Saturday, November 24, 2012

Talvivaara is in trouble

In a country in which silence is preferable option to 'unnecessary' small talk, public demonstrations do not draw a whole lot of people unless something very upsetting has happened. The 3rd gypsum waste pond leakage in Talvivaara mine was such event. It came on top of many other incidents in the same mine. No wonder the “Stop Talvivaara” movement has gathered a lot of sympathy lately from the general public. The movement has collected close to 20,000 names into petition to close Talvivaara mine.

The political risk is getting larger and larger. Ville Niinistö, minister of the environment, reportedly has said to protestors that unless he was the minister he would have been among them on that day. You better believe that because he is the chairman of The Greens of Finland. Finnish Police is also investigating Talvivaara on three separate counts of suspected environmental crime.

Ville Niinistö, minister of the environment, speaks to protesters on 14th of November 2012. Picture by Hanna Nikkanen. Some rights reserved.

Talvivaara has approximately 52000 stockholders in Finland. Among them is husband of ex. minister of the environment Paula Lehtomäki of Centre Party of Finland with 51320 shares and their children with 3560 shares [Talouselämä 41/2012]. Talouselämä magazine also counted that so far they have lost  some 160,000 euros with those positions.
Among the biggest shareholders is Solidium, a wholly owned holding company of the State of Finland, with 8,89% of the shares. Pension insurance companies Varma and Ilmarinen own 8,71% and 6,15% of the shares respectively. The State of Finland pension fund owns 0,78% and The Local Government Pensions Instution 0,76%. All of these can be considered holdings for the benefit of general public in Finland.

Besides direct investments in Talvivaara, Finnish Government has high stakes in the mining sector overall. Finland has been consistently ranked as one of the best places in the world for mining investments. There is a mining boom going on in Finland. Finnish Government needs those investments because most mining prospects are in Northern and Eastern Finland where new jobs are badly needed.

Mining investments are made for tens of years and political stability and predictability are extremely important. Thus, it seems unlikely to me that extreme measures would be used such as closing the mine permanently. After all, The Greens of Finland is a rather small party with only 10 seats in the Parliament of Finland. This is not to say that there would not be MPs with sympathies towards “Stop Talvivaara” movement in other parties.
Production at the mine started in October 2008 and production ramp up is still ongoing. The current environmental permit is for 30,000 tonne annual capacity and does not cover uranium extraction. The company has been seeking both permit to increase annual capacity and permit for uranium extraction. Given the environmental problems, I doubt that they will get permission to increase volume. On the other hand with all of their production problems they won’t be near their full capacity any time soon.
The target for year 2011 was originally set to produce 30,000-35,000 tonnes of nickel. The company has lowered its guidance on Nickel production already twice this year (to 17,000 tonnes) It is unlikely that the company meets even that because their metals recovery plant has been suspended since November 4th 2012. The company told on 21st of November that it has been permitted to re-start the plant and it will ramp it up by 25th of November.
Even before the massive leakage from gypsum pond, the company had suspended ore production because unusually heavy rains forced the company to use the open pit mine to store some 1,7 million tons of excess water. This does not affect metal production potential short term because so much ore is stored in the heaps. However, it won’t certainly help them either.
The Talvivaara mining company will make this year net loss far bigger then the net loss of 10,5 million euros last year. Net loss for the first three quarters alone has been 44,5 million euros. At the end of Q3 (30th of September, 2012) the company had 87,3 million euros of cash and cash equivalents. Debt level stood at 601,9 million euros at the end of the quarter. Debt-to-equity ratio stood at 140,6%.
Analyst estimate according to Kauppalehti (kol 21.11.12) that the company might need up to 150 million of extra funding. Talvivaara’s management is admitting that their cash position is challenging on mid to long term. This means they will need more funding one way or another. This isn’t good news for the current shareholders.
I conclude my post with a quote from my previous analysis on Talvivaara:
"There is nothing Talvivaara can do about Nickel prices. There is, however, a lot it can do about environmental problems and bad press. If not handled properly these might become blocking points for uranium extraction and ramp up to full capacity (not to mention production expansion / mine area expansion)."

Full disclosure: The author does not have any positions in Talvivaara and there are no plans to initiate any in the immediate future.


  1. A lot has happened this past week with Talvivaara, massive drop followed by today's 13 percent you have any revised predictions? Eg. do you think we've seen the worse and folks will buy-in as we approach resumption of production mid-2013 with expected strong nickel prices? Love your analysis so far on this company.

    Taneli - a fellow Finnish investor

  2. I think it's very difficult to value Talvivaara right now. Certainly all my previous analysis will be void by the time Talvivaara has completed issuing new shares in the massive way it now plans.

    With Solidium (i.e. Finnish Government) and other major shareholders backing Talvivaara the likelihood of going totally out of business seems low at the moment provided that they really get soon their act together and return profitable. They are bleeding cash (-60 million EUR in Q4 2012 alone) so even after getting more money via rights issue they can not continue like that for very long.

    The proposed EUR 260 million Rights Issue may mean up to 26 billion new shares subject to shareholders' pre-emptive subscription right. Unless you pay more you probably get seriously diluted.

    I am certainly going to avoid the stock until
    1) they are done issuing new shares
    2) they return profitable
    3) there is clear evidence that they get the production running at 30 ktpa level.

    And even after that it's going to depend on how the environmental side of things look and also what's their debt level like. I would expect the turnaround to take quite some time.

    In addition to the already mentioned rights issue they seem also be proposing to the extraordinary general meeting of the Company to be held on 8 March 2013:

    - Authorising the Board of Directors to decide to issue new shares and/or special rights entitling to shares in deviation from the pre-emptive subscription rights of the shareholders
    - ...authorisation to the Board of Directors to decide to issue up to 600,000,000 new shares

    According to Talvivaara itself: The number of shares issued and outstanding and registered on the Euroclear Shareholder Register as of 31 December 2012 was 272,309,640


    - now there is 272 million shares.
    - They might issue up to 26000 million shares subject to shareholders' pre-emptive subscription right
    - And then they might issue up to 600 million shares basically in any way they please

    I can't estimate what will be the share price after they are done with all that since there is no way to know how many shares there will be in the end sharing the profits they hopefully start spitting out at some point of time.

    I have gone through many companies in resource sector and I have to say that I have seen cases where existing shareholders have been diluted quite seriously. I one case there was something like 100 times more shares issued than was existing. Means that if you had stock trading at 1 euro by the time they were done issuing shares one stock was worth only 0,01 euros.

    Impossible to know how it's going to go in case of Talvivaara, but be warned.