Hambledon: Fully funded and ready to exploit the full potential of the Sekisovskoye mine

Tim Daffern is itching to get on with things.  “I’m not here to tread water, that’s not what I’m about,” says the recently-appointed boss of Hambledon Mining (LON:HMB).

And he has a lot to do in the wake of the company’s discounted cash call to raise a much-needed £9 million that it is hoped will revitalise its fortunes.

The open offer closed at the end of March, and the funds have already been earmarked as part of an ambitious US$19 million programme designed to increase production from the Sekisovskoye gold-silver mine in Kazakhstan and reduce costs.

It will also take the company underground where the grades of the precious metal - currently 1.2 grams per tonne - should improve markedly to around 4 grams.

You can’t fault Daffern’s ambition.  However a look at Hambledon’s track record and you realise it has tended to over-promise and under-deliver.

“The targets put forward two-to-three years ago,” he tells Proactive Investors.  “were  over ambitious and were going to be hard to achieve”.

“The open pit mine and the metallurgical plant have now reached a steady state of production. The grade is lower than determined by the initial technical studies.”

Located 40 kilometres north of the regional capital Ust Kamenogorsk, Sekisovskoye Mine, or Seki as it is known for short, is an open pit operation, with plans to go underground later this year.

The project hosts a JORC-compliant resource of 1.94 million ounces at a grade of 3.9 grams per tonne and 2.56 million ounces of silver.

Last year production from the open pit, which has a mine life of less than four years, was 24,000 ounces of gold in 2010, a figure that will rise to 26,000 this year.

The underground mine will be in operation towards the end of 2011, which will add a further “22-23,000” to the company’s annual output in 2012, which is hoped will grow to 100,000 ounces by 2016.

In that time it is expected the cash costs of mining the gold will fall to around US$650 an ounce in 2016, from US$850 currently and to US$725 in the next 18 months.

The plan is not about cost cutting per se, but investment. So that’s investment in new plant and machinery, waste facilities, power supply and metallurgical processing.  Each has the capacity to bring down the costs.

The proceeds from the placing and open offer and the expected cash flow from the 2011 operations will underwrite an ambitious programme of change.

Around US$7 million is earmarked to take Sekis underground, with US$5.8 million set aside for surface infrastructure and a further US$4 million to fund the cost-cutting effort.

Daffern is aiming to create a mid-tier operation similar to the Gwalia Mine in Western Australia, which is slated to produce around 130,000 ounces of gold this year.

“It is obviously not a Barrick, Newcrest or Newmont – style mine, but it is a pretty important mine nevertheless,” Daffern said.

“Looking forward we want to add to the asset and develop the business to become perhaps a multi-site operation possibly targeting output over the medium term of 250,000 ounces a year.”

The chief executive has set aside a small portion of the cash infusion for corporate development.

He says there are opportunities to expand the company’s land holding in Kazakhstan – but it has to be the right asset in the right place.

“We want to look sensibly and properly at the properties we are being offered,” Daffern explains.

“There are plenty of opportunities, but we want to take our time, get the right one.

“We know a lot of the people and projects (in Kazakhstan) and there are a lot of growth opportunities out there.”

Almost debt free, the group has what is effectively an overdraft facility with a local offshoot of Russia’s Alfa-Bank. However the company may take on borrowings of some description going forward, though Daffern wouldn’t comment specifically on the company’s plans, or the uses of the cash.

However having a loan facility might provide Hambledon with a certain amount of flexibility when purchasing plant and machinery.

The potential source of the finance is not yet determined, though Sekis might just be the sort of project the European Bank of Reconstruction and Development or the International Finance Corporation might get behind.

If this were the case then the involvement of an influential stakeholders such as the EBRD and IFC, or a local partner might help to mitigate some of the political risks which weigh on the minds of investors – but are often more apparent than real.

All Daffern says to my probing on the subject is: “There is a growing understanding within the board that we can’t build a mining business on equity alone – at some point we may need some debt finance.”

The shares have been hit hard in the past month as rumours of the company’s impending cash call surfaced.

More generally, a discount rating has been applied to the stock which reflects the failures of former management.

Yet if Daffern and his team can deliver, then we have in Hambledon a significant cash generating asset.

A back-of-the-fag-packet calculation suggests a net present value of around US$200 million based on a five per cent discount rate, compared with a market cap of around a fifth of that figure.

But the company must first show signs of serious progress before there is a significant re-rating.

That may explain Daffern’s hurry. “What we’re offering is a refocused approach. We have a good asset and a good team.”