Matsa (MAT AU) - Quick update (Sept 26)

Talk about a roller coaster. Conclusion is Matsa lives to fight another day.

Quick recap = 14th September - Matsa announced mining at Devon stopped on 9th Sept due to non payment of invoices to its contractor (Blue Cap). On 10th Sept, Matsa paid its invoices ($22.8M) in full. On 11th Sept, Blue Cap appointed KPMG as receiver to Matsa Gold (a subsidiary which owns Devon ONLY). Apparently, the main contention was Blue Cap believed it was owed its share of profit from Devon (80/20 profit sharing per its agreement with Matsa).

Why it was so bad ? Matsa up-sized and drew down its debt facility with Deutsche Balaton (DB) to pay Blue Cap. Remember DB charges very high interest rate (well over 20%). In addition, with Devon gone, Matsa again relegated back to a small gold explorer with a weak balance sheet.

The latest = Matsa pulled a rabbit out of the hat. Anglo exercised its option and paying $55M to Matsa for tenement adjacent to its land(22nd Sept). $55M was roughly half the sum of the original agreement.

What does it mean ? Let's lay out what we know:

1. As of June 26, it had cash of $6.2M + $5.6M in ROM ore stock.

2. It had gold sales of $7.9M in Q2 (from campaign 3/4).

3. 35kt of ore to be processed in July/Aug (vs. 41K already processed from Campaign 3/4 in Q2).

4. 1948oz of gold credited to Matsa after Jun. Say @ $5861/oz, we are looking at value of $11.4M.

5. To date, Devon has yielded 10K oz. But campaign 3/4 were difficult... Due to hitting voids from historical underground mining, unplanning mining dilution was as much as 40%.

6. Devon mining expense was $22.3M (including processing cost) for campaign 3/4.

7. It spent $2.2M in exploration in Q2.

8. It up-sized its debt facility with DB to $37.5M. All up, to pay off Blue Cap, it drew down $32.8M from the facility. In addition, it drew down another $4M from another facility to pay off Nitro and Mokim. So all up, $36.8M it owes DB.

What we don't know ?

1. The ground for Blue Cap to seize Devon was because Matsa was late to pay its invoices. Matsa only paid the invoice in full on 10th Sept. Why did it take so long to pay the invoice ? Why paid in full in one go ? Why did it not pay "some" invoices in Jul/Aug ?

2. Why is Blue Cap now suing for share of profits ?

3. How much gold did Matsa end up getting from its 35kt of ore in Jul/Aug ?

4. Was Anglo a bad deal ? I remember when we first saw the drilling result from Anglo.... Most folks did not think much of it... So I would say $55M was a good deal for Matsa.

What does the future hold for Matsa ?

1. Matsa just received $10M from Anglo. So fair to assume the deal will close. After paying off DB with the Anglo cash flow, it would have $18M left. Also we need to consider the $6M in cash as of June 26 + 1948 oz of gold it received after Q2. Plus whatever gold the 35kt or ore yielded in Jul/Aug. Matsa should have more than $18M in the bank.

2. It spent $2.2M in exploration in Q2. $18M from Anglo alone can cover a few quarters of exploration.

3. It remains to be seen how Devon will develop. Now that Matsa has paid off its invoices, what ground does Blue Cap have to seize the asset ? I am not a lawyer. It feels a bit rich to sue for share of profits when there has been not much to go around between campaign 1-4. I guess my base case is Matsa will keep Devon.

4. BUT.... If I were to guess, Matsa will need to find another contractor. It will take time for Devon to re-start if it is at all feasible.

5. Now the big question is if Devon is worth anything AT ALL ? Most people are prepared to write off Devon as a zero. So at least we are starting from a good spot in terms of sentiment/expectation. My take is Devon is worth something. The resource is 82k oz (mostly indicated) at Devon. So far we have mined 10K oz. Surely, it can yield more than 10k in the long run ? OK... Its cost may be higher (say $4k/oz, rather than $2829 (in feasibility study). It is likely not a zero (or negative cash flow)... Guess we will find out.

What to do with the stock ?

1. MV = $46M. It has been suspended and will remain so. So let's see how it trades when it opens (when it has sorted out the situation at Devon).

2. If we are to write off Devon completely, it would have resource of 860k oz + Fortitude North.

3. Its balance sheet will be healthy enough to fund a few quarters of exploration. So we will get to see how much gold there is at Fortitude North. If we are really lucky, it may find >1M oz at Fortitude North.

4. Everyone has his/her opinion on management. Management did convert the Anglo option deal into cash. Apparently, Matsa paid $300K for those tenements and turned $300K into $55M. No doubt Blue Cap was a fiasco... BUT my gut feeling is Blue Cap is no saint either. Plus with Matsa now paying off DB facility, management may have more freedom to move things along.

5. In a way, we get a "free" option on Devon. Everyone expects Devon to be a zero already. If Matsa can find a contractor who can do a better job, maybe Devon is NOT a zero. Then we still have maybe 10-20K oz left somewhere ?

6. If all goes well, Matsa needs to figure out how to fund the capX for its mill.... Just like many other junior gold explorers. If Devon is viable, it will need to raise less capital in the future.

Bottom line => Matsa lives to fight another day. Management has pulled a rabbit out of the hat with Anglo in my view. Devon is likely not a zero. Matsa gets its chance to better understand what it has at Lake Carey.