Minefinders (MFN): Racing Against the Clock to Production

Racing is a fairly apt description but more on that below. First, an update from Q1 2008 (all figures US$ unless noted):

  • The company burned $7M during the course of operations in Q1 2008, more than doubling last year’s cash burn. Because MFN is not yet in production, looking at the total cash burn number is important. Here we see the company drew $6M from its credit facility during Q1 and burned through $15.5M total, including operations and capex. The company’s cash balance, as of Q1 2008, stands at $5.5M with $44M remaining in its credit facility.
  • On the balance sheet, the company’s liquidity position is starting to run a little close to the flesh. See above for cash balance. Total debt jumped 12.3% due to the credit draw. What’s interesting to note is that the company has $13.2M in receivables, the vast majority of which are VAT refunds due from the Mexican government for construction of the Dolores mine. About $10M cash was paid to the company subsequent to the release of the Q1 results so there’s a little breathing room.
  • Obviously, a company with no production and burning cash is going to show a loss. Other than a 2% increase in shares outstanding, the income statement didn’t have much of note.

Other items of note from subsequent updates:

  • An illegal blockade led to operations being briefly suspended and the first-pour date being pushed back from June to mid-July. The blockade was resolved in early June.
  • Management released 2008 production estimates for 40k oz au and 1M oz ag at cash cost of $403 per gold equivalent oz. At average prices of $850/$16 for gold/silver, income from production would be around $26M for 2008.
  • Remaining Dolores expenditures are projected at $32M over the rest of 2008 (as of 03/31/2008). At that time, MFN had $5.5M cash, $12.3M net working capital & $44M remaining on their credit facility.
    • As of 05/08/2008, the company had $10.9M in cash and $37M remaining in its credit facility.

Minefinder’s situation is fairly clear from examining the results. The company is in a footrace to bring Dolores into commercial production before they run out of liquidity and have to resort to dilutive measures such as issuing equity or convertible debt. If you take the company’s word at face value, the race is getting a little close for comfort but nothing to suggest code alert red as of yet. I usually discount management projections to the downside (CEO Mark Bailey & his team have proven this to be prudent) so I fully expect this race to tighten as we move into the 2nd half of 2008.

As the blockade demonstrated, there are also (always) inherent risks in operating mines, even in safe jurisdictions. From my position, it is impossible to fully anticipate which sites will run into community issues, cave-ins, etc. and so I accept that risk when investing in mining companies (known unknowns, if you will).

Despite this, I fully expect management to win this race and bring Dolores online with current liquidity at hand.

Performance Measurements:

  • Hit 2008 Guidance:
    • first pour in mid-July 2008
    • 40k oz au + 1M oz ag @ GOE cost $403/oz
    • Generate $22M – $28M in production income
  • 2009/2010 Production guidance:
    • Gold: 129k oz both years
    • Silver: 3M oz / 4M oz for 09/10
    • cash cost @ $297 (I expect this number to move higher)
  • Bring Dolores online without dilutive measures. Taking on more debt is preferable but barely acceptable (and no guarantee it will be available). I would like to see management live up to their word that they can bring this thing online with current resources on hand. Understanding that a first mine is a huge undertaking with many learning curves, this expectation, for me, is a line in the sand — can management deliver or not?
  • Complete feasibility study in 2008 on the prospect of a flotation mill at Dolores. According to the company, such a mill would boost recoveries on gold from 72.25% to 90-95% and on silver from 50.8% to 85-90%.
  • Cash flow positive by YE 2008 or in 2009 at the latest.
  • Define the possible resource at Dolores outside the current open-pit mine plan.
  • Continue exploration at other sites (Planchas de Plata, etc).

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