The Motley Fool

Should You Buy African Minerals Limited On Rising Production?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

opencast.miningAfrican Minerals (LSE: AMI) published its interim results this week, but despite news that iron ore production rose by 58% during the first half of the year, the company’s share price is still 90% lower than it was at the start of 2014.

Why?

The falling price of iron ore means that African Minerals received an average free-on-board (FOB) price of just $49 per tonne during the first half, down from $77/t for the same period last year.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Average C1 cash costs of production were $39/t, so African Minerals remains profitable at a cash operating level.

However, my calculations indicate that the more inclusive C3 cost — which includes interest costs and depreciation — was around $50/t, suggesting that African Minerals is struggling to break even on its mining operations.

Losing money

African Minerals reported an operating loss of $85.1m for the first half, even before meeting the $30m interest costs on its $458.8m net debt.

Shareholders should not be misled by the reported ‘profit before finance items and taxation’ of $46.1m, as this was largely the result of a $167.6m paper profit described as a ‘gain on non-controlling interest put option’.

This is essentially a fair value reduction in the penalty African Minerals would have to pay its Chinese backer, Shandong Iron and Steel Group (SISG), if the firm’s founder, Frank Timis, resigns.

Cash and debt

Another feature of the results that could be confusing is African Mineral’s $332m cash balance. Of this, $284m can only be spent with SISG’s consent, and is restricted for use in the Phase II expansion, while $30m is held in escrow.

In other words, available cash for Phase I capex is just $18m, which is why the firm is currently trying to agree a refinancing deal.

Chairman Frank Timis warns the refinancing “will inevitable require the support of all our stakeholders”, and I believe shareholders are likely to be heavily diluted.

For example, one plausible scenario is that SISG will expand its 25% interest in African Mineral’s operating business in return for further funding, leaving shareholders owning much less of the Tonkolili mine.

Ebola risk

Although African Minerals has not yet been affected by the devastating Ebola outbreak in West Africa, the risk of transport and operating restrictions remains real, and could easily leave the company unable to operate.

In my view, African Minerals carries too many unquantifiable risks — and too much debt — for me to consider investing.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.