Shares in London Mining (LON:LOND) motored higher as the company unveiled its first operating profit since starting production at the Marampa iron ore mine in Sierra Leone.
The company announced a first half operating profit of US$10.2 million, compared with a loss of US$5.6mln last year, while underlying earnings (EBITDA) were US$24mln, up from a small loss in 2012.
Production volumes rose 129% to 1,535 million dry metric tonnes (dmt) of iron ore during a period that included the commissioning and ramp-up of a second processing plant.
“Production and sales have both doubled since the year-end,” noted chief operating officer, Jim North, in a conference call with investment analysts.
The company added that measures taken to minimise the impact of heavy rainfall during the wet season are working as planned.
“Moisture levels have crept up, but that’s as expected,” North said. “We’ve had above average rainfall, even more than last year, but we haven’t lost any production as a result of rain.”
North said the company expected the rainy season to continue for another couple of months.
London Mining ended the period with US$72mln in cash. The company, which has initiated a salary freeze at its head office, while senior executive have waived cash bonuses, is enjoying strong cash flow.
Chief financial officer (CFO) Rachel Rhodes said the cash could either be used to reduce net debt or restructure its financing arrangements at the appropriate time, while chief executive Graeme Hossie said the strong cash flow would enable the company to concentrate on reducing operating expenditure costs.
One area where the company could reduce unit costs is by switching to the use of capesize vessels for shipping. This could happen in the next 12 months, North indicated.
Meanwhile, freight costs are expected to trend down now the company is exclusively using ungeared vessels.
“Recent freight costs are around less than the US$30 a tonne level, dry, and we expect it to remain below US$30 for the rest of the year,” CFO Rhodes revealed.
Shares were up 5.9% at 113p in late morning trading, as investors got on board, most notably Morgan Stanley, which upped its stake to 5.04% from less than 3%.
“Today's results show that London Mining continues to make excellent progress as we focus on our Marampa operation and establishing it as a solid and sustainable long term cash producing business,” Hossie said.
“We are pleased to report our first group operating profit since starting production and remain focused on our continuous improvement plan and reducing costs,”
“We reached the 3.6mln dmt/a production rate in H1 and we are on track to achieve our target run rate of 5mln dmt/a by year end with estimated capital expenditure unchanged.”
John Meyer, at boutique broker SP Angel, said the numbers from London Mining were respectable, with no major surprises.
Referring to the company’s hedging policy, Meyer said: “The hedging policy to protect margins is sensible given the debt on the relatively short term debt on the balance sheet. The average CFR [cost and freight] price of US$130/dmt on the hedged amount is not too far from where iron ore has been trading.
“For the second half 1.1 dmt has been hedged at a CFR price of US$120/dmt so 50% of the second half may be hedged at lower prices than the current spot assuming around 2dmt of sales. Overall though it is right to hedge and we would expect the company to try and lock in current high prices now there is greater comfort in achieving production targets.”
Meanwhile, Investec said: “Operationally London has performed in line with expectations and has re-iterated its scheduled ramp up plan. Net financing costs of US$25.7mln have been a significant impact on earnings but otherwise no major surprises.”
The next big event for London Mining will be completion of the life of mine study. The company expects to present this to the investment community on 25 September.