Small cap resources group Stratmin Global (STGR:AIM) continues to struggle with efforts to build a commercial graphite mine in Madagascar. Its shares fall 13.7% to 15.75p after admitting that it won't be able to produce a high-quality product this month, as previously hoped. It needs to do further processing test work and plant upgrades as presently it cannot produce a consistent quality product.

As we pointed out in July, it is perfectly normal for new mining operations to experience teething problems. Yet Stratmin has already disappointed the market with production delays. Today's announcement is another negative to the story which explains the share price reaction.

In the summer, Stratmin admitted to Shares it wasn't told of delays to bringing processing equipment from China. Having directors in one country and operations in another can spell trouble, particularly in the early stages of business development. Stratmin took action with a change of personnel at the mine site and a new managing director to help improve relations with City analysts, fund managers and investors.

The earlier delays to production meant Stratmin needed extra cash for working capital. We're therefore surprised that the company is only now admitting it needs to raise funds. That should have been sorted over the summer. Indeed, surely that was the purpose of hiring a new nominated advisor and broker in Peel Hunt (26 June). At that time, it was understood that a £1.3 million cash injection would have been satisfactory for its needs. The latest delays to produce a high-grade product (90%+ carbon content) means this monetary requirement will no doubt have got bigger.

The company says it has been examining 'a number of financing options' to upgrade its plant and provide enough working capital to reach 'cashflow break even'. It also says several offers have been made, so there could soon be a resolution. Should it go down the equity route, any new shares would probably be placed at a discount to the share price, given yet another production hiccup. We previously thought all the bad news was out of the way, so a discounted placing may have been avoided.

Fundamentally the story remains attractive. Graphite demand is expected to rise as it is used in lithium-ion batteries for electric cars and portable storage batteries. Stratmin's task is to prove it can actually produce a high-grade product and with minimal variation to grade. Production is set to begin on 9 September but carbon content and recovery rates are likely to remain variable for at least this month. Stratmin plans to upgrade its plant in parallel with production. It is talking to potential customers to sell a product with 70%+ carbon content.

Stratmin's situation does raise broader concerns about the increasing number of cash shells that are buying mining prospects. Doing a deal is easy if there's cash on the table. Being able to run a mining business is a totally different skill.

Issue Date: 06 Sep 2013