Update: African Minerals Is Also Facing A Liquidity Crunch

Aug.19.14 | About: African Minerals (AMLZF)


African Minerals is in bad shape and needs to transfer funds from the project level to the company level to solve its working capital problem.

Even though the situation was indeed quite bad after the iron ore price drop, this is quite a drastic measure and indicates I was too optimistic in the past.

This has an impact on how to look at this company because it looks like it isn’t generating free cash flow at this point in time.

African Minerals (OTCPK:AMLZF) has announced it is drawing down money from the project level to the parent company level in order to be able to meet its working capital requirements. This is quite a creative move as it doesn't happen very often that in a joint venture deal, the JV partner allows the other partner to draw money from the project level. In this case, the amount is very considerable, as up to $284M can be moved from the project level to the company level. This indicated the working capital position of African Minerals is worse than anticipated because of the lower iron ore price.

Together with this move, the CEO of African Minerals has also announced he is resigning and will be replaced by the previous CEO of African Minerals who oversaw the construction activities of the first phase of the Tonkolili project. There's also some positive news, as the company is hinting at the possibility that the expansion to the higher grade ore could happen faster and at a lower capital expenditure than anticipated, which would obviously be excellent news.

A sudden liquidity crunch and a new CEO could indicate that the situation at African Minerals is worse than anticipated, and that's very likely in the light of the current very low iron ore price. Unfortunately enough, this iron ore price very likely results in a cash flow neutral production profile, as not only is the grade lower than the benchmark price, you also have to deduct the moisture content and add the high shipping costs to the equation. So it will be very important to see how fast and at what cost African Minerals can start producing its higher quality iron ore product.

Disclosure: The author is long AMLZF.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.