Hambledon Mining (LON:HMB) shares have slumped in recent days amid market speculation of a discounted cash-call. This morning it confirmed plans to raise just over £9 million to upgrade infrastructure at the Sekisovskoye gold mine in Kazakhstan.
Right now Hambledon is a steady-state gold producer. It expects to produce between 24,000 and 26,000 ounces from the Sekisovskoye open-pit mine this year.
But it is preparing to take the mine underground with an ambitious expansion programme which will see it almost double production to around 45,000 ounces next year and ultimately ramp-up to 100,000 ounce by 2016.
This morning it unveiled a discounted £9 million fundraising that has disappointed some investors. We caught up with chief executive Tim Daffern as he waited to jet off to Kazakhstan to get his view on the placing and the group’s ambitious expansion programme.
Daffern took the helm at Hambledon in November 2010, and he quickly initiated a detailed review of the operations and the group’s plans to expand the Kazakhstan gold mine.
What he found was a debt-free, un-hedged gold mining operation generating a decent amount of cash.
However he quickly recognised the need for further investment to improve infrastructure, so that it is more suited to a 20 - 30 year mining operation.
Crucially Daffern expects the planned upgrades to improve the mine's economics in the near term too.
“We see an opportunity to move forward, with investment, to reduce cost and increase gold recovery,” Daffern said. “Some of the infrastructure that was put in place during 2007 and 2008 now needs to be upgraded for the long-term.”
He added: “We are trying to get more operating costs out of the business. Therefore these investments are not just designed for the long term project, but they are also going to provide cost savings sooner rather than later.”
While the rationale behind the move seems fairly straightforward, the terms of the funding haven’t exactly been welcomed with open arms. It is issuing 227 million new shares at 4 pence each - a 15.79 percent discount to Friday’s closing price of 4.75 pence - to raise £9.09 million gross.
The shares, which were trading at 8.5 pence as recently as January, had already fallen from Friday’s opening price of 5.6 pence as market speculation grew that a potential funding was in the works. Since the placing was confirmed this morning Hambledon shares dropped another 13 percent to trade at 4.125 pence a share - just above the placing price.
“I know some people are disappointed by the price that we’re issuing the new shares at, but unfortunately that is the market of the London Stock Exchange,” Daffern said.
“It is disappointing but it reflects perhaps some of the historic aspects of Hambledon.”
He added: “Over the past month or so there has been some ‘tittle-tattle’ in the wine bars. We think that this ‘tittle-tattle’, that’s occurred from various people, has eroded the share price and that is a really disappointing fact. Unfortunately that’s life in London.”
Although investors may be disappointed by the discounted placing price, Daffern highlights the structure of the fundraising gives all existing shareholders the opportunity to avoid dilution and invest at a level which offers ‘exceptional value’.
The Australian chief executive is referring to the open offer that has been incorporated into the funding arrangements, which allow existing shareholders to buy one new share for every ten shares they own at 4 pence each.
“This is not a traditional British thing, but it is very popular in both Australia and Canada.”
Daffern added: “I feel it is courteous, right and proper that all private investors get an opportunity to buy the new shares.”
“They will not be diluted without having the chance to invest at the same price as the London institutions. This treats all shareholders, whether they are large or small, with the same courtesy. All cash and pounds are the same, so we should treat people like that.”
The funding is expected to conclude by 31 March. Then Daffern and his team intend to put the new cash to work as soon as possible.
Hambledon plans to focus on four main infrastructure projects, which it expects will save a combined US$120 an ounce in operational costs.
Firstly a new ‘integrated waste facility’ will mean that Hambledon won’t have to build more large tailings dams on the Sekisovskoye site. The company will use £2.6 million of the new capital to build the facility and Daffern expects that it will save around US$55 an ounce in operating costs.
Secondly Daffern plans to spend £1.3 million to automate and improve the metallurgical processing systems at the mine. He reckons that the project will increase recoveries from 85 percent to around 90 percent, which will in turn give a US$35 an ounce saving.
Sekisovskoye’s workshops must be expanded to support the enlarged fleet of mining equipment that will be used in the underground mine. Hambledon will spend £600,000 of the proceeds on this project and it is expected to give a US$15 an ounce saving.
The other major upgrade aims to secure a 100 percent guaranteed power supply to the mine. Hambledon will spend £1.1 million of the new capital on a second power line from a second provider and a new substation.
“At times we get ‘brown-outs’ in the summer and some problems in the winter so we don’t always get a guaranteed electrical supply. So this second line will give us that and it is also a required part of the underground development,” Daffern added.
The power upgrades are expected to save US$15 an ounce in operational costs.
Aside from the infrastructure projects Hambledon has also earmarked £900,000 for corporate development purposes. Daffern said that these funds could be used to help the group look at new growth opportunities in a structured manner. He reckons it is enough to support due-diligence activities over the next year.