Could Premier African Minerals shares be a bargain?

by MMC
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An oil tanker arrives to dock in calm waters and a clear sunset

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The last few years have been rewarding for the shareholders of First African minerals (LSE: PREM). Its shares have soared 280% over the past five years until market close yesterday (September 28), meaning the mining company’s shareholders have more than tripled their capital over that period.

But since April, stocks have fallen.

Could the company’s interim results released today (September 29) provide investors with some useful clues about the company’s prospects and what that could mean for its share price?

Potential future cash generation

The CEO opened the results by stating that he thought β€œThis will be the last time I potentially report interim results that do not include details of cash-generating operations..”

This seems optimistic about where the company will be this time next year. If the mining company does indeed start generating significant cash flow, the current share price could prove to be a bargain.

Also on a positive note, the company said the past month has been “encouraging” and that after restarting operations this month, it expects to meet its production targets for November.

The company then plans to install a new factory over Christmas which will allow it to increase production from the start of next year.

A loss of $7.5 million was reported for the period.

What’s next from here?

The company estimates it can start generating revenue later this year.

But if production is delayed, the company may have to raise more money. Indeed, at the end of June, net cash and cash equivalents were less than a quarter of a million dollars. Since then, Premier African has raised more funds.

Last month, it announced the issuance of new shares, raising cash but diluting existing shareholders. I see further dilution risk if more Premier African Minerals shares are issued to raise additional funds.

At the same time, the lack of operational cash flow continues to pose a risk to the company’s ability to stay afloat. He included the following warning in his interim results.

If the Company is unable to obtain additional financing to meet the Group’s working capital and investment requirements, significant uncertainty may exist which could cast significant doubt on the Group’s ability to continue as a going concern.“.

In other words, if production does not occur when expected – which is not unusual in Africa where the company’s mining operations are located – then the company may not be able to survive if it cannot raise more money.

High risk

This risk alone is enough to dissuade me from purchasing Premier African Minerals shares, regardless of the potential reward I see if production starts on schedule.

And the company has a high concentration of risk in a small number of operations located in a politically unstable region.

It has consolidated its finances, but until significant commercial production and cash generation begins, there is an ongoing risk that it could run out of cash or further dilute its shareholders.

For now, I won’t touch Premier African Minerals shares with a barge pole.

The post office Could Premier African Minerals shares be a bargain? appeared first on The Motley Fool United Kingdom.

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C Ruane has no position in any of the stocks mentioned. The Motley Fool UK has no position in any of the stocks mentioned. The opinions expressed about companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a broad range of ideas allows we are better investors.

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