Pamodzi Gold: a South African poisoned chalice
Jesse Livermore, a US whiz who made and lost fortunes on Wall Street before killing himself in 1940 once said:"An investor has to guard against many things and most of all against himself."That was a long time ago and, in the South African investment context, Livermore could have easily been referring to Pamodzi Investment Holdings, controlling shareholders of the embattled listed junior gold miner, Pamodzi Gold (JSE:PZG).Pamodzi Holdings CEO Ndaba Ntsele, who is also Pamodzi Gold’s non-executive chairman must be cracking his head trying to find solutions to massive problems faced by his gold mining company.Ntsele is a self-made, trail blazing entrepreneur, a true road warrior, if ever there was one. But, as Livermore warns, did the Pamodzi stable guard against itself when it started the gold investment journey?Pamodzi Gold is a poisoned chalice, enough to break anyone’s spirit.For Pamodzi Gold, the journey has been pretty short, but arduous and very thorny.The launchpad was an open pit mine in Middelvlei on the West Rand, followed by an acquisition of Bema Gold’s Petrex mines on the East Rand.The junior gold producer officially listed on the JSE in December 2006 giving it a market value that it could use to negotiate acquisitions and potential consolidation. The share price debuted at R21.80, an 18% premium on its private placement, valuing the company at R894m. The company announced then that it had an ambitious target to double its production capacity to 400,000 ounces of gold a year by the end of 2007, which it hoped to achieve through acquisitions. Everyone was on a high.That was then. And things, as Nigerian author Chinua Achebe would say, started falling apart.From a listing price of R21.80 in December 2006, the share crashed to a low of 60 c last month. This is a bloodbath by any measure.However, business executives should not spend any of their time managing the share price. They must spend most of the time managing the fundamentals of the business. And, in Pamodzi Gold’s case, business fundamentals are rotten. If they disagree with me they should just take a close look. Nothing makes sense about this business any longer. All its ratios are upside down. Cost to income ratio, debt to equity ratio, you name it, it is all pathetic.Recently the company took to the market, confessing that it was barely surviving. It could not even pay suppliers. In fact it owed suppliers around three quarters of a billion rand. In other words, it had accumulated more debt than its current equity.Last month, workers downed tools because the company was late in paying salaries. Last week, more than 4,000 miners in the Free State downed tools as they had not been paid. Last month, more than 2,000 workers at the Free State operation did not report for duty when the municipality cut the water supply due to unpaid bills.The union representing the workers claims that miners were being forced underground without water or sanitation and that 112 of them had not been paid for the month of January. The company hit the hard times after a cash crisis last year. The junior minor had managed to secure a R200m loan from the Industrial Development Corporation (IDC) and another R200m from Best Rock Investments and Bayerische Hypo-und Vereinsbank.The money had not arrived due to delays in the US. The parties agreed that Pamodzi Gold would raise bridging finance in the interim, and Best Rock agreed to give Pamodzi Gold a timeline for the arrival of the R200m. The IDC loan is conditional on the Best Rock loan, so the company does not have access to that money either.But how did it all become so hard for Pamodzi Gold?Frankly, the Pamodzi stable is run by intelligent and good businessmen. But with Pamodzi Gold, they miscalculated badly.There is a combination of factors here, and a few of them deserve a mention.Firstly, they inherited a messy hedge book when they acquired the Bema Gold Mines. Those mines are deep and old. They are very costly to mine. In short, mining requires deep pockets and Pamodzi Gold does not have deep pockets.In a hurry to list on the JSE without a track record, and an anxiety to justify the number of hundreds of ounces they were mining, they rushed head first into Bema Gold’s acquisitions. Those were bad investments.As Livermore warned shortly before his suicide in 1940, investors should guard against many things, including themselves.