Embattled iron ore miner African Minerals (LSE: AMI) jumped earlier today, adding to gains made over the last week as investors speculate about the company’s future. Indeed, so far this week the Sierra Leone iron ore miner has seen its share price nearly double and trading volumes have shot through the roof.
On Tuesday alone the miner’s shares jumped 48.6%, as around 10% of the company’s shares changed hands — most of these trades were done in block deals between brokers. The West Africa-based miner also received a boost from the rising price of iron ore. Earlier in the week the price of iron ore rebounded from a five-year low of $81.90 per tonne, to settle at $85.20 per tonne.
Brokers unconvinced
But despite recent gains, the City is still unconvinced about African Minerals. City analysts believe that the company needs to raise around $700m to meet funding obligations, eclipsing the firm’s market capitalisation of around $100m.
What’s more, African Minerals’ management itself, admits that the company has been hit by a “perfect storm” of low iron ore prices and heightened concern over the serious Ebola virus outbreak affecting several countries in West Africa. Nevertheless, at the beginning of August the company did announce an injection of liquidity, offsetting some concerns about financing. Prior to this announcement, there were questions arising regarding the company’s working capital position. The cash received, approximately $284m, should be enough to offset funding fears for the near future.
Lucky escape
The most serious threat to African Minerals right now, is the deadly Ebola outbreak. Management has been keeping the market updated about the company’s exposure to the virus and it seems as if, for the time being, the firm has avoided the worst.
A update released on 11 September stated that the company continues to closely monitor the Ebola outbreak with no cases suspected or confirmed at its sites, and operations remain unaffected. Additionally, the company has negotiate with the Government of Sierra Leone following the recently announced decision to impose heightened short-term restrictions on the movements of citizens, from the 18th to 21st September 2014.
Contingency measures are expected to allow for the on-site staff to continue operations and exports over the four day period. As a result, African Mineral remains on track to meet 2014 production and export targets.
A risky bet
Still, with the price of iron ore falling, it’s likely that African Minerals will miss profitability targets this year. The City currently expects the firm to report a pre-tax loss of £10m, followed by a profit of £20m next year, if the company hits all production targets, although there’s a strong chance that these figures could be lowered.
But African Minerals is a low cost producer, with cash costs in the range of $34 to 36 per tonne, so over the long-term, the company should be set for growth, if it survives. With an estimated net asset value of around 200p per share, African Minerals could be a risky bet worth taking.
