When long-standing mining group, Glencar, pulled its rights issue and suspended dealings in its shares in February, the shareholders were worried, very worried. Then following a heavily discounted new rights issue, which is totally underwritten, and the relisting of the shares, a calm appeared to have been re-established. But the 33 per cent drop in the share price to 16 cents, or 3 cents below the rights price, on Friday, has engendered a new fear. With more shares now being issued to raise fewer funds, and with a negative net worth of $3.9 million at the end of 1999 - according to the accounts released last week - does it have a future?
Most of its eggs are now in the Wassa gold mine project in Ghana and this project's success will have a big bearing on its future. One paragraph in the rights document is revealing. "Management projections for the Wassa mine are that for it to break even in cumulative cash terms over the life of the mine (after all debt and operating costs are paid), based on a spot gold price of $300 per ounce for unhedged ounces, additional proven and probable reserves of approximately 160,000 ounces will be required in addition to the 735,000 contained ounces" which are the latest reserve figures contained in the report by Steffen, Robertson & Kirsten (UK).
That means it will have to considerably increase the proven and probable reserves before that project ever goes into a positive cash flow mould. Glencar is optimistic. Indeed, it says it expects these reserves to be increased by around 190,000 ounces. And this does not include reserves from additional drilling.
The 190,000 ounces would give it a surplus of 30,000 to provide positive cash flow. Operating costs are running at $200 per ounce so a sale at $300 per ounce would give Satellite Goldfields - it operates the mine - a gross profit of $3 million.
Glencar would only be entitled to part of that as it has a 66 per cent stake in Wassa Holdings which in turn owns 90 per cent of Satellite (the government of Ghana owns the other 10 per cent).
Glencar's prospects in Ghana have a three-pronged dependency. First, the ability to get gold production moving, second, its ability to get more reserves, and third, the price of gold.
Gold production was uneven in 1999 due to a slower recovery from phase 1 heap leach area. However, the construction of a new phase 2 heap leach area came into operation last March, a year ahead of schedule with better production rates.
Glencar is convinced there is much more gold. And the new financing gives it $1 million to spend compared with $0.75 million in the first rights issue.
Had the price of gold stayed at the level when Glencar first became involved in Ghana, it would be receiving $100 per ounce more; that would have transformed the company. But the dumping of gold by Central Banks, particularly the Bank of England, pushed the price to a 20-year low of $252.80 per ounce by July 1999.
The market was saved by the announcement by the European Central Bank and 14 other EU banks, that they would limit their collective sales of gold to 2,000 tones over a five-year period. With a consumption rate of over 3,500, that led to a recovery and gold is now trading in the range $270 and $290. However, the whimsical hedging market is substantially bigger than the physical gold market and it can have a pivotal influence on the price. But what about the latest financial package, the rights issue. At first glance, it looks much less favourable than the first one. Granted more shares are being issued - 32.6 million against 30.4, at a lower price - 19 cents against 26.3 cents, and less is being raised - $5.35 million against $7.40 million. The present rights issue is one new share at 19 cents (compared with Friday's closing price of 16 cents) for every two shares held. The 25 per cent discount to the first rights reflects the market and the question marks over the company when it had to admit there was an "error" (the person connected with the error has since left the company) in the calculations for the 2000 forecast.
However, the postponing of the issue has had a number of beneficial effects. The accrued interest payment due up to the end of 2000 is to be capitalised. Although this is a mere postponement it frees up with cash flow in the early years. Also, it has more funds to spend on exploration in Ghana and elsewhere. And the write down of the carrying interest in Wassa - this led to the negative value in the balance sheet - will benefit the bottom line in the event of a positive cash flow.
With a negative net worth at the end of 1999, Glencar could not have survived without this rights issue. By postponing the issue it will have a more appropriate financing which will make it a potentially better company than last February. But, as a mining and exploration company, it is still subject to the vagaries of that industry.
