The fall out from Carillion collapse will be felt far and wide

Carillion logo

Carillion, the U.K.'s second largest construction company, collapsed today taking with it 19,000 jobs in the U.K., wiping out shareholders and causing huge write-offs for its lenders. The collapse leaves Carillion's creditors, which include Barclays, HSBC, Lloyds Banking Group and Santander UK with a combined hit of up to £2 billion.  But the pain could be felt for months or even years to come as the effects on sub-contractors, consultants and partners become fully evident. The construction industry like automobiles involve many parties in large projects. 

Carillion contract wins 2017

Carillion was spun out of Tarmac in 1999 before acquiring George Wimpey, McAlpine and Mowlem. By the end of 2017 its net borrowings had ballooned to over £800 million as a number of contracts soured due to engineering challenges including the £750 million Aberdeen bypass and the £350 million Midland Metropolitan Hospital in Smethwick and the Royal Liverpool University.

 In July, it shocked the market with £845 million of write-downs (the three projects above alone accounted for £375 million) and the departure of its chief executive Richard Howson.

The company's market capitalisation at the end of last week was just over £60 million, which was dwarfed by its debts and it also had a £587 million pension liability. 

Balfour Beatty has had to say goodbye to an additional £45 million due to three joint ventures on road projects with Carillion in Aberdeenshire, Cambridgeshire and north-west England.  In 2014,  Carillion briefly tried a  £2 billion takeover of Balfour Beatty.

Galliford Try says it expects to pay up to £40m to complete a joint venture it was working on with Carillion on the Aberdeen Western Peripheral Route project in Scotland.

The situation is not too different to that during the financial crisis of 2008/2009. Before declaring bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch). Under the notorious Dick Fuld, when it failed, the repercussions were felt across the financial world as its complex entanglements with hundreds of companies were unraveled over many years. 

After today's news hundreds of smaller companies in the U.K. as well as in places like Canada could collapse and thousands of pensioners will be impacted with reduced payments. 28,000 members will now be subject to the Pension Protection Fund and those who are transferred to the PPF, and not yet retired, will receive 90 per cent of the pension they were expecting, up to a limit. Members already getting pensions will continue to receive 100 per cent of their benefits but may see lower annual increases.

Despite the obvious stress the company was facing the awarding of additional contracts by the government has been criticized. Since July 2017, the government has awarded 10 awards or frameworks with a total value of £1.3 billion to the company, of which £137 million was in actual contract awards and £1.2bn was in Carillion’s estimated share of frameworks with multiple suppliers, such as the HS2 high speed rail contract.

At the end Carillion failed due to too many acquisitions, too much complexity, bad decisions and governance. At to that underbidding on complex contracts which made most of them unsustainable - any problems with construction or engineering and they became hugely unprofitable. Despite the high salaries at the top of the company, they failed to manage Carillion in a sustainable fashion. Another British company destroyed by incompetence at the highest levels. 

Richard Howson

Richard Howson

Keith Cochrane

Keith Cochrane

Richard Howson, Carillion’s former chief executive from 2012 until July 2017 earned £1.5 million in 2016, including £591,000 in bonuses. He will continue to receive his £660,000 salary and £28,000 benefits for another year, until October 2018. He was replaced by Keith Cochrane. 

Newmont decide to walk from Greatland Gold's Ernest Giles Project

After a long wait for shareholders in Greatland Gold (GGP) for news on their collaboration on the Ernest Giles project in Western Australia with Newmont Mining, it was not the result they have hoped for. Instead of the expected multi-bagger on good news, the shares tanked 70% at one point from Friday close of 2.16p to a low of 0.6p, before rebounding to around 1p later after a YouTube video was released featuring Chief Executive Gervaise Heddle. 

Greatland Gold share price January 15th 2018

GGP said that

Newmont has informed the Company that its current corporate priorities are largely focused in other districts. Consequently, it has informed Greatland that it will not be proceeding with the project at this time. Newmont's six month right of first refusal over the Ernest Giles Project has already lapsed in accordance with the agreement announced 16 May 2017.

Newmont's DSG survey has been successful in defining a new large gold anomaly, covering an area of approximately 5km by 1.5km and untested by previous drilling.

Heddle helped the shares to recover by remininding investors that they had £4 million in place to start work on Ernest Giles in Q1 2018 to further prove up the asset and that a "Large 5km long by 1.5km wide gold anomaly identified, oriented in an east-west direction, that sits approximately 1km to the north of Greatland's previous drilling" and that " Several additional robust gold anomalies successfully identified, many of which have not been drill-tested".

Still this is bad news for GGP and a major setback. Although Ernest Giles may prove to be a great asset Newmont Exploration decided to walk and it was not surprising that the shares are 50% plus down. A positive result would have propelled the shares many times higher of course. 

The Ernest Giles project has the potential to host a several multi-million-ounce gold deposit but this will take time to develop to a proven JORC resource and lots of $$$. The bounce from the lows of 0.6p was not unexpected, but a return to 2p will be many months away as more positive data will need to be released either from Ernest Giles or its other projects. The Newmont collaboration and potential buy-out or JV was a game changer which won't come along in the short term again but maybe in the medium-long term. Certainly the new data from Newmont will help GGP get another deal to develop the area underway but patience will be needed that's for sure. A very disappointing day for GGP shareholders, other than those buying in several months ago or at the open today.  

World's largest recent gold discoveries

Wafi- Golfu, Papua New Guinea

Wafi-Golfu mine Papua new Guinea

Wafi-Golpu is an advanced exploration project located in the Morobe Province of Papua New Guinea (PNG), approximately 65 kilometres south-west of the port city of Lae, PNG’s industrial hub and second largest city.

The project is owned by the Wafi-Golpu Joint Venture (WGJV), one of three unincorporated joint ventures between subsidiaries of Newcrest (50%) and Harmony Gold (50%), formed in 2008 and referred to collectively as the Morobe Mining Joint Ventures (MMJV).

Deep drilling conducted by the WGJV since 2008 has identified a world class porphyry deposit at Wafi-Golpu (the Golpu deposit) suited to bulk underground mining techniques, similar to those being employed by Newcrest at Cadia Valley Operations.

The project has Mineral Resources estimated to contain 26 million ounces of gold, 8.8 million tonnes of copper and 48 million ounces of silver. This includes Ore Reserves for the Golpu deposit estimated to contain 11 million ounces of gold and 4.8 million tonnes of copper. 

In December 2014 Newcrest and Harmony approved stage one of the Golpu project to proceed to feasibility study following the completion of an updated 2012 Golpu pre-feasibility study (PFS).

The updated Golpu PFS proposes a smaller, lower capital cost development for stage one of Golpu, with production expected to commence in the 2020 calendar year. The capital cost to build stage one is estimated at US$2.3 billion. 

http://www.newcrest.com.au/media/our_business/4365_Newcrest_FS_Wafi-Golpu_October2015_LR.pdf

Tasiast, Mauritania

The Tasiast gold mine is located about 300km north of Nouakchott and 162km east-south-east of Nouâdhibou in the north-western Mauritania. It is an open pit mine lying in a prospective greenstone belt.

Officially opened in July 2007, the gold mine began commercial operations in 2008. The gold equivalent production in 2009 was 158,657oz with a 336/oz cost of sale. Production in 2012 increased to 185,334oz.

In the fourth quarter of 2009, the processing capacity was expanded from 1m tons per year (mt/y) to 2.5mt/y. This expansion included improvements to the crushing circuit,  and the addition of a CIL tank, a ball mill and a gold room.

In September 2010, Canadian gold mining company Kinross Gold (Kinross) acquired 100% ownership of the Tasiast mine from Red Back Mining. This takeover was part of a $7.1bn acquisition of Red Back Mining by the metal producer. The life of the mine is expected to run until 2030.

The proven and probable reserves at Tasiast as of December 2012 stood at 149.65mt graded at 1.66g/t, which is equivalent to 7.96 million ounces of gold. Measured and indicated resources are estimated at 6.75 million ounces.

Kinross planned to invest about $1.5bn for the expansion of Tasiast mine by 2013. The expansion plan is, however, deferred until 2015 due to the decline in gold prices. The expansion will include construction of a new mill to increase the processing capacity from the current 10,000t/d to 38,000t/d.

2017 stock market performance review - quite a year!

Champagne corks flying

Happy New Year readers!

Driven by strong economic growth, Trump tax cut euphoria and growing corporate profits 2017 was an exceptional year for U.S. stock market investors. 

The FTSE All-World index advanced nearly 22 per cent during 2017, its biggest gain since  the post financial crisis year of 2009 and its fourth-best yearly performance since the benchmark started in 1993. It also had 14 straight months of gains — the longest run on record.

For the first time in its history, the S&P 500 produced positive returns every calendar month of 2017 with dividends included.

The UK’s FTSE 100 finished at a record high of 7,688, a rise of 5% in December but a lowly 8% for the year. But in dollar terms,  index has gained over 17% in 2017.

2017 U.S. stock market performance

S&P 500 +19.4%

Nasdaq rose +28.2%

Dow Jones Industrial Average +25.1%

Dow Jones all time high events by year
Dow Jones Industrials Top ten performers 2017
Dow Jones Industrials Top ten worst performers 2017

2017 U.K. stock market performance

FTSE 100 +8%

FTSE ALL share + 6.6%

2017 Asia stock market performance

Japan Nikkei 225 +19.1%

China Shanghai Composite +6.8%

Hong Kong Hang Seng +36%

UKOG update December 28th 2017

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UKOG issued a follow up RNS to the one issued at 7 am on December 27th with a correction at 3.24 pm. The shares closed down 25% at 3.05p yesterday on the news of a further wait for key results and a zero flow from the lower KL3 limestone.

Shareholders now wait for the critical KL3 Upper to KL5 tests during January. Probably no news for a little while which may cause a drift in the share price if YA offload more loan shares.

The paragraph, "Operational update", second sentence should have referred to test 4, not KL4 and this amended paragraph is written below:

Test 4, over the basal 50 ft section of KL3, was successfully completed following several mechanical and test completion problems. Following nitrogen lifting, the well flowed naturally at an instantaneous rate of approximately 300 bfpd declining to a steady inflow of between 30-50 bfpd over several days. Fluids returned over the duration of test 4 consisted primarily of completion fluids together with traces of live oil, accompanied by a gas blow during pressure build up periods. In the Company's view, this horizon, whilst containing moveable hydrocarbons, appears to be unproductive due to low reservoir permeability.