Patron saint smiles upon St Barbara
Chief executive Bob Vassie has led a remarkable turnaround at the goldminer.
The patron saint of miners was nowhere to found back in June 2012 when her namesake ASX gold mining company St Barbara spent $556 million acquiring Allied Gold.
The cash and scrip takeover — struck at an amazing 92 per cent premium — proved to be a disaster, almost sending St Barbara broke before a turnaround began to take shape in December 2014.
The turnaround has been remarkable, as has been reflected in St Barbara shares being the best-performing stock in the S&P/ASX 300 last year.
Starting out last year at 10.5c for a market capitalisation of $50m, the shares rose strongly throughout the year to finish at $1.425 for a market cap of $705m.
The 1257 per cent gain blitzed all comers, with the infant formula group Bellamy’s coming a distant second with its 724 per cent share price gain for the year.
The man who has presided over the turnaround is former Rio Tinto stalwart Bob Vassie. After a stint at Queensland metals group Inova following 18 years with Rio, the New Zealand-born and raised mining engineer took the St Barbara reins in July 2014, with his time at Inova convincing him that after 30 years in the game running a listed company was what he really wanted to do.
St Barbara shares reflected the company’s dire situation at the time of Vassie’s appointment by trading at 11.5c, a far cry from the $2.10 at the time of the ill-fated Allied Gold acquisition under previous management.
Vassie tells The Australian that St Barbara’s lowly rating back then reflected expectations the company was “going to run out of money’’.
“And certainly up until that time the cash balance had been dwindling, primarily because of the troubled acquisition of Allied,’’ Vassie says.
The acquisition came with two mines — Gold Ridge in the Solomons and Simberi in Papua New Guinea. Both were losing money.
“Still, the low valuation of the company was a bit unfair because the Gwalia operation near the town of Leonora in Western Australia was actually producing quite a bit of cash,’’ Vassie says.
“But it was all draining out through the Pacific operations and leaving the company exposed. On top of that we had very high debt levels ($US325m) which we needed to handle. The market had factored all that in, possibly over- cooking it a bit.’’
Central to the turnaround was “demonstrating that we could plug the cash drain, and start to build cash levels’’.
“And that started in December last year when we stopped spending money on the Solomons and PNG became cashflow-positive after losing money for two years,’’ Vassie says.
“We also reduced costs significantly by halving our corporate headcount and by paring back on exploration.
“To top it off, having stemmed the cash drain, we turned things up at Gwalia and had a record year (250,000 ounces in the 2015 financial year at an all-in sustaining cost of $841 an ounce),’’ Vassie says.
“All that allowed us to start accumulating cash for the first time since acquiring Allied.’’
The turnaround, anchored by Gwalia, allowed the company to pay off $US100m in debt which, in turn, prompted a move back into the S&P/ASX 300 and analysts slapping buy recommendations on the stock.
The average price target on the stock is $1.75 a share. “We are now true peers of Evolution, Northern Star and OceanaGold in many dimensions,’’ Vassie says.
“And you can see there is still an enterprise value gap there (on key valuation metrics) which does give some support to where the brokers are putting us.’’
The clean exit from Gold Ridge in the Solomons in May has been pivotal to the broker re-ratings.
The troublesome operation was sold for a peppercorn amount to a company associated with local landowners.
“We gave over quite a bit of value for a small price but we were totally released from the operation in all respects,’’ Vassie says.
Vandalised and at the mercy of cyclones, the real concern for St Barbara at the loss-making mine — operations were suspended in April 2014 — was the risk of its tailings dam being breached.
Attempts to reach agreement with the government to act on a remedial action plan came to nothing and St Barbara had to pull its 700 workers out in August in 2014 when their safety could no longer be guaranteed.
“It became an untenable situation,’’ Vassie says. He also expressed concerns that the tailings dam issues had not been rectified.
“To my knowledge they haven’t started dewatering yet, which is a concern. While we are covered legally and commercially, if it is mismanaged and there is an overflow, it would be unfortunate, and no doubt it would be of some reputational concern for us,’’ Vassie says.
“But it is something that we can’t control.’’
Before completing its exit, St Barbara supplied a new waste water treatment plant to replace the one that had been vandalised.
“We have given all the infrastructure and potentially all they need to do is flick a switch and they can solve the problem,’’ Vassie says.
While Gold Ridge is gone from the portfolio, Simberi in PNG has managed to double production and halve unit costs. All-in sustaining costs are not the lowest around at $1200 an ounce but the company has hedged a full year of production at $1600 an ounce.
“So we are making about a $400 an ounce margin which makes it a useful mine with annual production of 100,000 ounces.” The turnaround came with the realisation that the $100m spent by previous management on increasing milling capacity had been a flop. “It was a complete disaster, to be frank,’’ Vassie says.
For a small outlay on recommissioning the old mill and running it in parallel with the new one, St Barbara under Vassie finally got the volume through the mills to get the ounces it needed.
“At the moment we did that (November last year) the mine went cashflow-positive.’’
The challenge at Simberi now is to lower costs again, initially through improving the mining and ore delivery system. Currently a contractor hauls ore from the mine down the hill to the treatment plant, even though an aerial conveyor system is in place.
Increasing the uptime of the conveyor could do away with the need for trucking the ore.
But of all the opportunities before the company, it is developing the deeper potential of Gwalia — the mine is already at depths of 1600m.
Believed to be the deepest mine in the world reliant on trucks to bring its ore to the surface, Gwalia nevertheless makes serious money because of its high grade and good ground conditions.
“We are making money by hauling with trucks that are taking an hour and 45 minutes to get to the surface, which is actually the bottom of the old pit,’’ Vassie says. “We dump it there and have to pick it up again and haul it all the way out of the pit to the treatment plant. Still, we are making considerable money there with all-in sustaining costs of around $700 an ounce in the last quarter.
“With the high grade and good geotechnical conditions way down deep, we could go a lot deeper, with drilling now down to 2000m, and with plans to pattern drill below to 2200m,’’ Vassie says. “But at some point it is going to get too deep to truck.’’
The solution could be to sink a shaft, turn the ore into a slurry and pump it to the surface, or install a vertical conveyor.
“We are doing the conceptual studies now and we aim to come back to the market towards the end of the next (March) quarter with what the ... options are.”
Asked if St Barbara’s stronger balance sheet meant mergers and acquisitions were back on the agenda, Vassie says the term M&A was wiped from the dictionary after the Allied debacle.
And besides, the best goldmine it can acquire is sitting beneath the current one at Gwalia.