Wednesday, 9 October 2013

#BHR My bottom drawer just got a little fuller

What a shocking fall off the cliff for BHR. Having posted about their reserves statement only last week, and having bought more at 2.1p I now feel gutted that I could have bought the same shares for nearly half the price just a week later. The RNS released Friday contained the following “highlights” but “lowlights” would have been a better way to describe it based on market reaction:
  • Agreement to issue unsecured convertible loan notes to raise up to approximately US$19.2 million:
  • US$3.3m of unsecured convertible loan notes with a subscription price of US$3.0 million to be issued to the Company’s largest shareholder, Latitude Zero Financial Investment Fund; and
  • Agreement with Darwin, a majority owned subsidiary of Henderson Global Investor’s Volantis Capital, to issue at least £2.75 million (equiv to US$4.45m) and potentially up to an aggregate of £11.0 million (equiv to US$17.8 million) in unsecured convertible loan notes with a subscription price of up to £10.0 million (equiv to US$16.2 million)
  • This financing funds the development of the Phase 2B and 2C Plant upgrades at Beacon Hill’s Minas Moatize Project which should significantly enhance the operational and financial performance of the project, raising capacity from 1.8 mtpa to 2.8mtpa and provides additional working capital for the Company in addition to the US$4.4 million of cash on hand and US$4.5 million in contractor prepayments 
  • The Company also intends to offer new and existing institutional shareholders the opportunity to participate in the convertible loan notes on the same terms and conditions as Latitude to raise additional proceeds to fund discretionary capital expenditure and working capital and will update the market in due course   
  • The Phase 2B and 2C upgrades to commence shortly and scheduled for completion in Q4 2014 cutting production costs to less than US$110 p/t FOB
  • The Company has identified a new and superior rail offload site adjacent to the port of Beira.  Construction and upgrading will take five months and completion is scheduled for completion by Q2 2014
  • Following the completion of these initiatives, the Company will move into a first quartile FOB cash cost position which is key to sustainable cash flow generation
  • Term sheet received from a leading lending bank to provide new secured loan facilities to re-finance Vitol senior debt facilities, refinance and replace any undrawn convertible loan notes, provide capital expenditure and general working capital and overall to substantially lower the cost of capital to the Company

Following the RNS, and in tandem with the chaos in America and across AIM generally, the share price went into free fall. A 50% fall in 2 days hurts. According to one BB poster Chairman Justin Farr-Jones has replied to his email with the following:
“I understand your frustration. Pls accept my apologies in delay to replying. My view is as follows: Majority of the coking coal market is loss making. We need to get to a tier 1 cash cost and must complete the phase 2C washplant upgrade. We need funding to do this. If we complete the upgrade and hit mgmt targets we can make money in difficult markets. The market has priced in full dilution that is why the price has dropped. No one expected it to do so in the manner that it has. We think that is pricing in worst case and we hope to refinance with senior debt and minimise dilution. We can’t make announcements on share price falls when the reason is potential dilution. Our objective is to secure snr debt and remove this concern.”
I really don’t think Mr Farr-Jones does understand the very real frustration and despair that long term patient investors feel. PI’s sitting on thousands of pounds of paper losses. Does the board really understand what it feels like to work hard to save a little money and see it disappear down a never ending hole because of consistently undelivered timescales? I doubt it.

There’s too much going on at the moment to make sense of it all and the dust needs to settle to see what happens next. Maybe it’s been an overreaction and we’ll see a bounce back to 2p levels, but the 1p’s could also be here to stay for another 6 months if BHR don’t deliver on what they have set out. Without doubt many of the original statements about production and first rail transportation in Q3/Q4 this year are now laughable. The recent timescale has just been pushed out by 10 months, and it seems that this has changed in the space of just a few months since the half yearly report which had no mention of any changes. So why did the BoD drop news like this? – I feel despair about their comms like many others on the boards, and feel dismayed that a BoD could be so flaky with the truth, and disrespectful to investors who are their employers. 

And then there is the salt in the wound - we get dilution and in particular dilution via Darwin who just seem like such a bunch of greedy pigs. We’re over the barrel and held tight – so I’m steeling myself to take it like a man - for that’s what getting into bed with Darwin will mean (sorry about the misuse of analogies here but you get my drift) 

So what now? Do I sell out and abandon ship with a loss like many others? Or do I stick it out and extend my timescales, just like the BoD? 

Well, I bought in for a medium term gain, expecting to hold my shares until early 2014 once production was up and running. The market has indeed priced in the worst case situation of full dilution, and barely economic production in the current depressed coal market. It is also sceptical of timescales and promises made, who can blame it? 

I have thought hard about what I want to do. Am I prepared to hold and wait, or would I rather walk away with a loss and move on? Perhaps against my better judgement, I’ve decided I can wait, and I’ve also decided that the future could still turn out well. That’s because:
  • We know that the reserves we have mean we can mine economically for at least 15 years. 
  • We’ve got phase 1 production up and running
  • We’ve got a hard won allocation on the Sena line - a strategic rail allocation of great importance in an up and coming production area of Mozambique. 
  • We have rolling stock in manufacture
  • Our market cap is now only £20million and yet we have assets far in excess of this – so we could be vulnerable to a hostile takeover from a much bigger player. 
  • The financing deal (albeit painful) now guarantees that BHR can get to tier 1 cost status.
  • A Senior debt facility is hopefully on the way later this year or early next. This would replace the 3rd tranche of loan notes and remove much of the dilution 

BHR has got this far with coking coal prices down to $130pt and despite the pain I am feeling I don’t get the sense that BHR are going under, in fact the opposite. The recent average is $170pt and an increase from the current price would see a significant improvement in profitability. 

One poster commented that BHR is the next Angel Mining. I was in Angel and lost everything. Let me make this clear – there are very few similarities between Angel and BHR. The actions of Angel bordered on fraudulent. They never produced anything of substance other than lies, didn’t have the equipment to do it, didn’t have funding secured, and were trying to get gold out of a glacier accessible for only part of the year via a cable car and crampons, in sub zero temperatures. Angel mining makes BHR look like a FTSE100 company. And that’s from very personal painful experience. So let’s not go too far in our trashing of BHR. It’s done well this year, but Friday’s news was not welcome. 

So, on balance, I’m holding for 2014 on the basis that this is about as bad as it could have got, and I hope that now the funding is in place, we should get continued progress towards production in 2014. If, and I accept it’s an if, the BoD deliver the rest of the pieces into place, then I just need to wait longer for the 3/4/5/6p that I expect to get back. I've bought more today at under 1.3p, and now have an average that I feel comfortable will be met at some point. If it all goes tits up, then so be it, but I think on a risk/reward basis that is unlikely now we have our dear friends (cough) from Darwin on board. Wishing all holders a sincerely better week next week.

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