Monday, July 22, 2024

Minergy bagging big losses 

In theory, making a profit is simple: a company just needs to sell its product/service for more than it costs to produce. Reality is more complex. This reality has hit a local coal mining company, Minergy.

As it stands, the most pressing concern for investors, which include two state owned enterprises, Botswana Development Corporation (BDC) and Minerals Development Corporation Botswana (MDCB) is Minergy’s path to profitability – when will the company report a ‘feel good’ news to the market?

In January 2023, the company came closer to doing that. Buoyed by remarkable increase in demand for coal and higher prices, coupled with stable operations, the company said in a market update at the time that it is edging closer to profitability. The Australian coal explorer, which listed on the Botswana Stock Exchange (BSE) since 2017, and began production at its wholly owned Masama mine in 2019, said it expected both an operating and EBITDA profit for the first six months of the 2023 financial year.

“Overall average pricing has increased, buoyed by lucrative export pricing. Pleasingly, coal qualities have been consistently achieved to the extent that deliveries have resulted in quality bonuses. These factors combined to achieve better revenue,” Morne du Plessis, the miner’s chief executive officer said in January 2023.

But now as Minergy prepares to publish its latest financial results for the year ended 30 June 2023 which are expected to be released this coming week of 18 September 2023, du Plessis has some bad news for Minergy shareholders: the company will report a further increase in the net loss before taxation.

He shares that all the positive momentum generated, including operating and EBITDA profits as reported in the interim results on 31 March 2023, has been reversed.

“The Board of Minergy advises shareholders that the net loss before tax for the full year will be between 0% and 10% higher than the previous year. This equates to an additional net loss before tax of between P0 and P15 million for the year ended 30 June 2023. The reported headline loss per share (“HLPS”) and loss per share (“LPS”) calculated on losses after tax for the previous year was 27.91 thebe. The Company’s HLPS and LPS for the full year under review is expected to increase by between 0% and 10%,” says du Plessis.

Poor performance explained…

In its defense, the Minergy board says a sudden drop in export pricing from late December 2022 led to a loss in opportunity to operate at full capacity. The company says exports through Walvis Bay, Namibia became uneconomical, based on Free-on-Board pricing and logistics costs to port.

“Minergy had to find replacement sales for 35 percent of sales in a market that was and remains flooded with coal, with local pricing coming under pressure in a buyers’ market. This presented a completely opposite scenario from the position in H1 2023,” says du Plessis.

As a result, the BSE quoted coal mining company says it has been forced to navigate an oversupplied and low priced market, exacerbated by new competitor activity.

As if that not enough, the miner says the pre-boom and pre-existing overdue indebtedness to the mining contractor meant that  the company simply did not have trading volumes to recover overdue balances, as was the case with the first half of 2023.

The debt resulted in the stoppage of operations at the Masama Coal Mine at the beginning of March 2023 by the mining contractor, Jarcon, which was restarted, on a downsized scale, during the week of 7 April 2023. Minergy has since announced plans to find a new contractor after it terminated Jarcon’s contract in September 2023.

MDCB pulling the strings….

As it stands, an increase in Minergy’s finance costs has significantly impacted the company’s net loss before taxation. The company has admitted that its capital structure is heavily weighted toward expensive debt funding, which increased finance costs.

Du Plessis explains that the increase in finance costs has been driven by the full year effect of debt incurred in the previous year, additional debt arising from the mining contractor’s 15 percent deferral of mining charges and compounding of capitalised interest.

“Mining costs have increased on the back of higher explosive and diesel prices. Operating expenditures have been affected by foreign exchange losses and a claim on an export vessel. Excluding these items operating costs are lower year on year,” says du Plessis.

The positive news is that the additional income earned on the selling of by products has assisted in the recovery of costs.

At the same time, the company has successfully concluded a further P90 million in funding from its main funder, the state owned, Minerals Development Company of Botswana (MDCB). The proceeds were disbursed on 3 August 2023 and were allocated to the trade payable arrears of the mining contractor, Jarcon.

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