Noventa looks to move on after torrid time

It has been a tough time recently for tantalum miner Noventa (LON:NVTA,TSE:NTA) with disappointing drilling results and errors in business planning leading to a warning of delays and spiralling costs at its flagship Marropino tantalum mine in Mozambique, hurting the shares badly and undermining investor confidence.

Primarily a miner of tantalum, a key component in every mobile phone as well as a host of consumer electronics and aircraft engine blades, Noventa’s ambition is to become “the world’s largest, low-cost industrial-scale supplier of tantalum concentrate”.

Those ambitions took a knock on June 2 and 3 when it issued trading statements warning additional funding was required for the new plant at Marropino and to lay a pipeline for water in addition to working capital due to a change of civil engineering contractor. This new plant was due to be commissioned in July 2011, but was announced to the market to be commissioned in the fourth quarter, which should still hold good.

The resulting problems included the old existing plant being unable to sustain a targeted rate of production of 200,000 lbs per annum due to mechanical difficulties.

The June 2 statement warned that it had become increasingly apparent the capex required to bring the new plant, with a capacity 600,000 lbs, into full production, would be “significantly higher” than originally envisaged by the company.

Problems and delays in changing the plant’s engineering contractors; higher than expected energy costs associated with its running, a hit from unfavourable exchange rates; and less than expected rainfall, which is used  to serve the processing plant, added to Noventa’s woes.

The cost of delays, the need for additional capex, and already tight cash position demanded an “urgent fund raising”, the company said.

Yet Noventa has been keen to stress that all these various problems had little to do with “mining” activity per se. Rather, it argues, they can be attributed, in the main, to poor business planning and errors in operational management, while others, like the exchange rate hit and lower than expected precipitation levels, were beyond its control.

All these issues, added to the fact that the then chief executive Pat Lawless, who resigned in May, had a pressing family matter to attend to over a critical period of time for the business, led to a “perfect storm”, according to the company.

That June 2 statement, which led to a 60 percent fall in Noventa shares on the day, was quickly followed up by confirmation of plans to raise $25 million to help with taking production at Marropino to the targeted 600,000 lb/year.

Throughout its woes Noventa’s chairman Eric Kohn has insisted that the company’s recent shareprice performance has been deeply disappointing.

He has said the stock is “grossly undervalued” at current levels in relation to the quality and prospects for the company’s tantalum assets.  He has also noted that the current price is the same as when he took over the company when the mine was in “care and maintenance” and badly in need of a turnaround.

Now, he can point to a company that boasts production, has completed a N43101 (a strict set of rules and guidelines for reporting and displaying information related to mineral properties in Canada), and a new plan on the way for the fourth quarter.

Indeed Kohn had a track record in turning around businesses before taking over Noventa, with successes at enterprises like Holmes Protection Inc., Omnilabs Group Ltd, the airline dba already under his belt.

At an EGM last week the company sought and secured approval for the fundraising, with Kohn assuring investors that Noventa is “well advanced” with its plans to raise the capital it needs to help bring the new plant at Marropino into full production this year.

Kohn also revealed in the EGM statement that the company has commissioned an independent working capital review from one of the "Big Four" firms of accountants.

Noventa expects to finalise its refinancing plans on the completion of this review, at which point an update will be provided to shareholders, he said.

The EGM statement updated on production at the Marropino mine too. Over July, output averaged 177,000 lbs per annum of tantalum contained in concentrate, and production is expected to reach 200,000 lbs per annum in August.

But while the company continues to advance its critical plans for Marropino, intriguing developments elsewhere might provide a further shot in Noventa’s arm.

For a few days ago the respected Metal Bulletin reported that Global Advanced Metals (GAM), the world’s leading tantalum producer, was in talks to buy US-based Cabot Corporation’s tantalum processing business, citing market sources.

Cabot’s tantalum business is one of the world’s main consumers of the metal and the company is one of Noventa’s main customers, the other being HC Starck.

The older of the two offtake agreements is with Cabot and its pricing is less favourable to Noventa than for the one it only last month successfully renegotiated with HC Starck.

If the GAM acquisition is completed in will be interesting to see what will happen to the Cabot contract. With tantalum supply remain tight there should not be a problem finding a buyer for the freed tantalum.

The outlook for tantalum pricing looks pretty solid. Soaring demand has seen the spot price for the metal increase from $37/lb at the start of 2010 to over $130/lb now. Canadian investment firm Mackie Research expects prices to continue rising, but more slowly than in the last couple of years, to reach around $160/lb by 2015.

The soaring price of tantalum over the last 18 months reflects a recovery in electronic demand coupled with  companies avoid buying so-called “conflict minerals” from places like the Democratic Republic of Congo (DRC), which has been a major supply source in recent years.

Mackie Research reckons DRC makes up around 30 per cent of global tantalum supply but points out there has been a growing political backlash against sourcing the metal from the troubled country.

Of course, a GAM-Cabot deal cannot be taken for granted but it is a tantalising prospect for Noventa management, not to mention Noventa shareholders.

Even if it does not come off, the near to medium term tantalum pricing outlook should benefit Noventa once the Marropino plant is at full capacity, giving upside from production that falls outside of its existing guaranteed offtake agreements.

The company has other assets it can potentially bring into play to leverage into strong prices. There is Morrua, which boasts double the parts per million of Marrapino, and Mutala that it can exploit. It has also has not explored the whole of the Marrapino concession, which runs over 11,000 hectares, and holds other exploration licences.

On a further speculative note, HB Markets mused in July that the steep fall in Noventa shares could make it a bid target. The broker believes the company, is prime “rescue and recovery” bid territory.

Like Mackie Research, HB Markets’ also points out that the price of the metal has more than trebled over the last two years, as shortage of supply persists. It also reminds investors that Noventa was sometimes referred to as a bid target when it traded as high as 285p earlier this year.

For the time being, however, Noventa management is no doubt fully focused on delivering with Marropino and getting its finances in shape. And it is doing so with a changed boardroom following a big shakeout of personnel.

Pat Lawless, the former chief, has been replaced Fernando Fernandez-Torres, who will hold initially the position of both chief operating officer and then chief executive officer.

Fernandez-Torres has been involved in the mining industry for over 30 years, including over 20 years within Rio Tinto and five years within the Sibelco Group.

Noventa has also recently secured the services of Thies Eggers as an independent non-executive director and head of its audit committee.

Aside from Pat Lawless, recently announced departures from the board include Timothy Griffiths, chair of the audit committee, who resigned in June.

Daniel Cassiano-Silva, the company's chief financial officer, meanwhile, has tendered his resignation and will leave his post in November. The company is in the process of recruiting a replacement for Cassiano-Silva.

With its boardroom looking fresher, fundraising progressing, a potential GAM-Cabot deal in the background, and the pricing outlook for tantalum still looking very good, Noventa management is no doubt keen on drawing a line under the torrid past two months and restoring shareholder faith in the company.