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In December, St Barbara (ASX: SBM) announced the US$20 million buyback of its Senior Unsecured Notes, effective 20 January 2017 (in addition to previous reduction of debt by ~US$100 million). This buyback is set to reduce the company’s future interest expense by A$2.4 million p.a., hence strengthening its overall net-cash position. The decision by the Australian-based gold producer and explorer was welcomed with positive investor sentiment and resulted in a credit rating upgrade by Standard and Poor’s.
Figure 1. St Barbara USD-Denominated 8.875% 2018 Bond Price History
This turnaround in the company’s operations has been remarkable for a company whose credit profile in 2012 reflected expectations that it was going to run out of money on the back of the disastrous acquisition of Allied Gold. Both the mines (Gold Ridge in the Solomons and Simberi in Papua New Guinea) obtained through the acquisition were losing money, and this exposed the company’s already dwindling cashflow to extremely high level of debt ($USD 325 million).
The turnaround is mainly attributable to the new CEO who took over control in December 2014. He has stated that central to the turnaround was “demonstrating that we could plug the cash drain, and start to build cash levels’’. In mid-2015, the company sold off its loss-making mine, Gold Ridge, in Solomon Islands to local landowners and reduced costs through cutting down corporate personnel and mine exploration costs.
While the operations in Simberi still have room to for further reduction, stemming leakages from Gold Ridge allowed the mine to double its production and halve unit costs.
As a result, the company has positioned itself as one of the low cost producers of gold globally, with all-in sustaining costs of A$933/oz in FY16 compared to a A$1007/oz in FY15. SBM’s ability to reduce costs combined with a favourable trend gold prices (average revenue A$1,592/oz) enabled the company to have a favourable net cash position for the first time since the troubled acquisition (Figure 2).
Figure 2. Revenue, Costs & Production
Source: Company Reports
Additionally, the significant earnings generated by the record production from Gwalia operation in Western Australia allowed it to pay off US$100 million in debt, prompting both credit investors to re-evaluate SBM’s financial position.
Since then, the company has focused on optimising cash flow and reducing the cost base in the Simberi region. Seismic exploration around Gwalia and Leonara regions that have high-grade mines and good ground conditions further support the company’s outlook. This, along with its efforts to maintain a conservative financial profile has enabled the company to reduce debt and gain investor confidence in the past year. SBM demonstrates the importance of having an experienced and effective management team at the helm. While many miners have crumbled, SBM has rebounded strongly and is largely because of precise and efficient strategic direction. As a result, management style and strategy is crucial in credit analysis and should be considered in the portfolio selection and monitoring process.