Towards Financial Freedom
AusGroup - Temporary Client Payment Issues
AusGroup made an announcement today regarding i) withholding of AUD21.7m of progress payments from Karara Mining Ltd (KML), ii) KML's notice of intent to call on AusGroup's AUD8.8m performance security, and iii) KML's claim against AusGroup of unfinalised value. We cut FY13F earnings by 21% to reflect possible provisions, and reduce our TP to SGD0.66 (from SGD0.73) based on 9x blended FY13F/14F EPS.
- No complaint from KML on past 13 months of work. AusGroup stated that "in the past 13 months AGC has performed this contract, KML have not issued any formal show cause notice" and that "KML has not provided a substantiated basis for refusing payment". Operations began at KML on 9 Apr 2013, and according to Gindalbie Metals, production "continued to ramp up...currently running at 70% of its capacity".
- KML is a JV between ASX-listed Gindalbie Metals and China's AnSteel. KML appears financially-troubled. MiningWeekly states that during the March quarter, each JV partner advanced a AUD50m interestfree loan to KML "to assist with short-term capital requirements", which
was subsequently followed by AUD30m advances from both parties. Three days ago, AnSteel offered another AUD30m loan to KML.
Gindalbie's MD expects it to turn "cash flow positive within months". - Appears to be a squeeze on suppliers/contractors. From this angle, KML's action against AusGroup appears to be an effort to pass losses on to its suppliers and contractors. AusGroup's legal team is of the opinion that the Progress Payments are validly due. There is of course a possibility that AusGroup did not perform satisfactory works and KML is due damages, but the fact that the mine is now operational and ramping up production gives more credence to AusGroup's point of view.
- Market knee-jerk reaction offers attractive entry point. While we have made an AUD6m adjustment to reflect possible provisions, the dispute resolution process now currently underway may produce a better result. AusGroup remains in a net cash position, and valuation is attractive at 6.4x FY14F EPS. We maintain our BUY call with a lower TP of SGD0.66.
Source: OSK
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