As recent as six or seven years ago, junior miners would easily get finance to start production at a multi-million ounce gold deposit. Two years ago, it was clear the capital markets had become more picky with resource stocks. Today, it seems that only the cream of the crop will get financing (at decent terms).


African Consolidated Resources (AFCR:AIM) is a good example of a company that a decade ago would not be wondering where to get a slug of cash to start commercial production on a 3.2 million ounce gold deposit. That would have been an easy sell; yet today it sits slightly nervous. African Consolidated says it needs up to $8 million to take its Pickstone-Peerless project in Zimbabwe beyond trial production, preferably without having to further dilute shareholders with yet another share placing.


Not helpful to its cause is market speculation that Zimbabwe's mine ownership rules could, once again, change. Bloomberg reports that Zimbabwe may alter its previously-agreed indigenization deal that required foreign miners to 'sell' 51% of their projects to local entities. The mooted changes could see Zimbabwean entities no longer have to compensate miners, thereby being able to receive dividends from mine profits immediately.


African Consolidated hasn't yet submitted an indigenization plan, saying the law could change by the time it believes it needs to comply (which it cites as being 2015 once it reports the first set of accounts to include cash generated from the mine). Chairman Roy Tucker reckons the miner is presently exempt from the current rules, claiming that its Zimbabwe subsidiary has a net asset value below the qualifying threshold to give up 51% of mine ownership.


The threshold used to be having net asset value above $500,000. This changed in 2011 where any company with net asset value above $1 had to comply with the new indigenization rules. African Consolidated argues that its liabilities at the subsidiary level outweigh its assets, so it doesn't immediately have to meet the new rules.


The miner nonetheless recognises that it has to let the community share the benefits of running a mine. It has proposed to form a community trust, giving locals 10% of the mine. They won't have to contribute 10% of capital expenditure, yet chief executive officer Craig Hutton says they won't get a 'total free ride'.


Liberum Capital has looked at the impact of the rumoured changes to the indigenization rules on Aquarius Platinum (AQP), which has assets in the country, and says they would reduce 2014 earnings before interest and tax by an astonishing 40%. '(This also raises) concerns about the sustainability of assets,' says analyst Ben Davis. He says that should Zimbabwe choose to 'dividend strip all profits without reinvesting as capital expenditure' which would significantly shorten mine lives.


Anecdotal evidence suggests that institutional investors have started to show more interest in Zimbabwe mining assets, partially because there was clarity over the indigenization structure. This improved sentiment could wane if there is troubling newsflow from the country about changes to the local ownership terms.


For now, African Consolidated's priority is to get the final slug of cash needed to advance its flagship asset. Trial mining has already begun. The initiative is not to make money as it reckons that gold production will simply cover the costs. Instead, it is to show Zimbabwe that the asset is not being neglected and that the company is serious about developing a commercial operation.


United Arab Emirates investor Brimfell has built up a 28.4% stake in the miner, including a £7 million investment in February. While that money certainly puts African Consolidated off to a good start, there remains a $8 million shortfall to the $17 million capital expenditure requirement detailed in the table below. (Source: African Consolidated)


af table


Hutton says funding options include selling a property, potentially getting a grant from South Africa and forward-selling some gold. Yet he admits that the worse-case scenario would be to come back to the market for more cash.


The miner is in a strong position to avoid the equity markets, given its alternative funding options, yet the latest event in Zimbabwe's indigenization would suggest that resorting to the equity markets would involve the inevitable heavily-discounted share placing. The country's risks have once again become a worry and investor appetite towards gold stocks are at a multi-year low. Expect significant share price volatility until both cash and geopolitical issues are resolved.

Issue Date: 23 Apr 2013