Monday, 14 October 2013

#BHR The casino continues

An interesting development today regarding Beacon Hill Resources. I commented last week here that the market clearly didn't like the news that they had agreed to issue unsecured convertible loan notes to raise up to US$19.2m, with the share price dropping from 2p to 1.25p. This followed hard on the heels of a drop from 2.6p the week before when an updated JORC compliant reserves statement was published confirming that  BHR have 39.38Mt of coal, with proven and probable saleable reserves of 16.16Mt of which at least 8.3Mt is coking coal. This was less than some investors were expecting, albeit I am not sure where they had got their expectations from. And that was following a drop from over 3p in June on the back of some isolated incidents of civil unrest in Mozambique. 

The summer has been a disaster for the BHR share price falling around 60%

Personally I didn't take too much notice of the civil unrest issue as it is non specific to BHR and should be sorted before elections next year, and I thought the updated JORC statement was reasonably good news confirming that we have an economic mine for 15 years, even in these coal-price-depressed market conditions. There was also some confusion regarding the difference between resources and reserves which I have outlined here. I bought more at 2.1p and 1.27p - and have certainly been cut by the falling knife!

The coverage last week was positive, with SP Angel quoted as reporting "the good news is that funding has been secured to achieve operational plans" but that didn't stop the fall, in part more to do with the shift in export timescales until mid/end 2014, and also in part due to the deal with Darwin and the potential for significant dilution to hit in the coming months. Without doubt the difference in statements regarding production timescales from the BoD between the end of July and the end of September takes some explaining and the BoD must take responsibility for this collapse in confidence.

But today, it emerged that SP Angel, commenting last week on the deal, had got their sums wrong. Whether this was sloppy reporting, bad information passed to them, or, as some of the more cynical BB commentators speculated, a concerted effort to drive the price down to enable a bargain take over, in any event the net effect was to spook investors that with only $4.4m left in the coffers, and a "cash burn rate of $1.5m per month", dilution would be sooner rather than later.

In reality the cash burn is less than half that reported last week, at $700,000 per month. SP Angel had conveniently omitted to include the benefit of BHR's ongoing production. At this revised cash burn rate, with £4.4m in hand, and $7m already drawn down from Latitude and Darwin, it now looks like funds could last a while longer than first expected and some of the reason for the dramatic drop in SP last week is negated.

SP Angel also reminded us today that debt facility negotiations are ongoing, named as with a “South African” bank, and if this arrangement were to be announced any time soon, the market reaction last week would begin to look very overdone in my opinion.

To me, last weeks fall-off-a-cliff share price movement not only looked like it priced in all of the bad news, it also now looks like it priced in some bad news which didn't even exist. Whilst I am very disappointed by the PR from this BoD, it does look like there could be significant upside if any of the market assumptions and pricing in the last 2 weeks are proved to be over-pessimistic.

As was commented on by a market commentator last week, us little guys have no idea what is going on under the surface, we’re just insignificant cannon fodder for the big guns of the city and ii’s. Most play the aim game as we play roulette - badly - and once the wheel stops turning, we pack up and go home, reflecting on the fun we had but poorer and probably a little jaded by the bright lights which failed to deliver the returns we optimistically expected.

But BHR remains a enigma to me. Missed deadlines, strategy failure, dilution, incorrect broker reporting, and now bizarre PR. On the other hand, a turned around H1 performance, wash plant upgrade, Sena rail allocation, first production, 15 year life, economic reserves statement, and now a promise of funding one way or another.

So it’s back to the roulette wheel for me. I increased my stake last Friday and feel like I am now on a red/black spin. The odds feel roughly 50/50 to me - either last week will prove to be overdone, or bad news will follow bad news. I guess my view is the former, otherwise I would have walked away to play another table. Good luck.

Extract from SP Angel note today:

Beacon Hill Resources (BHR LN) 1.4 pence, Mkt Cap £17.1m – Correction to Monthly cash burn at Project
  • Following our comments last week on the change in plans at the Beacon Hill project, the cash burn rate is $700,000 not $1,500,000 per month.
  • The reduced burn rate reflects the fact that the company are keeping a minimum level of production while implementing their new mine plans.
  • The company had $4.4m in cash on their balance sheet prior to the new funding arrangements being put in place.
  • $4m has been drawn from Darwin 1 tranche and $3m from Latitude giving them a total of $11.4m cash equivalent plus $4m of contractor prepayments.
  • The company continue to work on securing a debt facility from a South African bank with an Import Export Guarantee

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