Savannah continues to distinguish itself within the junior exploration arena by a high level of activity.
CEO, David Archer, 25 February 2015
The thing about a statement like this from Savannah Resources financial results for the year ended 31 December 2014 is that it comes against a backdrop of absolutely no revenues whatsoever and the words ‘high level of activity’ can mean only one thing to investors: cash burn.
If you are drilling massive holes in the ground in an attempt to find economically viable deposits of minerals then making the ground you cover look like swiss cheese comes at a huge cost to shareholders, especially when the historical financial record is so poor.
Archer himself admits as much:
Operating loss of £1,917,190 reflects the increased tempo of operational activities around the Company’s prospective copper and heavy mineral sands projects in Oman and Mozambique and finance expenses of £491,851 principally attributable to movements in the valuation of derivatives
As to the tempo of this activity, Archer continues:
In addition, our acquisition of rights to three highly prospective copper projects in Oman marked a transformational move into a highly prospective copper producing region. We intend to leverage our in-country advantage to ultimately become a mid-sized copper producer. In line with this, we are increasing the tempo of the exploration programme, with drilling already started
As radical an idea as it sounds, revenues leading to positive earnings would propel Savannah into a mid-sized copper producer.
Savnnah has had five years of swiss cheese making activities to book revenue ever since it started with a few licences and a Mine in Mali.
Savannah Resources’ previous name when it first listed on AIM on 1 November 2010
All this means is that Savannah Resources is highly speculative because it is not as easy as finding good quality and large amounts of minerals: there is the cost of capital of developing these resources as well as the operating costs.
By way of example Kibo Mining (LSE: KIBO) is also an AIM-listed loss making stock that mines thermal coal.
Kibo has recently signed JV agreement with one of China’s largest engineering firms (SEPCO III) to deliver coal the due diligence, internal approvals and governmental approvals of which have yet to be finalised.
Also construction work is expected to commence in Q2 of 2016, with completion and first power delivered into the grid, expected by Q1 2019 which means investors can expect revenues from the project to be recognised in the half yearly report of September 2019.
Kibo has stated that for a capital investment of between $46 million and $89 million, the project’s mining component annual coal sale revenues are estimated to be between $37 million and $44 million the profits from which they will have to share with SEPCO III.
There is no mention of what the operational costs of the project will be.
For more information on the difficulties that Kibo (and other small cap mineral stocks) faces click here.
It is these types of issues that makes junior explorers highly speculative since many of the projects fail to materialise or are simply loss making.
Reducing risk is one thing but increasing risk by buying into speculative companies is quite another.