Hello All,
I just got off the phone with SUF's CFO and I feel a lot better. While I was unconcerned about the EPS due to write-downs, start-up expenses, etc., the cash flow numbers really disappointed me. How could mining income be $39.6mil and cash flow be less?!?!?
Digging thru the website info, I found that the cash flow was negatively affected by an item called "change in non-cash working capital balances" to the tune of $6.985 million or $.27/share.
I'm going to use my words to explain what the accounting says happened here: (This will be reflected on the balance sheet, unavailable at present, but to be included in AR), and forgive my lack of accounting acumen:
The "change in non-cash working capital balances" reflects increases in the following three balance sheet items: Receivables +$18mil, Payables +$7.2mil, Taxes +$4mil, leaving a net "change" of -$6.985mil (to cash flow, the Receivables are negative, while the Payables and Taxes are positive so -18+7.2+4=-6.985 (roughly), and given that this is SUF first year of production, the increases in all are large --actually a good thing!) So the net is that cash flow is lower by $.27/share, prompting me to ask WHY?
Again, not being an accountant, my understanding is that the diamonds produced at Klipspringer/Marsfontein and sold thru De Beers have a two month lag before De Beers coughs up the dough. So diamonds produced in November generate cash from De Beers in January, and likewise, December production generates cash flow in February. The earnings report the income in the period produced, but the cash flow is two months behind!!
While I don't like this lag, now that SUF has this lag built-in, the quarter-over-quarter and year-over-year comparisons going forward will also incorporate this timing difference and will look much better. De Beers actually owes SUF $18mil recorded in, but not paid for, in 1998.
I understand that in my simpler way of understanding accounting, given that I'd net out the time lag, SUF would have had cash flow of $1.62 per share, perhaps even greater given the details of the Receivables and Payables.
I will admit to being quite disappointed in the handling of this release: late (Mar 17?) and confusing (above, lack of financials with NR). But given that we all have come to look at SUF first with the "what is wrong?" attitude, I think some other numbers are very important.
Firstly, this is SUF's first year (half, really) of production. In the depths of last June, who would've possibly anticipated earnings over 50cents and cash flow of $1.35 {1.62;)}? And NO DEBT!!!
Secondly, the Canacord analyst is on paper expressing doubts about SUF producing the early goal of 102,000 carats. Well, SUF's share was 282,000 from Klipspinger alone! Where is he now?
Thirdly, development at Klipspringer is continually ahead of plan. How about fast-tracking the Sugarbird blow, having M1 cranking out diamonds in August, full M1 production in October, the new smaller plant speeding exploration on Marsfontein and Klipspringer, with the underground fissure system adding to production (100% SUF) early in the second half of 1999. All this for a company that almost lost everything in the battle with De Beers.
Fourthly, very promising exploration potential from NWT. While I believe SUF should be considered a South African producer (but traded here and in NY) with excellent blue sky in NWT and Angola, many others see this potential as more important. This is good.
Fifthly, the many good minds at SUF have been very busy for the last several months doing stuff. Now that the defense of the company from De Beers has ended, and M1 ramped up, imagine what the keen minds might come up with in the next few months?
Sixth, for anyone who has been a long time shareholder, folks who remember the broken drill bit in sample, the disappointment of Tli Kwi Cho, the fiasco of last spring, look around at Diamet and Aber. One has production and meaningful earnings in three or four years, the other hopes to finance a huge project to develop production in another few years. SUF has earnings, and cash flow NOW. Given that they've paid for everything so far out of cash flow, I think we can look forward to cash flow well over $2.00 for FY99. And the earnings!?!?
Seventh, given the markets'/analysts'/investors' lack of understanding about SUF, if SUF were to start an ambitious program to communicate to the world all that they have, maybe, just maybe, long term shareholders can realize their goals for this stock. Pencil me in for over $20.00 this year.
Regards,
Confluence |
