Hwange Colliery Co. Ltd. posts a 2019 HY profit BUT...
Hwange is currently under the administration of Mr Bekitemba Moyo of DBF Capital Partners (a good guy, one of the best brains we have in our country). As the administrator, he did well to post a HY profit coming from a clearly insolvent position in an economy facing numerous headwinds. He also has a vision of how to maneuver out of the quagmire which he clearly spelt out under the outlook heading of his accompanying statement.
However, there are a few concerns:
1. Hwange's main challenge remains retooling its obsolete plant and equipment and the servicing/restructuring of its $400 m debt (inclusive of long term creditors). This is the elephant in the room and he did not satisfactorily address how he intends to deal with it going forward.
2. It is clear, though, that extinguishing/managing the debt will require free cash flow; now that is the one thing that the miner failed to generate during the 6 months. However, this may change if plans to increase production bear fruit, though, most of the cash to be generated will be required for retooling, which is a must.
3. There is a (negative) $1,8 m net cash flow utilized in operations which was funded by a $8 m Long term creditors financing arrangement. If we factor in the negative $6 m utilized FY 2018 it means the miner burnt almost $8 m in 18 months. This probably explains the $8 m Long term creditors financing arrangement that was obtained during the HY.
4. All this comes after the company incurred $13 m in finance costs for the HY which seemingly was not serviced. The administrator in his statement mentioned something about restructuring of certain debts but not enough details were provided to conclude on how this mitigates the non-servicing. One gets a feeling that the huge finance charges are a result of compounding interest meaning Mr Moyo has to double up efforts on the restructuring of the BS.
The good news is however, that the administrator is positive about ramping up production in the second half and in the near future which will increase cash flows.
BUT the major risk remains the possibility of being weighed down by the humongous debt.
A coal mine might not be as strategic an asset as we think given the increasing shift to renewables that is happening all over the world. In 30-50 years time there will be negligible demand for coal. For me, we should be leaning towards more sustainable sectors of the economy and borrowing a leaf from countries such as Saudi Arabia and Dubai who have seen the trend and are already shifting their focus from oil to other sustainable sectors. Coal is certainly on it's way out.
Experienced Chartered Accountant
5 年Hwange has survived the onslaught from creditors mainly due to the fact that it is under administration. In this environment, it is near impossible to retool especially when you have such a huge debt and bickering shareholders. Lets see what the 2nd half has in store.?
Safe Sport Consultant Council of Europe : Advisory Board Member Safe Sport International :Director Dominion Sport
5 年Nuggets of insights which companies in the mining sector can learn from.?? Thanks for sharing? Taps