Alphamin: Problems And Stock Dilution At The Finish Line

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Introduction

On April 8, Toronto- and Johannesburg-listed Alphamin Resources (OTCPK:AFMJF) announced it raised $12 million in an equity offering after identifying a working capital shortfall of $9 million due to a change in the mining method at its world-class Bisie tin project in the Democratic Republic of Congo (DRC) and other project delays.

With full commissioning and ramp-up scheduled for Q2 2019 and production at planned throughput expected in Q3 2019, the company is diluting shareholders on the final stretch of development.

In December 2018, Alphamin had assured investors that it was sufficiently funded till production at Bisie following the draw-down of the final $20 million of its $80 million credit facility. What a difference a few months can make.

The Bisie tin project

Alphamin owns an 80.75% interest in Bisie, which is located in the province of North Kivu in the DRC:

Source: Alphamin

Mpama North at the project is one of the richest tin deposits in the world and its grade is equivalent to around 17 g/t of gold and 16% of copper equivalent:

Source: Alphamin

Alphamin CEO Boris Kamstra recently claimed that mines of this nature and grade strength have not been seen probably in the last century.

The quality of the grades meant that Alphamin would be a lowest ten percentile producer of tin in concentrate in the world.

Source: Alphamin

With an average production of 9,642 tpa tin at a cash cost of $8,837 per ton tin produced and $10,359 per ton tin sold after duties, royalties, levies and marketing fees, the project was expected to generate an average EBITDA of over $100 million per year and have a payback period of less than two years. The net present value looked great even in conservative scenarios:

Source: Alphamin

While initial mine life is 12.5 years, the exploration potential is amazing and the company believed that the region can produce tin for well over 30 years.

The mining method issues

At the end of November, Alphamin mentioned in its accounts for Q3 2018 that rock conditions underground had made it review its chosen mining method. This was a big red flag and the company subsequently switched its mining method plans to cut and fill. This requires an update to the mine schedule as well as the life of mine schedule.

Alphamin had initially selected the sublevel caving mining method, which resembles top slicing in that the ore body is worked from the top down, and the ore is taken out in horizontal slices. However, a block of ore is left above the slice and when a small portion of the slice has been mined out, this back is allowed to cave.

With the cut and fill mining method, mining is carried out in horizontal slices along the ore body, where the bottom slice is mined first. The excavated area is then backfilled and production continues upwards. It’s generally referred to as a small-scale mining method.

Each of the two mining methods has its own advantages and disadvantages, but the most important issue for shareholders of Alphamin should be that cut and fill is more expensive.

Advantages and disadvantages of sublevel caving:

Source: 911 Metallurgist

No figures are still available but Alphamin said that initial analysis indicated that the unit costs per ton will be higher in 2019 and 2020 than what had been anticipated in its most recent feasibility study. The update of the life-of-mine schedule is expected during Q2 2019 following which the company plans to announce updated project economics.

Reasons for the working capital shortfall

The change of the mining method to cut and fill resulted in a slower ramp-up of material to the run of mine stockpile.

Other contributing factors to the $9-million shortfall in working capital included a delayed response to a request to partially export concentrates by airfreight, which meant that the company had to truck all export material, a delay in VAT refunds and a delay of manufacturing and delivery of certain components to complete plant commissioning.

Conclusion

Alphamin owns perhaps the best tin project in the world but its recent troubles highlight the risks associated with putting a mine into production. While presentations of mine developers always look amazing, cost overruns, delays and technical issues are common.

I think that the company still presents a compelling investment opportunity as this is a world-class project involving a commodity which will see growing demand thanks to the adoption of electric vehicles. Despite the change of the mining method, the extraordinary grades should guarantee Bisie a place among the lowest-cost producers in the world.

Still, I prefer to wait until the mine reaches steady-state production before investing in Alphamin and I think that the company could’ve avoided diluting current shareholders by taking on more debt.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial adviser. All articles are my opinion – they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.

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