Pain looms for profitable Sallies
Allan Seccombe
Posted: Tue, 24 Mar 2009
miningmx.com
[miningmx.com] -- FLUORSPAR producer Sallies posted a long-awaited operating profit, which was marred by a R74m impairment of its Buffalo mine. The outlook for the company, however, is one of production cutbacks and mothballing parts of its operations because of poor market conditions.
Sallies recorded an interim profit of R13m for the period to end-December 2008 against a loss of nearly R26m a year earlier. The Buffalo impairment dragged the company into a net loss of R61.6m against a R25.6m loss before.
Operationally, Sallies turned in a very strong performance, with revenue bouncing up 105% to almost R150m and operating profit growing around 500% to R46m.
The outlook for the company is less rosy because of declining demand for its product and tapering off of prices for acid-grade fluorspar which broke through $400 per dry metric tonne during the interim period.
“Given the state of world markets and a downturn in fluorspar demand, cash conservation strategies, including production cutback and mothballing, are being evaluated,” Sallies said in a note accompanying the results.
CEO Tom Dale said the Witkop mine is a medium to high-cost operation and it was these kind of operations that "go to the wall" when prices drop off. "Our liquidity is good, so I'm not going to produce fluorspar that either we can't sell or must sell at a loss, destroying the liquidity we've built up over a two-year period," Dale told Miningmx. "I'd rather live to fight another day."
The biggest threat to the company's survival is a dispute with US-based Honeywell, which could mean a payment of R65m, including the claim, interest and legal fees, if the decision in the International Chamber of Commerce goes against it.
"We wouldn't be able to absorb a smack like that," Dale said, unwilling to comment on what Sallies would do to pay that amount if the decision goes against it.
Honeywell has lodged a claim of $4.5m against Sallies, which is being decided by the Zurich-based arbitral tribunal. Sallies has a counter-claim of $3.8m. The case relates to a terminated supply agreement between the two companies.
Sallies has made no provision for the claim.
A ruling will be handed down to the International Chamber of Commerce by the arbitration tribunal during March and the final award by that chamber will be made in April.
Sallies has cash of R12m or roughly $1.2m on its books. It has money due to it of R40m and inventories of R43m.
A second case has been brought by the Solvadis agency, which acted as Sallies European agents for its fluorspar production from November 1999. Sallies said it gave the agency 12 months notice and terminated the agreement at the end of 2008.
Solvadis is claiming $500,000 in terms of the Swiss Code of Obligation. Sallies is contesting the claim and has made no provision for it. Solvadis has retained the money from cash due to Sallies, Dale said.
The third matter relates to a dispute with the South African Revenue Service for inter-company expenditure deductions. If Sallies loses the dispute it will have to pay R700,000, but if it wins, then SARS will pay R6.7m to the company.
At the Witkop mine, production was up 10% at 62,638 wet metric tonnes in the interim period. It sold 15% more product during the six months at 60,251 tonnes. The Buffalo mine was close in October.
Prices for acid-grade fluorspar reached an improved annual average of $301/tonne free-on-board (FOB) during 2008, and broke through $400 shortly before October when world markets crumbled.
“Witkop has sold production forward into calendar 2009, but the future outlook for prices and volumes is at present opaque,” Sallie said.
Sallies is embarking on a drilling programme at the Witkop mine to prove up the orebody and allow it to control grade far more closely. It has spent R4m buying a new reverse circulation drill and is tendering for contractors to operate it. |
