RE: RE: Question for OmniportentYour comment:
"According to the feasibility study Varvarinskoye SHOULD be cash flow positive at current metals prices; however, shareholders have received no guidance from management saying when this might happen."
Compare the grade and recovery rates of the techncial report to the actual grade and recovery rates for the 2Q08 and 3Q08. There are not only problems with reaching 100% capacity but also problems with grade and recovery... See page 1.10 of Amended March 2005 Tech Report.
No doubt OSU can achieve profitablity, but it appears unlikely that we can rely upon the profits forecast per the feasiblity study anytime soon given the "grade control" problems and current recovery rates. The recovery rates have been moving up which is encouraging, but OSU will have to perform a lot more tinkering to get recovery rates in line with 87% per Tech Report for LGCF ore (69.5% actual for 3Q08). The average HGCF gold recovery rate is over 72% per the tech report vs. 51% in 2Q08 and 59% in 3Q08. Moving in right direction, but there is 20% room for improvement in both LGCF and HGCF ore.
In regard to LGCF Grade Au g/t, the tech report showed an average 1.05 g/t for proven reserves, yet Orsu has been reporting grades around .60 these last 2 quarters and even the 1Q08 showed just .79. With a 1.05 g/t average, you would think OSU could easily find some 1.5 g/t LGCF high grade gold to process this quarter...? Yet, OSU is talking about increasing throughput to the HGCF circuit because this is more profitable at $1.80 copper...?
Following Q2, 2008 Orsu had $34.3 million in cash and a working capital (that took this year's debt repayment into account) of $17.9 million. Given Orsu's previous cash burn rate and the size of their operating losses I believed the company would have sufficient funds to make their debt payment at the end of the year and still have a cushion left. Given that the Chairman of the company bought plenty of shares at $0.50/share, that Orsu prepaid their hedge for the whole year, and they were also spending millions on exploration, my belief that a cash crunch was not an imminent problem was reinforced.
Needless to say, the Q3 results were a very large and unpleasant surprise for me. The operating loss for the quarter was much larger than I expected, and the working capital has now evaporated into a deficit. Had it not been for the non-cash derivative gain from the hedge, Q3 would have been a truly ugly thing to behold. I don't understand why Kurzin was buying and why Orsu was spending so heavily on unnecessary items when they saw the deteriorating cash situation.
The good news is that the grades for Q4 are expected to be higher and so too are the production totals. However, given the low current price of copper and the so-so performance of gold, it is difficult to estimate how things will come out in the wash for Q4. It looks extremely likely that there will be another large derivative gain from the hedge, but that doesn't help solve the cash shortage.
Within the next month Orsu needs some kind of deal with their bankers or they will run out of cash when the debt payment comes due at the end of December. If a deal can be made, then Orsu needs to prove that it can do much better with respect to production numbers and achieving a cash flow positive status. According to the feasibility study Varvarinskoye SHOULD be cash flow positive at current metals prices; however, shareholders have received no guidance from management saying when this might happen. Quite obviously, positive cash flow is needed in the near future, because there are more debt payments to be made in 2009.
Orsu's debt load is not that huge. If the world's credit market hadn't imploded, I would imagine that it would be a near certainty that a satisfactory deal could be reached with Orsu's bankers. However, we are living through unprecedented times. Many mining companies, Orsu included, are in serious jeopardy due to low cash and debt.
If Orsu gets a favorable deal from its bankers, achieves the higher production totals they have been talking about and delivers on their promises for 2009, then today's share price will be an unbelievable bargain. On the other hand, if Orsu can't get a deal from their bankers, or they don't deliver on the production they promised, they are done. The cash burn we saw in Q3 is simply not sustainable. Orsu needs strong positive cash flow by Q1 2009 at the latest, or they will simply go from one crisis to the next.
I am extremely disappointed at how this company has fumbled the ball over and over. I thought the new management team would turn things around and realize the true potential of Varvarinskoye, but so far the results are worse than I could have imagined. Not only has the new management and the mine been underperforming, but this is happening in the most brutal environment for mining companies.
Your comment:
"Can Kurzin live up to his reputation and turn Orsu around? I hope so"
Well, I hope so as well... Per that interview, he has a good reputation but boy oh boy does he have his hands full. I do not think the SA banks can find anyone better qualified to replace him (unless they can engineer a takeover by a major), and even the majors have limited expertise in operating Eastern European mines which is Kurzin's background. Thus, the banks will likely have to extend the loan if Kurzin and company can keep showing progress. Keeping Kurzin is likely the best way for the SA Banks to recover their capital... But Kurzin & Co have to not only show improvements in reaching 90+% capacity but also getting the grade and recovery issues resolved to get to those Tech Report profitability projections....
Just my opinion.