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Acacia rejects Tanzanian probe data, sees downgrades amid uncertainty

Tanzanian President John Magufuli was presented May 24 with findings of a presidential committee's investigation into the export of gold and copper concentrates, based on an investigation of the contents of concentrate containers.

The committee accused Acacia Mining plc of not fully declaring all minerals contained in the concentrate and recommended the export ban on metallic mineral concentrates remains in place.

Acacia on May 26 rejected the findings and data presented in the report based on a published summary, as the company had not yet received the full report as requested.

According to the company's verified data, the 277 containers at the Dar es Salaam port contain an aggregate 26,000 ounces of gold, while the committee's findings put the gold shipment content at 250,000 ounces.

Acacia noted that the containers represent one month of production, while the committee's figure equals the production total from the Bulyanhulu and Buzwagi mines for all of last year.

"The committee's findings imply that Bulyanhulu and Buzwagi each produce more than 1.5 million ounces of gold per year," Acacia said in its statement. "This would mean they are the two largest gold producers in the world … and that Acacia produces more gold from just three mines than companies like AngloGold Ashanti Ltd. produce from 19 mines, Goldcorp Inc. from 11 mines, and Kinross Gold Corp. from their nine mines."

"This is not a laughing matter but it sounds like someone in the committee has missed a decimal point somewhere along the line," Investec said in a May 25 note to clients. "Alternative explanations don't bear thinking."

Acacia's 63.9% shareholder Barrick Gold Corp. said it may review its full-year production guidance due to the recent extension of Tanzania's mineral concentrate export ban, which may affect the two mines that account for about 6% of Barrick's 2017 forecast. Acacia accounts for 10% of Barrick's overall guidance.

The gold major said it would wait to see if Acacia adjusted its guidance before making any changes to its own.

Acacia reiterated in its latest statement that it is losing more than US$1 million in revenue each day due to the export ban, and that it is considering all of its options.

RBC Capital Markets analysts downgraded the London-listed company's stock to "underperform" from "sector perform" and revised the target price from £4.50 per share to £3.15 per share, saying that the under-reporting of contained gold in concentrate is "highly unusual" in its view and could place the company's operating license under pressure.

"With the lack of near-term resolution to the concentrate ban and uncertainty around the future implications, we see investors further discounting the potential cash flows in the near and medium term," RBC said May 24.

Acacia shares were up 7.48% in London at £2.89 per share after the company refuted the findings of the audit report. This compares to a closing price of £3.92 per share on May 22 and a 52-week low of £2.53 per share on May 26.

Although RBC believes it is highly unlikely and metallurgically doubtful that Acacia was actually under-reporting its gold content, especially to the 10x extent it has been accused of and with the export ban in place, it expects the company to temporarily halt operations at the mines to avoid further build-up of working capital from the concentrate that it is unable to sell.

Numis Securities also shares the view that Acacia is likely to place the two operations on care and maintenance, also due to the lack of space to store concentrate, with the resultant redundancies — both direct and throughout the supply chain — and fall in royalty revenues expected to put some political pressure on the government to resolve the situation.

The Numis analysts said the company will probably have to repay US$22 million in prepayments for concentrate produced in January and February, noting that Acacia is not expected to face near-term funding issues after ending the first quarter with net cash of US$196 million.

Numis kept a "buy" rating on Acacia stock but cut the price target to £5 per share, down from £6 per share, while also disputing the accusation that the company's management understated the value of the metal.

"However, it provides a further indication of how problematic the relationship between the company and the government has become," Numis noted. "[Acacia] has ongoing parallel disputes relating to reclaiming an outstanding [value added tax] receivable and around dividend payments made by the company. It also faces pressure to change the ownership of its local operating companies to include a 30% holding by Tanzanian nationals."

Meanwhile, uncertainty reigned at Bank of America Merrill Lynch's metals and mining conference in Barcelona, with a slowdown of demand growth in China being the biggest concern in the industry in the near term.

"While coincident indicators still look strong, we see a risk that prices may come under pressure towards 2018, given the ongoing stimulus removal," the bank said May 23 in its Global Metals Weekly report. "Notwithstanding, further out, industry focus is starting to shift away from China towards metals enabling future technologies."

Against this backdrop, miners continued to focus on value over volume, streamlining balance sheets with asset disposals, CapEx cuts and deleveraging.

Amid low prices and squeezed margins, producers are delaying mine investments on fears of inadequate returns, indicating that the next generation of growth projects is unlikely to come online before 2020.

However, the industry acknowledges that considering project life cycles averaging about 6 years, miners need to boost spending to stop depleting reserves and resources. Larger players still do not have the mandate to increase CapEx while most of the spending is coming from junior and mid-sized miners.

The bank believes that this will ultimately change, some companies will have to increase spending, initially through cash flows then moving on to debt and equity raising with activity in more targeted project finance seen likely to pick up along with M&A.

In a May 23 research note, RBC analysts assessed South32 Ltd.'s C$110.3 million investment for a 15% stake in Arizona Mining Inc., saying it adds another dimension to the investment case for a company well positioned for further shareholder returns with US$1.5 billion in net cash.

RBC noted that the decision shows that the BHP Billiton Group spinoff has a strategy to grow the business using excess returns considering the estimated US$1.0 billion in free cash flow in fiscal 2018 beyond the existing cost out program.

Arizona Mining's primary asset is the Taylor deposit at its Hermosa zinc-silver-lead property in Arizona, which South32 CFO Brendan Harris termed as "one of the best" in the industry, with similarities to South32's Cannington silver-lead-zinc mine in Queensland, Australia.

Cannington has about six years of mine life left and the company will have to decide in 2020 or 2021 on whether to invest in an extension through an open cut. Chances of such a move are currently "fairly marginal," according to Harris.

RBC said the Taylor deposit exists as a top quartile asset, with significant byproduct credits giving an average C1 cost of 66 U.S. cents per pound of zinc, with 72.4 million tonnes of measured and indicated resource grading 10.5% zinc equivalent.

Upon achieving full capacity of 3.3 million tonnes per annum in calendar 2024, the bank estimates the project could add 108,000 tonnes of payable zinc, 127,000 tonnes of payable lead, and 5 million ounces of silver per year for the remaining 25 years of production. From calendar 2022 onward, and assuming an average C1 cost of 61 U.S. cents per pound of zinc, the asset is expected to contribute about US$260 million of EBITDA.

"South32's investment provides it with a 15% stake, a seat on the board and anti-dilutive rights on future raisings for Arizona. South 32's 15% C$110 million investment appears good value, relative to our attributable net asset value of C$158 million and relative to comparable transactions," RBC noted, while keeping its target price on South32's ASX stock at A$3.50 and reiterating an "outperform" rating.