Report Card: More detail needed on Otter's strategy

Friday 1st June 2001

Otter Gold Mines is perhaps best known for the long-running stoush between former executive chairman Tony Radford and Sir Ronald Brierley. After several tilts at the company over many years, Sir Ronald and his Guinness Peat Group (GPG) grabbed control in late 1999. Mr Radford departed from the board shortly thereafter.

So far, GPG will be wishing it had left well enough alone. The performance of the gold miner, and that of its share price, has been terrible.

Fortunately, Otter hasn't tried to disguise this. Its annual report showed its 2000 financial year net loss of $6.9 million at the top of its highlights page. At least it is one of the few companies to use the term in its sense of a summary of key points rather than a public relations exercise.

One of the reasons GPG is interested in Otter can be found on the financial highlights page. This shows the company nearly doubled its gross operating profit to $5.9 million on turnover up a more modest 8% to $79.4 million. It is abnormal costs that have dragged down the company's results for at least the past two years and GPG undoubtedly has taken the position that writeoffs don't go on forever. Also, net operating cashflow remains strongly positive, although at $7.8 million it is well down on the previous year's $17.1 million.

Other appealing figures indicate all the gold Otter digs out of the ground is sold at a price consistently above its costs per ounce. Through good use of derivatives, it generally secures prices above the world market spot price.

But considering the troubles the company has experienced and the difficulties it continues to face, the report is light on commentary, extending to no more than a one-page chairman's report. While that is free with positive comments, it is light on specifics about the company's strategy or prospects.

Some of this can be gleaned from detailed profiles of each of the company's mines in Australia and New Zealand.

Thankfully, the report has foregone the traditional geologists' maps and jargon-laden descriptions given by many mining companies.

A nice touch is a description of capital and exploration costs during the year and how they were funded (a combination of net profit, sale of investments, new debt and cash reserves). Normally investors have to look through tables of figures to find that information.

In the notes to the accounts we can find another potential benefit to Sir Ronald and friends; $17 million in tax losses, up from 1999's $13.4 million.

On the downside, there are several contingent liabilities. While some are routine mine-related guarantees, there are two interesting items.

First, the departed Mr Radford is seeking $A1.9 million under his employment contract, a claim that has been rejected by Otter and was scheduled for arbitration. Second, Otter is facing a $A1.3 million bill over contractual disputes associated with its Beaconsfield joint- venture mine. But it stands to gain $10.5 million if its counterclaim is successful.

One thing missing from the report is a five-year performance history or useful ratios. Those who make the effort to calculate some ratios will find some cheer. Return on assets, before abnormals, has improved from 2% in 1999 to 3.7%, although this is hardly a figure to write home about. The return on equity is a moderate 9.6%, again an improvement on the previous year's 4.3%. But this is partly explained by the decline in shareholders' funds by 16% to $61.5 million, representing a slender 39% of total assets.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen‚s Investment Report. www.mcewen.co.nz, davidm@mcewen.co.nz

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