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#Going down the PAN?
Last edited 2 months ago

30-Jan-2020:  Updated FY20 Production Guidance

There are a lot of companies applying for membership to the Sin Bin Collective (aka the Downgrade Club) lately.  TWE were down -25.96% yesterday on the back of their guidance downgrade (and bounced +5.26% today, so they're still down around 20%), and I thought NEA's -29.84% drop today (on the back of their guidance downgrade) would take some beating, but PAN was up to the challenge, falling -33.93% today on the back of a production guidance "update" that contained not very much good news at all (i.e. it was pretty much ALL bad news IMO).  The most worrying part was definitely the last two paragraphs:

"Panoramic is assessing the implications of the revision to FY20 production expectations, combined with the finalisation of the alternative Savannah North raise bore completion solution and the current level of LME nickel prices, for its forecast cash flow. In anticipation of a need for further additional short term funding, Panoramic is considering a range of funding options, including options that do not involve raising equity capital. These include proposals from parties that have previously expressed interest in providing funding to Panoramic, including supportive major shareholder Zeta Resources Limited. Additionally change of control transaction discussions continue.  Panoramic cautions that there is no guarantee that any of these proposals or discussions will result in a concluded transaction(s).

"Panoramic is in discussions with Macquarie Bank Limited around the effect of the revised production forecast and associated forecast cash flows on the covenants in relation to the $20 million debt facility. It is anticipated that it will be necessary to seek waivers in relation to certain covenants to be calculated on 31 January 2020."

In summary, (1) they need more money to continue as a going concern (need to raise capital as they are fast running out of cash and they already have substantial debt), and there is no guarantee that they will be able to raise that money, and (2) they expect that they will soon breach the debt/lending covenants that they have with Macquarie Bank (MQG) (if they haven't already) and if they don't receive waivers from MQG, they are toast.

With that in mind, a drop of ONLY -33.93% was perhaps being kind.  They could easily be entering that final trading halt shortly - the one that companies never emerge from, where the companies are eventually delisted and shareholders lose 100% of whatever they'd shelled out for those shares.  It's not even like you can get a quick capital loss out of it either.  It can take years to play out.  I've been on the wrong side of a few of them.  My current one is CDU - CuDeco - once a promising copper miner, now a total pain-in-the-ass.  They may never trade again.  Probably won't.  Before that it was QIN (formerly TFS).  That one is still listed in my CBUS Industry Super account at their last traded price, even though they were delisted from the ASX a couple of years ago.  Pops up every time I check my current holdings, even though it shouldn't.  Bug in their system I suppose.  Just a nice subtle (and constant) reminder of past mistakes.

But back to PAN - who I do NOT own shares in - thankfully.  Independence Group (IGO) had a takeover offer in for PAN, but they announced in December that there were a number of defeating conditions that they were not prepared to waive and they intended to allow the offer to lapse, which they did, on schedule, on January 20 (10 days ago).  Back on December 27, Peter Bradford, Managing Director and CEO of IGO stated: “Any M&A must deliver a return to our shareholders. At announcement, IGO’s off market takeover bid for Panoramic, which was based on the public disclosure of the 2017 Savannah Project feasibility study, represented a potential “win win” for both IGO and Panoramic shareholders. The subsequent disclosures by Panoramic, including the operational update and need for additional funding have significantly eroded the value proposition for IGO and its shareholders. Consequently, we have decided to allow the Offer for Panoramic to lapse. This decision reflects our disciplined approach to M&A.” 

IGO's own SP rose 30 cents (+4.82%) that day.  It was clearly the right decision.  And there was more bad news to come - from PAN - as it turns out.  Unfortunately there almost always is. 

The nickel price has fallen almost 30% in the past five months, but the SP of IGO (who mostly mine nickel themselves - from Nova in WA) is actually up over that period.  

Are there lessons to be learned?  Probably.  One might be that established producers with good management (who have great track records of excellent capital allocation decisions) (like IGO) are far less risky than explorers, developers, or ex-miners who are looking to re-start production at a mine that had been previously mothballed (placed on "care and maintenance") due to its costs being too high and/or ore grades too low (like PAN).

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