The broker still maintains a “buy” recommendation for the stock over a 12-month timeframe, but subsequently removed Pike from its “conviction list”
On Tuesday, the Kiwi coal producer slashed its production forecast from 620,000 tonnes of saleable coking coal to 320,000-360,000t.
The downgrade was made on the back of slower than anticipated development progress which forced planned extraction panels into the following year.
The immediate mine plan has also been revised to meet environmental consents.
Goldman blamed the slow development rates on the “poor performance” of Pike’s two original continuous miners, while it said the downgrade would exacerbate Pike’s “tight funding” position.
The looming problem is that Pike’s $NZ25 million working capital facility from its major stakeholder New Zealand Oil & Gas is repayable on December 15.
“We estimate that PRC will have a $13-16 million shortfall at this time which will need to be funded by either a rollover of the existing NZO facility, a new debt facility or equity,” Goldman Sachs said in its update report released on Tuesday.
“PRC’s poor history on execution will likely mean that accessing traditional debt channels is challenging.
“We believe the risk of a fifth equity raising is not immaterial and is principally dependent on NZO’s willingness to roll its debt facility.”
Goldman also revised its own production forecasts for Pike which are less optimistic than the company’s estimates.
The broker expects Pike to reach just 250,000t of coking coal production this financial year, while it forecast 750,000t in the following year – down from its recent 800,000t forecast.
But Goldman said its base case forecasts were largely academic given “inherent uncertainty over future production”
The broker added that the impact of lower volumes was dramatic given the fixed-costs nature of Pike’s namesake coal mine.
Goldman forecast a $43 million net profit loss after tax for Pike this financial year, followed by a post tax net profit of $49.8 million for 2011-12.
“The next opportunity for PRC to provide investor comfort over operating performance will not likely be until post June 2011 if it delivers on its 60ktpa target for the quarter,” the broker said as part of its investment view.
“Longer term, the investability of PRC is a challenging question. It is certainly not a stock for investors with a lower risk tolerance.
“However, we believe the stock is pricing in a low operating success scenario, the leverage to a positive outcome is substantial and, on balance, we maintain the view that the risk/reward equation appears positive.”
Pike shares were unchanged at 80c yesterday and this morning.
