin.
Similarly in a note to clients Investec’s Hunter Hillcoat: “AMI’s tight cash position means it may need to take on more debt or seek some alternate financing options.”
Despite his concern the Investec analyst did say that although cash reserves are likely to be pressured, it should be manageable and overall the positives of Thursday’s statement outweigh the negatives.
Repeating a ‘buy’ recommendation, which targets 767 pence a share, Hillcoat added: “African Minerals is on the verge of becoming a substantial iron ore producer from a new frontier.”
Similarly Renaissance Capital, which has a ‘buy’ recommendation targeting 850 pence, Thursday said: “The net result is ultimately likely to be a more valuable project, although the financial headroom at the completion of the project remains very low, suggesting that further working capital facilities could be required to cover any delays in getting first ore on ship in the first quarter.
Meanwhile Oriel Securities analyst Charles Cooper focused on the long term positives for AMI. The analyst said: “Overall this is a mixed message of short term production issues and higher costs but with a rosier outlook for investors with a longer term view.”
On the London Stock Exchange Thursday AMI shares were down 39 pence each, about 7 per cent, changing hands at around 511 pence.
“Overall the board is pleased with the achievement of the increase in Phase I capacity from 12Mtpa to 15Mtpa, with a very low capital intensity of this expansion of just US$44 per annual tonne, allowing African Minerals to take advantage of the continued strong markets for iron ore,” said AMI chairman Frank Timis.
“The overrun costs of the project are in part due to the steps that we have taken to de-risk the construction of the rail and port ahead of the rainy season, to deliver the project on schedule by Q4 2011.”
Thursday morning AMI also told investors that it has now secured a US$90 million credit facility for equipment, from Standard Bank Ltd.