| Thu 13 Aug 2009, 8:53 | | SNU - Sentula Mining Limited - Trading Update and Capital Restructuring |
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SNU
SNU
SNU - Sentula Mining Limited - Trading Update and Capital Restructuring
Sentula Mining Limited
Incorporated in the Republic of South Africa
(Registration number 1992/001973/06)
Share code: SNU & ISIN: ZAE000107223
("Sentula" or "the group" or "the company")
TRADING UPDATE AND CAPITAL RESTRUCTURING
Introduction
Sentula has previously announced that it has been considering various
initiatives to, inter alia, strengthen its balance sheet and allow for the
alignment of its capital structure to its business model and the current
environment.
This announcement provides background to the requirements for these initiatives,
a trading update and salient features of an envisaged capital raising.
Trading update
In terms of the Listings Requirements of the JSE Limited ("JSE"), companies are
required to publish a trading statement as soon as they become reasonably
certain that the financial results for the period to be reported on will be more
than 20% different from that of the previous corresponding period.
Sentula is expecting basic earnings and headline earnings per share of between
15 and 25 cents per share for the six months ending 30 September. Basic earnings
per share and headline earnings per share for the six months ended 30 September
2008 ("the prior period") were 79.8 and 69.6 respectively.
Trading conditions in the current six month period have been more demanding than
those that prevailed in the prior period ended 30 September 2008 during which
commodity markets and related activity was strong. The trading conditions during
the past six month period were also more onerous than those of the second half
of the prior financial year as the mining industry continues to experience
negative growth.
Whilst the Company still has a reasonably full contracting book and activities
are materially in line with expectations, customers are experiencing challenging
commodity markets and this translates into lower volumes and tighter margins.
Opencast mining has experienced cut-backs and the capping of contract volumes in
certain instances, which in turn has resulted in lower than budgeted volumes and
margins. The reduction in contracted volumes and the increase in equipment
availability, as a consequence of improved equipment maintenance, refurbishment
and acquisition programmes, have also contributed to this division having excess
productive capacity of approximately 10% of the equipment fleet.
Exploration drilling`s performance is consistent with expectations and that
experienced during the second half of the 2009 financial year and is expected to
improve during the second half of the 2010 financial year, based on customer
orders and exploration prospects.
During the first quarter, overburden drilling and blasting experienced delays in
the commencement of a number of new contracts due to delays in the awarding of
mining licences and the reduction in work from anthracite producers as a
consequence of poor sales demand. The division is expected to benefit from
improved demand during the second quarter and flowing through to the second half
of the 2010 financial year, as new contracts have been awarded, primarily in the
Witbank and Middelburg coal fields.
The crane hire division continued to experience strong demand as a consequence
of infrastructural development in the Mpumalanga area and is expected to perform
ahead of budgeted expectations.
Sales of anthracite from Nkomati were slow during the first quarter, as the
ferro-chrome and ferro-manganese industry experienced a reduction in demand.
This resulted in an operating loss for the period, but with demand improving
during the second quarter and orders expected to remain steady for the remainder
of the financial year, the outlook for the operation continues to be positive.
The Koornfontein mine continued to produce at budgeted levels and is expected to
meet its sales profile for the second half of the financial year, as demand for
thermal coal remains buoyant.
Results for the first half of the 2010 financial year were also adversely
impacted by the following:
- Legal and forensic fees associated with the recovery of funds
misappropriated in the 2008 financial year. No provision has been made for
the further recovery of any of the misappropriated funds at this stage. The
Company however believes that it should be in a position to make such a
provision in the second half of the 2010 financial year;
- Retrenchment cost, primarily, associated with the restructuring of
Megacube`s business model;
- Unrealised currency losses relating to the translation of the Group`s
foreign operations as a consequence of the strong Rand/Dollar exchange rate
relative to March 2009 exchange rates; and
- Increased finance charges as a consequence of rescheduling and
restructuring the Group`s senior debt
The Company expects a general improvement in trading conditions in the second
half of the year supported by recovering commodity markets and a return to
higher levels of mining, processing and ancillary activity.
This trading statement has not been reviewed or reported on by Sentula`s
auditors. The release of the interim results announcement for the six months
ended 30 September 2009 is expected to be published in mid November 2009.
Capital raising
As previously announced, Sentula and its consortium of financiers ("the
Consortium") have renegotiated the restructure of the senior debt facility of
approximately R1.6 billion. The debt renegotiation was required after the debt
service cover ratio ("DSCR") was breached in December 2008. Although, the Group
redeemed debt, comprising both principal and interest, of R890 million during
the 2009 financial year, applying a DSCR of 1.25 times, the Group was required
to have generated free cash flow in excess of R1.1 billion.
The current principal terms of the restructured debt, which is secured over all
major assets of the Company, are as follows:
- interest rates of JIBAR plus 5.19%, as opposed to the original interest
rate margin of 1.19% over JIBAR;
- an additional fee of 3% (R48 million) should a debt reduction to the value
of at least R300 million not occur by 30 October 2009. This fee is in
addition to the 2% fee (R32 million) payable for the debt restructure;
- additional margins of 2%-3%, in addition to the margin of 5.19%, for the
periods that financial performance deviate by more than 10-15% from
budgeted levels and provisions for the forced sale of assets should this
underperformance continue for certain periods. These provisions apply
notwithstanding that the Company may be in full compliance with its
financial covenants;
- default interest rates of 5%, in addition to the interest rate of JIBAR
plus 5.19%, should an event of default occur or key covenant ratios
breached;
- a prohibition on any distributions to shareholders; and
- restrictions pertaining to the Company`s ability to transact with its asset
portfolio.
Whilst the debt restructure has been agreed upon, the Board is convinced that,
in light of the considerations mentioned below, a capital raising is required to
establish a sustainable and robust capital structure:
- the impact of current trading conditions on certain of the Group`s
subsidiaries, notably, exploration drilling and certain of the opencast
mining operations;
- high debt levels, in part as a result of the misappropriation of R242
million from the Company during the 2008 financial year; and
- excess equipment of approximately 10% of the opencast fleet primarily as a
result of the optimistic acquisition programme in the 2008 financial year.
This situation has been exacerbated by improved maintenance programmes
resulting in increased equipment availability and the capping and
curtailment of certain contracts. The excess equipment will, largely, be
refurbished for future business growth.
The Board`s decision has also been influenced by the Company`s current
difficulty in raising financing for capital equipment, resulting in all
equipment refurbishments and new equipment acquisition being financed from
internally generated cash flows. Whilst the Board does not believe that this
situation will continue indefinitely, it does believe this approach is prudent
until the credit markets improve.
The Board of Sentula has accordingly, after assessing all other alternatives,
resolved to pursue a rights offer of approximately R500 million.
The table hereunder illustrates the comparative debt redemption profiles,
comprising both interest and principal installments:
A B C
Original debt Rescheduled debt Rescheduled debt
based on debt
reduction of R400
million
Financia Redempti Free Redempti Free Redempti Free
l Year on cash on cash on cash
profile1 flow profile2 flow profile3 flow
required required required
to meet to meet to meet
DSCR4 DSCR4 DSCR4
(R`milli
on)
2010 790.1 987.6 573.4 716.8 448.4 560.5
2011 690.1 862.6 743.2 929.0 493.1 616.4
2012 501.2 626.5 728.2 910.3 478.2 597.7
2013 4.9 6.1 117.6 147.0 303.7 379.6
Total 1 986.3 2 482.8 2 162.4 2 703.1 1 723.4 2 154.2
Notes:
1. Represents the debt redemption profile of the debt package originally
entered into between Sentula and the Consortium in November 2007.
2. Represents the debt redemption profile of the renegotiated debt package
agreed during the 2009 calendar year.
3. Represents the debt redemption profile of the proposed new debt package,
based on a principal debt repayment of R400 million following the capital
raising.
4. Represents the minimum free cash flow required to be generated in order for
the DSCR prescribed by the Consortium to be met. In all three cases above,
the DSCR is 1.25 times the total debt payment in a given year.
The size of the rights offer has been based on the extent to which debt levels
are required to be reduced, taking into account the Group`s ability to generate
sustainable cash flows for debt servicing and covenant compliance during the
term of the restructured debt given the current volatile trading environment and
relative short term nature of the debt redemption profile.
The proceeds of the rights offer will be applied to reduce the levels of the
senior indebtedness and improve working capital within the Company, which should
result in the following benefits:
- a reduction in the level of indebtedness, resulting in improved debt to
equity ratios, in line with the Group`s target capital structure of debt to
equity ratio of 40% to 50%, which should enable the Company to negotiate
lower interest rates on its entire debt package;
- the capital raising and resultant debt reduction should enable the Company
to renegotiate and avoid the additional charges and further increased
interest rates that would come into effect in a default situation;
- the reduced debt levels will further result in reducing the risk of
breaching covenants and the imposition of restrictive conditions and
potential forced sale of assets;
- the debt reduction will enable the Company to position itself for
competitive refinancing of the Senior facility in the medium term; and
- should enable the Company to recommence dividend distributions in the
future.
In summary, a reduction in senior indebtedness reduces financing costs and
financial risk. In addition to restoring the capital structure, this would place
the Company on a solid growth path and enable value retention for shareholders.
General meeting and further announcement
Shareholders will be requested to approve various enabling resolutions,
including inter alia, an ordinary resolution placing sufficient authorised but
unissued shares under the control of the Board at a general meeting to be held
on Tuesday, 18 August 2009 ("the General Meeting") to enable a rights offer to
proceed. The proceeds of the rights offer, after associated costs, will be used
solely for purposes of reducing indebtedness and replenishing working capital.
This approval expires at the annual general meeting, scheduled for 21 October
2009.
The resolutions proposed to be passed at the General Meeting provide the
enabling secretarial structures for the Company to issue shares subject to the
rules of the JSE.
A circular containing details of the General Meeting was sent to shareholders on
Monday, 27 July 2009. Following the passing of the requisite resolutions to be
tabled at the General Meeting the Board of Sentula will finalise and announce
the terms of the rights offer.
Johannesburg
13 August 2009
Sponsor:
Merchantec (Proprietary) Limited
Corporate advisor:
Investec Bank Limited
Transaction sponsor:
Investec Bank Limited
Legal advisor:
Werksmans Incorporating Jan S. de Villiers
Date: 13/08/2009 08:53:48 Produced by the JSE SENS Department.
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