After rising 70% to 12.75p on the back of proposals in December 2012 to buy a rival out of administration, Jubilee Platinum (JLP:AIM) has lost nearly all these gains in the past few weeks as investors worry about a potential fundraising. The shares now sit at 8.38p.

The company, to put it bluntly, is terrible at communication. Its share price has been depressed on numerous occasions in the past because investors speculated over financing problems and Jubilee did nothing to allay these fears. The same applies today.

Add in the fact that the company has started so many different initiatives and never finished the job, and Jubilee ends up a mess in the eyes of many investors. Its ultimate goal of sourcing its own raw materials through mining and then producing metal through its own smelting operations is an attractive proposition. Yet we believe the company has alienated a large potential audience of investors through its inability to explain – and fully execute – this strategy.

With that in mind, Shares met with chief executive officer (CEO) Leon Coetzer to try and make sense of the company's position.

Jubilee is buying Platinum Australia in an all-share deal. Beyond the terms already announced, Coetzer categorically states that there are no plans to raise cash through issuing new Jubilee shares.

Investors have speculated that it needs cash to restart Platinum Australia's Smokey Hills mine (pictured above). Coetzer says the mine re-start and first six months' working capital will be sourced through project finance at the mine level – NOT at the plc level. He claims the mine will produce positive cash flow from month five.

Half of Platinum Australia's debt is being settled through the issue of new Jubilee shares. Macquarie bank will subsequently become a 13% owner of the plc business. Coetzer refused to say how long the bank is locked in to that shareholding, adding that such detail will only become public once the acquisition circular is published.

The other half of Platinum Australia's liabilities will be paid off via project finance debt. Jubilee will seek a loan secured against the target's mining assets. This money will pay off Platinum Australia's debt, finance the restart of Smokey Hills, provide six months' working capital and allow Jubilee to upgrade the mining vehicles. Three indicative term sheets have been received to date.

Platinum Australia ran into trouble last year after operating at only half its design capacity so it had inefficient operations. It has interests in three projects in South Africa. Smokey Hills was previously in production and can be quickly restarted. The other two, Rooderand and Kalahari, have completed feasibility studies and are both expected to cost £50 million to bring into production.

Several parties bid to buy the business out of administration. Coetzer claims Jubilee won the bid because 'the bank reviewed what we are building and saw an opportunity'. The key attraction is that Platinum Australia has shallow assets which are easier and cheaper to mine than the big underground deposits that dominate South Africa.

Jubilee itself remains a loss-making business, despite plenty of effort to introduce revenue-generating projects. 'Our exploration costs exceed the smelting and power revenue,' explains the CEO. It does toll smelting for third parties which has low margins. The power business was acquired to provide energy for its smelter but does sell some spare output to the national grid.


JLP - Comparison Line Chart (Rebased to first)

Between 2004 and 2009, the main focus for Jubilee was the Tjate platinum mine in South Africa. Chairman Colin Bird told anyone who would listen that Tjate was a world-class mine, sandwiched between deposits owned by Anglo Platinum and Implats.

The reality is that Jubilee would struggle to make Tjate a standalone mine on its own. The platinum is located very deep into the ground and it would cost in the order of £500 million to bring into production, says Coetzer, which is a tall order for Jubilee as a small cap business. It would either have to sell the project to one of its neighbours or bring in an Asian party prepared to invest for a long-term supply of metal, explains the CEO.

It has received a £6.3 million offer for the top corner of Tjate. Jubilee won't say who the bidder is but it is pretty obvious given that Anglo's Twickenham project surrounds this section of Tjate. Coetzer says not to expect any news on this asset sale for the next six months. Any change in ownership for South African minerals must be approved by the Department of Mineral Resources (DMR). 'They have a two-year backlog and are overburdened by applications,' admits the CEO.

The Platinum Australia acquisition will jump to the front of the queue at the DMR, says Coetzer, because of the employment opportunities.

Jubilee bought Braemore Resources in 2009 to access the ConRoast smelting process, for which it holds the patent until 2020, and treat chrome-rich platinum ore which is difficult to process by conventional smelting methods. It realises there are only seven years left on its patent exclusivity, so investigations are underway to file for a new patent within the main patent. Coetzer says: 'ConRoast is not a technology patent. It is a physics recipe patent.'

Jubilee has yet to turn ConRoast into a truly commercial operation. It used to have a pilot facility but hasn't built a full-scale plant. The process is clearly in demand as more platinum miners face the prospect of having to exploit chrome-rich ore. So far, only Northam Platinum has made the plunge with a memorandum of understanding to build a furnace facility using the ConRoast process. Northam is currently reviewing its future plans and Coetzer says he hopes to update the market soon on the proposed joint venture.

The 10 megawatt power business could potentially be sold in the near future. It was originally bought to provide energy for Jubilee's smelting operations. It sells half of the power output to the South African national electricity grid. Jubilee now has a chance to sell its entire output and, given that a bank has offered terms to expand the operation, Coetzer reckons now could be a good time to cash in its investment.

For now, the focus for investors will be the two risks that hang over the Platinum Australia acquisition. These are securing project finance and getting shareholder approval for the takeover.

Final term sheets for the project finance are expected in April with debt repayment required within three to five years. The acquisition circular is expected to be published in the first week of April and the deal targeted for completion in mid May.

There are significant risks even if Jubilee secures the acquisition. Restarting mines can be problematic, especially if the previous designs prove to be inefficient. But given the right skills, better communication about existing and future plans, and appropriate financial backing, there is no reason why Jubilee couldn't finally achieve its mine-to-metals strategy. We wonder if a management shake-up might be appropriate to win the market's support.

Issue Date: 08 Mar 2013