Argonaut Metals and Mining - New Kids on the Block

Transcription

NEW
KIDS
ON
THE
Gold
October 2010
BLOCK
Corporate Directory
Research:
Corporate and Retail Sales:
Ian Christie
Director, Research
Direct Line: +61 8 9224 6872
Email: [email protected]
Kevin Johnson
Executive Director
Direct Line: +61 8 9224 6880
Troy Irvin
Director, Research
Direct Line: +61 8 9224 6871
Glen Colgan
Executive Director
Direct Line: +61 8 9224 6874
Tim Serjeant
Associate Director
Direct Line: +61 8 9224 6806
James McGlew
Director
Direct Line: +61 8 9224 6866
Gianluca Paglia
Analyst
Direct Line: +61 8 9224 6824
Geoff Barnesby-Johnson
Senior Dealer
Direct Line +61 8 9224 6854
Email [email protected]
Institutional Sales:
Chris Wippl
Head of Research & Sales
Direct Line: +61 8 9224 6875
Andrew Venn
Senior Dealer
Direct Line: +61 8 9224 6865
Paul Carter
Executive Director
Direct Line: +61 8 9224 6864
Robbie Hamilton
Dealer
Direct Line: +61 8 9224 6830
John Santul
Consultant, Sales & Research
Direct Line: +61 8 9224 6859
Melaney Brans
Dealer
Direct Line: +61 8 9224 6873
Damian Rooney
Senior Institutional Dealer
Direct Line: +61 8 9224 6862
Cameron Fraser
Dealer
Direct Line: +61 8 9224 6881
Ben Willoughby
Institutional Dealer
Direct Line: +61 8 9224 6876
Corporate Contacts
Charles Fear
Executive Chairman
Direct Line: +61 8 9224 6800
Registered Office
Level 30
Allendale Square
77 St Georges Terrace
Perth WA 6000
Telephone: +61 8 9224 6888
Facsimile: +61 8 9224 6899
Website: www.argonautlimited.com
Edward G. Rigg
CEO & Managing Director
Direct Line: +61 8 9224 6804
Michael Mulroney
Executive Director
Direct Line: +61 8 9224 6803
Argonaut is a natural resources focused investment house that understands resources at a financial and technical level. Our
expertise in natural resources has given us the ability to identify opportunities in the mining and oil and gas industries as
well as the companies that service them.
Argonaut Securities Research
New kids on the block
Contents
OVERVIEW
New Kids on the Block .................................................................................... 1
STOCKS
Avoca Resources ............................................................................................ 9
Catalpa Resources ....................................................................................... 13
Focus Minerals ............................................................................................ 17
Integra Mining ............................................................................................. 21
Ramelius Resources .................................................................................... 25
Regis Resources .......................................................................................... 29
Saracen Mineral Holdings ............................................................................. 33
Silver Lake Resources .................................................................................. 37
APPENDICES
A: Map of Goldfields Projects ......................................................................... 41
B: Summary of Stocks .................................................................................. 42
C: Peer Comparisons .................................................................................... 43
GENERAL DISCLOSURE AND DISCLAIMER
i
Contents
NOTES:
ii
Research
Gold
11 October 2010
The gold bull market is alive and well. Prices are hovering near record highs of
US$1,350/oz. M&A is in full swing and producer de-hedging is sending further bullish
signals to the market as are expectations of a weaker USD, inflation threats and financial
uncertainty.
Strong pricing has resulted in the emergence of a number of new gold provinces (most
notable West Africa’s Birimian greenstone belts) as well as the reinvigoration of older ones.
In the September quarter Argonaut visited eight new producers in Western Australia’s
Eastern Goldfields, arguably the best example of a historical goldfield given a new lease of
life. The ‘new kids on the block’ featured are Avoca (AVO), Catalpa (CAH), Focus (FML),
Integra (IGR), Ramelius (RMS), Regis (RRL), Saracen (SAR) and Silver Lake (SLR).
However Argonaut notes that during the heights of the last resources boom, Aussie gold
was not the space investors wanted to be in. Soaring energy prices, declining grades and
the A$ conspired to increase cash costs and squeeze margins, resulting in a number of
casualties.
With new discoveries becoming increasingly few and far between, new producers are
mostly forced to ‘recycle’ old assets. Operational challenges inherent in running old mines
can include decreasing grades, decreasing production rates, mine life pressure, open pit
cutbacks, elevated strip ratios, pillar extraction, geotechnical risk, and safety. Fortunately
for the miners, higher gold prices and a low recent failure rate have increased the risk
tolerance of investors.
Consolidation amongst the new breed of Eastern Goldfields miners has been almost nonexistent. However the global M&A backdrop and stellar share price performance present a
window of opportunity for stocks coveting a gold premium and break-out of the crowded
75 – 150koz pa club.
To mitigate recycled asset risk, and to capitalise on corporate opportunities, it is prudent
to back quality management teams willing and able to engage in value-accretive M&A.
Argonaut’s key picks are:
x
Avoca (AVO) – Aggressive growth plan underpinned by a proven operational track
record and focused exploration. Successful M&A has catapulted the stock into the midtier gold vacuum. The next growth leg is via the proposed merger with Anatolia
Minerals (TSX: ANO).
x
Silver Lake (SLR) – Quality people impart tangibility to a conceptual growth target
of 300koz pa by FY14. SLR has added 1Moz to the resource base over the past 12
months at a discovery cost of <$10/oz.
Following significant share price appreciation, most valuations have been stretched.
Despite trading close to target prices, Argonaut remains attracted to Regis (RRL) and
Saracen (SAR) with the re-emergence of proven management teams mitigating risks.
Deepest value is currently offered by Focus (FML). The business plan has been
significantly de-risked over the past 12 months with debt, hedging and toll-milling
eliminated. However FML has received little reward for its efforts with the stock cheap
compared to peers, especially given the strategic value of the plant.
Analysts:
Troy Irvin
Tim Serjeant
1
Record gold prices
The continuation of gold’s 9
year advance is supported by…
The continuation of gold’s 9 year advance is supported by expectations that government
stimulus programs and protracted low interest rates will fuel inflation around the globe. For
example, recent price highs appear to have been driven by the prospects of further asset
purchases or quantitative easing in the US, which will place downwards pressure on US
interest rates and the greenback.
…expectations of a weaker
USD, inflation threats and
financial uncertainty
Fears of ongoing financial instability and currency uncertainty have spurred gold
purchases, with central banks expected to be net gold buyers this year (the first time since
1988).
Table 1: Argonaut’s gold matrix
Expected
Trend
Comment
Demand
Weaker US$, inflation
threats, financial
uncertainty
Investment
Industrial
Steady increase (albeit
relatively insignificant)
De-hedging
Major restructuring has
taken place, future dehedging to taper off
Demand to fall at higher
prices (particularly if prices
volatile)
Jewellery
Supply
Central
Banks
Looking for diversification
away from US$
Mines
Supply response muted by
a declining number of new
discoveries
Recycled
Will increase as price rises
Source: Argonaut
Note: Green = positive, blue = neutral, red = negative
Producer de-hedging continues
to send bullish signals
The world’s largest producers continue to send bullish signals to the market. Global
number three, Anglogold Ashanti, recently announced a US$1.58b raising to close its
hedgebook. Last year global number one, Barrick Gold, spent almost US$5b to increase its
exposure to the spot gold price.
The main risk to gold’s advance
is a sudden deflationary event
The main risk to gold’s advance is a sudden deflationary event such as a sovereign default,
a property market collapse in China, or a more severe than expected second round of
recession in the USA or Europe.
Argonaut’s gold price assumptions are presented below.
Table 2: Argonaut’s price assumptions
Argonaut conservatively
forecasts a gold price of
US$1,300/oz in FY11
Assumptions
FY11
FY12
F13
FY14
LT
Gold
US$/oz
1,300
1,250
1,200
1,150
900
FX
A$:US$
0.93
0.90
0.90
0.90
0.80
Source: Argonaut
2
M&A in full swing
The M&A cycle in the gold
space is back in full swing…
The M&A cycle in the gold space is now back in full swing. Current activity is dominated by
the larger global producers acquiring smaller exploration companies that have capitalised
on their expertise and risk appetite to build large, but undeveloped, resource bases.
…dominated by the larger
global producers
Since Newcrest Mining’s (NCM) initial pursuit of Lihir Gold (LGL) in April 2010 (now
complete), we have seen sizable proposals emerge for assets across the globe, including:
x
Kinross Mining’s US$7.1b bid for Red Back Mining (assets in Ghana and Mauritania)
x
Goldcorp’s C$3.6b bid for Argentine developer Andean Resources (AND), trumping
Eldorado Gold’s earlier C$3.4b offer
x
Turkish developer Anatolia’s proposed ~A$2b merger with Australian producer Avoca
Resources (AVO)
Aussie junior gold scene reinvigorated
The increasing gold price has
reinvigorated some older gold
provinces…
The bull market has resulted in the emergence of a number of new gold provinces (most
notable West Africa’s Birimian greenstone belts) as well as the reinvigoration of older ones.
Argonaut has recently visited eight new producers in Western Australia’s Eastern
Goldfields, arguably the best example of a historical gold field given a new lease of life.
The companies visited were Avoca (AVO), Catalpa (CAH), Focus (FML), Integra (IGR),
Ramelius (RMS), Regis (RRL), Saracen (SAR) and Silver Lake (SLR).
Table 3: New kids on the block – Overview
Company
Code
Managing Director
Catalpa
Focus
Integra
AVO
CAH
FML
IGR
Chris Cairns
Rohan Williams
Bruce McFadzean
Campbell Baird
Market Cap
$m
877
348
158
484
EV
$m
880
378
148
468
Project(s)
…including eight new
producers in Western
Australia’s Eastern Goldfields
Avoca
Trident
Edna May
Tindals
Aldiss-Randalls
South Kalgoorlie
Cracow (30%)
The Mount
0
Frog's Leg (49%)
0
0
0
Reserve
Moz
1.3
1.0
0.2
0.3
Resource
Moz
6.7
2.0
2.0
1.8
Production
Status
Production
Production
Production
Production
FY11F
280
112
94
56
Cash Costs^
FY11F
628
921
756
706
Production Target
koz pa
400
200
130
140
Yr
2013
2012
2013
2013
Ramelius
Regis
Saracen
Silver Lake
RMS
RRL
SAR
SLR
Les Davis
Timing
Company
Code
Managing Director
Ian Gordon
Mark Clark
Guido Staltari
Market Cap
$m
227
731
332
429
EV
$m
172
762
300
398
Wattle Dam
Moolart Well
Carosue Dam
Mt Monger
Mt Magnet
Garden Well
0
Murchison
0
0
0
0
Project(s)
Reserve
Moz
0.5
0.8
0.9
0.0
Resource
Moz
3.5
4.8
3.3
2.5
Status
Production
Production
Production
Production
Production
FY11F
80
77
126
100
Cash Costs^
FY11F
490
581
730
702
Production Target
koz pa
200
250
155
300
Yr
2014
2013
2015
2014
Timing
Source: Argonaut
3
Gold prices driving performance
But nothing has really
changed…
With no step-changes in management “know-how”, mining methods, resource estimation
techniques and gold exploration models, the sole engine driving the current local gold
boom is price. The US$ and A$ gold price have risen more than 40% respectively since
June 2008, without the commensurate increase in costs.
Notable is the performance of the WA based gold producers/developers over the last 12
months (see Figure 1).
Figure 1: A$ gold juniors relative performance - last 12 months
120%
100%
… other than record gold prices
sparking equity performance
80%
60%
40%
20%
0%
-20%
Oct-09
Jan-10
US$ Gold
Apr-10
A$ Gold
Jul-10
Oct-10
Index*
Source: Argonaut. *Equally weighted, comprised of the following stocks: AVO, CAH, FML, IGR, RMS, RRL, SAR, SLR
From zero to hero
A$ gold stocks are enjoying
their time in the sun…
However Argonaut notes that during the heights of the last resources boom Aussie gold
was not the space investors wanted to be in. Soaring energy prices, declining grades and
the A$ conspired to increase cash costs and squeeze margins, resulting in a number of
casualties.
… after a serious of failures
during the previous boom
The road from explorer to producer proved particularly challenging. Rising costs and
production issues were blamed for the collapse of local names such as Monarch (MON),
View Resources (VRE) and Gleneagle (GLN). Resource estimation issues halted production
at Bendigo Mining’s (BDG) Kangaroo Flats project in Victoria, and BMA Gold’s (BMO) Twin
Hills project in Queensland.
Fortunately for the miners, higher gold prices and a low recent failure rate have increased
the risk tolerance of investors. For example, “acceptable” underground grades have
arguably shifted from high 5’s g/t to low 4’s g/t, and “acceptable” open pit grades have
shifted from low 3’s g/t to high 1’s g/t.
However smart capital will continue to closely monitor risk factors, including:
Recycled asset risk
New discoveries are becoming
increasingly rare
New discoveries are becoming increasingly few and far between in the Eastern Goldfields.
Where they have been made e.g. Trident, Garden Well, Salt Creek, Wattle Dam they are
generally sub 1.5Moz. The exception is Independence Group’s (IGO) 5Moz Tropicana JV.
Local companies are therefore forced to recycle old assets, with smaller resource / reserve
positions, lower grades and ultimately less margin for error.
4
Inherent in recycled assets is a myriad of ongoing operational challenges that can include
decreasing grades, decreasing production rates, mine life pressure, open pit cutbacks,
elevated strip ratios, pillar extraction, geotechnical risk, and mine safety.
Sensitivity to energy costs
Cost pressures have squeezed
margins in the past
The cost of energy is recurring theme to monitor. The Eastern Goldfields is short energy,
with oil prices during the height of the last “boom” in 2007 soaring to over US$130/bbl and
WA gas prices above $10/GJ.
… particularly key inputs like
energy…
Energy intensive features that could lead to cost
include high on-site power generation costs (gas
distance surface road train haulage, long and deep
work index (measure of the energy requirements
pumping and ventilation requirements.
pressure and squeeze cash margins
v diesel, gas contract prices), long
decline or pit ramp haulage, high ore
of the milling circuit), and excessive
Labour shortage in Western Australia
… and labour
Labour shortages will place increasing pressure on costs in Western Australia, especially
with the large multi-billion dollar gas projects in the North West bidding up wages.
Workforce quality (experience and skill) is also suffering. Current scarce skill sets
applicable to the local gold mining industry include mining engineering (especially
planning), metallurgy, underground miners (especially with hand-held experience), and
electrical and mechanical trades.
Local consolidation
The timing is right for
consolidation…
The push for consolidation amongst the new breed of WA gold producers has often been
talked about over the last 12 months, but market conditions and valuations haven’t been
conducive.
However, with valuation gaps narrowing on the transition from developer to producer
coupled with favourable macro tailwinds, this time is fast approaching.
Figure 2 plots FY13F production against current share prices relative to assessed net
present value (P/NPV). Based on Argonaut’s analysis, only FML trades at a significant
discount – the rest are trading either in-line or at a premium to NPV.
Figure 2: FY13F Production (FY13) v P/NPV
500koz
400koz
AVO
SLR
300koz
RRL
200koz
FML
C AH
RMS
100koz
0koz
0.40x
0.60x
0.80x
IGR
SAR
1.00x
1.20x
1.40x
Source: Argonaut, Company data, Bubble Size = Adj EV
… with strong performance and
macro tailwinds providing a
window of opportunity
The global M&A backdrop and stellar share price performance present a window of
opportunity for stocks coveting the ‘gold premium’. Argonaut can identify more than 15
ASX producers within the ‘crowded’ 75 – 150koz producer club. The ability to attract
greater market interest / relevance, liquidity etc should not be underestimated. Other
benefits include de-risking and diversifying the asset base as well as expanding executive
skillsets.
5
Predator and Prey
So where do potential synergies lie?
AVO remains the natural
consolidator…
AVO, despite the proposed merger with Anatolia Minerals (TSX: ANO), still looms as the
natural consolidator of the Eastern Goldfields.
…other potential predators
include CAH, FML and SAR
CAH, FML and SAR loom as predators – all three have recently refurbished processing
plants, hungry for high grade feed sources. Additional tonnages over and above current
life-of-mine (LOM) plans are beneficial to project NPV. CAH, FML and SAR are likely to be
the dominant players or ‘gatekeepers’ in their respective regions (CAH in Westonia, FML –
Coolgardie, SAR – Carosue Dam).
FML itself could be a potential target for the likes of AVO, given its proximity to La
Mancha’s (TSX: LMA) White Foil and the Frog’s Leg JV (LMA 51%, AVO 49%). La Mancha
does not have a mill of its own in the Coolgardie region – instead it has relied on toll
treating agreements at the Greenfields (owned privately) and Three Mile Hill (FML) mills.
The combination of SLR and IGR is often talked about, given their close proximity to one
another.
RMS recently purchased the Mount Magnet gold assets (previously owned by Harmony) for
$40m, but still have >$50m cash in hand.
Following the 1.2Moz Garden Well discovery, RRL has an enviable organic growth profile
(~250koz pa from two operations). Hence the desire to return to West Africa (a la Equigold
days) has probably dissipated.
Filling the vacuum - AVO case study
The growth trajectory of AVO over the last 12-18 months is the most pertinent example of
how existing production combined with value accretive M&A can lead to market re-rating.
AVO’s growth trajectory is a
pertinent case study for the
peer group…
In 2009 a widening gulf between the large scale producers on the ASX (NCM, LGL) and the
rest was exacerbated when Eldorado (TSX: ELD) swooped on Sino Gold (SGX), the third
largest gold stock at the time (by market capitalisation). The de-listing of Centamin Egypt
(CNT) from ASX (which was Top 5 at the time) created a further ‘vacuum’ in the mid tier
gold space.
Figure 3: Filling the Mid-Tier Vacuum
Source: Argonaut – 9 June 2010
... how value accretive M&A…
AVO seized the opportunity to fill this vacuum by launching a takeover offer for Dioro
Exploration (DIO) in April 2009. DIO owned 100% of the South Kalgoorlie operation
including the 1.2Mtpa Jubilee gold plant, and a 49% interest in the 120koz pa Frog’s Leg
mine.
6
The spoils of victory were significant for AVO – Removal of single mine risk, and expansion
of annual production to ~250koz, reserves to >1.1Moz and resources to >4.0Moz.
Figure 4: 2010 production estimates for ASX-listed junior and mid-tier golds
Source: AVO (May 2009)
… can lead to market re-rating
AVO has set the scene for the local sector, demonstrating the benefits of value-accretive
M&A. Its market capitalisation increased from ~$385m in April 2009 to ~$900m today,
after peaking at over $1b.
Backing management is the key
To mitigate recycled asset risk, and to capitalise on corporate opportunities, it is prudent
to back quality management teams willing and able to engage in value-accretive M&A.
Recommendations
Recommendations
Argonaut’s recommendations and price targets are presented in Table 4.
Table 4: Summary of Recommendations
Company
Code
Price
Rec
Comments
Target
Avoca
AVO
$3.97
BUY
Catalpa
CAH
$2.15
HOLD
Focus Minerals
FML
$0.08
BUY
Integra
IGR
$0.49
HOLD
Ramelius
RMS
$0.84
HOLD
Regis
RRL
$1.67
HOLD
Saracen
SAR
$0.76
BUY
Silver Lake
SLR
$2.85
BUY
Aggressive target of 400kozpa in 2 years from 2 underground and 2 open pit mines near Kalgoorlie
The next growth leg is via a proposed merger with TSX:ANO (strategic position in the Tethyan Au-Cu belt)
The merger proposal with ANO aside, AVO is the natural consolidator of the Eastern Goldfields
Commissioning the low grade, bulk tonnage Edna May project in the Westonia greenstone belt
Hedge book provides protection - 70% of Edna May production hedged at A$1,557/oz for five years
Holds 30% of the narrow vein, high grade Cracow project in JV with NCM in North Qld
Consolidated the formerly piecemeal Coolgardie gold belt
De-risked the business by purging three "evils" - debt, hedging and toll milling
Expedited exploration plans to exploit lack of drilling below 200m and add to the reserve base
Commissioning the Randalls gold project, 90koz pa production from Phase 1, targeting 140koz pa
Strong exploration commitment - $15m budget in FY11 focused on the promising Majestic discovery
Appears fully priced relative to peers
Australia’s highest grade gold mine at the Wattle Dam project, 25km south west of Kambalda
Resource / reserve estimation risk given atypical Goldfields deposit with large coarse free gold component
Gold price leverage with Mount Magnet acquisition, robust balance sheet reducing downside risk
Commissioning at Moolart Well on budget and ahead of schedule
Potential ~250koz pa producer with 1.2Moz Garden Well discovery
Proven management team and operating track record has garnered strong market support
Best relative value play amongst the A$ golds
Raised $38m to spend on priority development (Red October) and exploration
Key to re-rating will be de-risking the production schedule and demonstrating tangible grade upside
People and high grades underpin the aggressive growth target of 300kozpa by FY14
Targeting a doubling of the resource base over the next 2 years to 5Moz
Catalysts include open pit evaluations, further parallel structures at Daisy Milano and the Murchison study
Source: Argonaut
7
Earnings and metrics summary
Summary earnings
Table 5: Summary earnings and metrics
Company
Avoca
Catalpa
Focus Minerals
Integra
Ramelius
Regis
Saracen
Silver Lake
Company
Avoca
Catalpa
Focus Minerals
Integra
Ramelius
Regis
Saracen
Silver Lake
Code
AVO
CAH
FML
IGR
RMS
RRL
SAR
SLR
Revenue
EBITDA
NPAT
Operating CF
Free CF
2011E
2012E
2011E
2012E
2011E
2012E
2011E
2012E
2011E
2012E
338
178
132
77
112
106
168
140
349
217
150
118
153
130
178
243
156
60
54
28
65
57
64
62
158
79
62
62
72
69
64
98
76
20
28
14
39
35
44
36
91
33
32
36
42
41
44
56
132
54
36
28
73
62
56
70
129
72
40
52
80
74
52
110
52
35
14
-27
43
26
19
18
86
45
18
37
14
-11
31
76
P/E
EV/Revenue (x)
EV/EBITDA (x)
2011E
2012E
2011E
2012E
2011E
2012E
2011E
P/CF (x)
2012E
2011E
P/FCF (x)
2012E
2.6
2.1
1.1
6.1
1.5
7.2
1.8
2.8
2.5
1.7
1.0
4.0
1.1
5.9
1.7
1.6
5.6
6.4
2.7
16.9
2.6
13.3
4.7
6.4
5.6
4.8
2.4
7.6
2.4
11.1
4.7
4.0
11.6
17.7
5.6
33.9
5.7
21.1
7.5
11.9
9.6
10.5
5.0
13.4
5.4
17.6
7.6
7.7
6.6
6.5
4.4
17.4
3.1
11.7
6.0
6.2
6.8
4.9
4.0
9.3
2.9
9.9
6.3
3.9
16.8
9.8
11.3
5.3
28.6
17.5
23.8
10.2
7.8
9.0
13.1
16.3
10.6
5.6
Code
AVO
CAH
FML
IGR
RMS
RRL
SAR
SLR
Source: Argonaut
Further detail is presented in Appendices B and C.
Best ideas/key picks
Key picks
Argonaut’s key picks are:
x
Avoca (AVO) – Aggressive growth plan underpinned by a proven operational track
record and focused exploration. Successful M&A has catapulted the stock into the midtier gold vacuum. The next growth leg is via the proposed merger with Anatolia.
x
Silver Lake (SLR) – Quality people impart tangibility to a conceptual growth target
of 300koz pa by FY14. Added 1Moz to the resource base over the past 12 months at a
discovery cost of <$10/oz.
Despite stretched valuations (following significant share price appreciation), other
companies that Argonaut remains attracted to include:
x
Regis (RRL) - Converting the virgin 1.2Moz Garden Well discovery into a second
mining operation provides RRL with an enviable organic growth profile, catapulting it
beyond the crowded ranks of the 100-150koz pa producers.
x
Saracen (SAR) - Management’s considered approach to development and production
has served shareholders well. Large tenement package provides option value that
could unearth higher grade opportunities and extend mine life.
8
Research
Avoca
BUY
11 October 2010
$2.90
$3.97
Current Price:
Target Price:
Ticker:
AVO
Sector:
Materials
The natural consolidator
Site visit:
Shares on Issue (m):
302.4
Market Cap ($m):
876.9
Recent site visits to Avoca’s (AVO) operations in the Eastern Goldfields confirm the
-3.3
aggressive growth plan is underpinned by a proven operational track record, and focused
Net Cash ($m):
Enterprise Value ($m):
880.2
52 wk High/Low:
$3.45
12m Av Daily Vol (m):
$1.50
1.52
exploration on the largest tenement holding between Kalgoorlie and Norseman.
Higginsville offers a stable production base and mine life upside, the under-rated South
Kalgoorlie offers production upside and the Frog’s Leg JV (La Mancha 51% / AVO 49%)
Key Metrics
10A
P/E (x)
EV/EBITDA (x)
11F
12F
15.2
11.6
9.6
5.9
5.6
5.6
10A
11F
12F
offers grade and reserve upside.
Impact:
Financials:
Revenue ($m)
285.7
338.5
348.6
EBIT ($m)
76.0
109.9
130.7
NPAT ($m)
57.8
75.9
91.2
Net Assets ($m)
268.9
321.0
407.4
Op CF ($m)
125.5
131.9
129.2
10A
11F
12F
Positive
Successful efforts in exploration and the M&A arena has catapulted AVO into the much
vaunted mid-tier gold vacuum. The Company is forecasting a 21% increase in production
for FY11 to 280koz, building to 400kozpa in FY13.
The next growth leg is via a proposed merger with Anatolia Minerals (TSX:ANO). ANO
been discovered over the last decade. The Company is developing the 6Moz Çöpler mine
Per Share Data:
EPS (cps)
holds a strategic position in the world class Tethyan gold-copper belt, where >50Moz has
18.0
22.9
27.5
DPS (cps)
0.0
0.0
0.0
Div Yield
0.0%
0.0%
0.0%
CFPS (cps)
39.2
39.8
38.9
in Turkey with first production from a heap leach scheduled for Q4 2010. The initial oxide
production rate is 175kozpa, growing to 400kozpa by 2015 assuming pressure leaching
of refractory sulphide ore.
ANO also has a large exploration portfolio in Turkey, including the Cevizlidere (445Mt @
Share Price Graph
0.4% Cu, 0.11g/t Au) and Karakartal copper gold porphyry deposits near Çöpler.
$3.50
20.0
$3.00
View:
Neutral
15.0
$2.50
The ANO deal could battle to get off the ground in its current form. With AVO ‘in play’
$2.00
10.0
better value proposals could emerge.
$1.50
However the proposed merger has deflected attention away from what attracted many in
$1.00
5.0
the market to AVO, as the natural consolidator of the Eastern Goldfields.
$0.50
$0.00
Oct-09
Jan-10
Apr-10
Jul-10
0.0
Oct-10
Recommendation:
Buy
The stock is trading at a 27% discount to Argonaut’s price target of $3.97 (1.3x NAV). At
spot gold and fx the valuation rises to $4.00.
Analysts:
Troy Irvin
Tim Serjeant
9
Catapulted growth
Successful efforts in
exploration and M&A have
catapulted AVO’s growth
Successful efforts in the exploration and M&A arena have catapulted AVO into the much
vaunted mid-tier gold vacuum. The Company is forecasting a 21% increase in production
for FY11 to 280koz, building to 400kozpa in FY13.
Underpinned by quality mining and exploration
The aggressive plan is underpinned by a proven operational track record, and focused
exploration on the largest tenement holding between Kalgoorlie and Norseman.
With mine life upside at
Trident…
At Higginsville the Trident underground mine boasts high grades (~5g/t), good geotechnical
conditions, and bulk stoping opportunities. FY11F production of 180koz is underpinned by
~800kt developed ore stocks and ~12 months of grade control drilling. The January 2010
reserve of 803koz @ 4.2 g/t presents a ~4.5 year mine life. Resources are 14.3Mt @ 3.4 g/t
for 1.6Moz. There is significant upside to mine life with the Trident ore body remaining open
at depth with a new drill intersection of 29m @ 5.0g/t ~500m below current stoping levels
and ~200m north of the Resource boundary.
…production upside at South
Kalgoorlie…
At the under-rated South Kalgoorlie asset, AVO recently increased the resource from
1.6Moz to 4.5Moz and delivered a positive Scoping Study at the HBJ pit yielding 745koz @
1.5g/t (capital + operating costs $790/oz).
Figure 1: HBJ pit
Source: Argonaut
…and grade and reserve upside
at Frog’s Leg
The 49% owned Frog's Leg mine is set to deliver >120koz pa. There appears to be upside
to the 5.5g/t budget grade via selective mining methods. The main risk is increasing rock
stress, however this is mitigated by the early installation of a seismic monitoring system,
the use of paste fill, appropriate mine design and ultimately local management experience
in the Kundana gold camp. JV partner La Mancha has commenced a 38,500m diamond
drilling program aimed at increasing the reserves 100-200m below the current Resource.
Figure 2: 2011 drilling
Source: AVO
10
Proposed merger with Anatolia Minerals
ANO and AVO have agreed to
merge in a deal that values
AVO at $3.10
Anatolia Minerals (TSX:ANO) and AVO have agreed to merge via Scheme of Arrangement.
ANO will pay 0.4453 of a share for each AVO share, valuing each AVO share at $3.10
(based on ANO’s closing price overnight).
The merger has the backing of both boards, and Pala, the largest shareholder of both
companies (20% of ANO and 23% of AVO). Ed Dowling, ANO’s CEO, will be CEO of the new
company.
ANO holds a strategic position
in the world class Tethyan
gold-copper belt…
ANO holds a strategic position in the world class Tethyan gold-copper belt, where >50Moz
has been discovered over the last decade. The Company is developing the 6Moz Çöpler
mine in Turkey with first production from a heap leach scheduled for Q4 2010. The initial
oxide production rate is 175kozpa, growing to 400kozpa by 2015 assuming pressure
leaching of refractory sulphide ore.
ANO also has a large exploration portfolio in Turkey, including the Karakartal and
Cevizlidere copper gold porphyry deposits near Çöpler.
Figure 3: Turkey - Tethyan Porphyry Belt
…where it is developing the
6Moz Çöpler mine in Turkey
Source: AVO / ANO
The merged group would have
a ~US$2b market capitalisation
ANO shareholders and AVO shareholders will hold ~50% each of Alacer Gold (the merged
group) respectively. Alacer Gold would have a combined market capitalisation of ~US$2b.
Forecast production will be 600koz in CY2013 and 800koz in CY2015 from 4 operations, and
combined Reserves will be 3.5Moz and Resources will approach 15Moz.
The natural consolidator
The ANO deal could battle to get off the ground in its current form. With AVO ‘in play’ better
value proposals could emerge.
The merger proposal aside,
AVO is the natural consolidator
of the Eastern Goldfields
However the proposed merger has deflected attention away from what attracted many in
the market to AVO, as the natural consolidator of the Eastern Goldfields.
The stock is inexpensive. Argonaut’s price target is $3.97 (1.3x NAV).
11
Equities Research
Avoca Resources
Analyst: Troy Irvin
BUY
Recommendation
Current Price
Target Price (1.3x NAV)
All Ords (XAO)
Sector
Issued Capital (m)
Market Cap (m)
Updated
$2.90
$3.97
4,740
Profit & Loss ($m) 30 June
Sales Revenue
Other Income
Operating Costs
Exploration Written Off
Corporate / Admin
EBITDA
Depn & Amort
EBIT
Finance Costs
Fair Value Loss on Derivatives
Operating Profit
Tax expense
Minorities
NPAT
Normalised NPAT
Cash Flow ($m)
Operating Cashflow
- Capex
- Exploration & Evaluation
- Asset purchases (+ asset sales)
Free Cashflow
- Dividends
+ Equity raised
+ Debt drawdown (- repaid)
- Other
Net Change in Cash
Cash at End Period
1.6
Balance Sheet ($m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
Production Summary
Trident (koz)
Chalice (koz)
Frog's Leg (koz)
South Kalgoorlie (koz)
Total
2010A
285.7
24.9
152.6
4.3
3.2
150.4
74.4
76.0
7.2
2.3
66.4
8.6
0.0
57.8
57.8
2011E
338.5
3.3
175.9
5.0
5.0
155.9
46.0
109.9
1.5
0.0
108.4
32.5
0.0
75.9
75.9
2012E
348.6
1.9
181.8
5.1
5.1
158.4
27.7
130.7
0.4
0.0
130.3
39.1
0.0
91.2
91.2
2013E
321.3
0.0
216.8
5.2
5.2
94.1
28.8
65.3
0.4
0.0
64.9
19.5
0.0
45.4
45.4
2010A
125.5
58.9
18.6
7.8
40.2
0.0
2.1
(30.2)
8.5
3.6
42.5
2011E
131.9
59.8
20.1
0.0
52.1
0.0
0.0
(40.0)
0.0
12.1
54.6
2012E
129.2
22.3
20.5
0.0
86.4
0.0
0.0
0.0
0.0
86.4
141.0
2013E
84.7
18.7
20.9
0.0
45.1
0.0
0.0
0.0
0.0
45.1
186.1
2010A
414.2
65.8
145.4
268.9
2011E
504.2
5.8
183.2
321.0
2012E
602.2
5.8
194.9
407.4
2013E
631.6
0.0
179.2
452.5
2010A
183
0
24
23
2011E
180
0
61
38
2012E
133
57
61
49
2013E
133
47
61
109
Financial Summary
Reported Earnings
Net Profit ($m)
EPS (cents)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS (cents)
EPS Growth (%)
PER (x)
Cashflow
Operating Cashflow ($m)
GCFPS (cents)
PCF (x)
Dividend
Dividend (cents)
Yield (%)
Franking %
2010A
Materials
302.4
$876.9
11-October-2010
2011E
57.8
18.0
15.2
Financial Ratios
2013E
91.2
27.5
9.6
45.4
13.7
19.3
75.9
22.9
26.8
11.6
91.2
27.5
20.2
9.6
45.4
13.7
(50.2)
19.3
125.5
39.2
7.4
131.9
39.8
7.3
129.2
38.9
7.4
84.7
25.5
11.4
0.0
0.0
100
0.0
0.0
100
0.0
0.0
100
0.0
0.0
0
57.8
18.0
(388.9)
15.2
#
2012E
75.9
22.9
11.6
2010A
2011E
2012E
2013E
Balance Sheet Ratios
Total Debt / Equity (%)
Interest Cover (x)
Acid test ratio (x)
24
10.5
0.5
2
75.1
1.3
1
318.9
2.1
0
159.3
2.7
Profitability Ratios
Net Profit Margin (%)
Return on Assets (%)
Return on Equity (%)
20.2
20.4
21.5
22.4
24.4
23.6
26.2
28.3
22.4
14.1
14.7
10.0
Valuation Summary
Trident
Chalice
Frog's Leg
South Kalgoorlie
Forwards
Corporate
Other Resources
Exploration
Listed Investments
Unpaid Capital
Tax Losses
Cash at 30 June
Debt
229
280
300
350
Gold Cash Cost (A$/oz)
Gold Price Realised (A$/oz)
650
1244
628
1401
607
1389
602
1333
Exchange Rate (USD:AUD)
594
0.88
772
0.93
782
0.90
0.90
Total @ 7.7% discount rate
Mt
6.0
2.5
2.0
g/t
4.2
5.0
1.6
Moz
0.80
0.40
0.11
Robert Reynolds
Rohan Williams
Stephanie Unwin
David Quinlivan
Jan Castro
A$m
354
91
182
116
0
-16
80
75
8
8
30
43
-46
A$/sh
1.17
0.30
0.60
0.38
0.00
-0.05
0.26
0.25
0.03
0.03
0.10
0.14
-0.15
925
3.06
731
Attributable Reserves & Resources
Directors
Reserves
Higginsville
Frog's Leg
South Kalgoorlie
Non-Executive Chairman
Managing Director
Non-Executive Director
Total
10.5
3.9
1.31
Resources
Higginsville
Frog's Leg
South Kalgoorlie
Mt
14.3
2.7
68.7
g/t
3.4
6.6
2.0
Moz
1.57
0.57
4.52
Substantial Shareholders
Total
85.7
2.4
6.66
Pala Investment Holdings
Colonial First State
EV / Reserve ($/oz)
EV / Resource ($/oz)
%
22.5%
5.4%
$673
$132
REALISED PRICE AND COST PROFILE
GOLD PRODUCTION
1600
400
350
1400
300
1200
250
A$/oz
200
150
1000
800
100
600
50
0
2010A
Chalice (koz)
2011E
South Kalgoorlie (koz)
2012E
Frog's Leg (koz)
400
2013E
2010A
Trident (koz)
2011E
Gold price
12
2012E
2013E
Cash cost
Research
Catalpa Resources
HOLD
11 October 2010
$2.14
$2.15
Current Price:
Valuation:
Ticker:
CAH
Sector:
Materials
162.8
Market Cap ($m):
348.3
Net Cash ($m):
-29.9
378.2
Volume game
Site Visit:
Catalpa Resources (CAH) is an emerging ~130koz pa producer across two gold mining
operations. The Company has attributable Reserves of 1.1Moz and Resources of 2Moz.
In April 2009, CAH poured first gold from the ~100koz pa Edna May open pit ahead of
schedule and on budget. Following an agreed merger with Lion Selection in December
52 wk High/Low:
$2.27
$1.18
0.43
2009, CAH inherited a 30% interest in the Cracow JV - managed by Newcrest Mining
(NCM). Cracow is a high grade, underground gold mine that produced ~102koz in FY10.
Key Metrics
10A
11F
12F
P/E (x)
62.5
17.7
10.5
EV/EBITDA (x)
81.0
6.4
4.8
22.3
168.0
177.5
EBITDA ($m)
4.7
59.5
78.9
NPAT ($m)
5.5
19.7
33.0
138.7
179.2
232.9
3.8
53.6
71.7
Financials:
Impact:
Neutral
Production ramp up at Edna May has been delayed by ~2 months following a minor pit
Revenue ($m)
wall slip in May and SAG mill repair in September.
Whilst cashflow positive over this
period, mining costs have been capitalised to date.
Short term catalysts include:
Net Assets ($m)
x
Op CF ($m)
Per Share Data:
3.4
12.1
20.3
DPS (cps)
0.0
0.0
0.0
Div Yield
0.0%
0.0%
0.0%
0.0
32.9
44.1
CFPS (cps)
production of ~93koz
x
EPS (cps)
Declaring commercial production (imminent) and ramping up to targeted FY11
Results from drilling beneath the Edna May open pit and maiden underground
resource (due early CY11)
View:
Neutral
Share Price Graph
$2.50
10.0
$2.00
8.0
$1.50
6.0
Edna May is a bulk tonnage, low grade operation. The hedge book offers margin
protection (~70% of production hedged at A$1,557/oz for 5 years) but the key is to
amortise the high fixed cost base over many tonnes as possible.
Project NPV is very sensitive to tonnes, grade and recoveries. Incremental tonnages
through organic or acquisitive means and/or displacing lower grade open pit feed with
higher grades (e.g underground) at Edna May coud add significant value.
$1.00
4.0
CAH has outlined an aggressive 5-year growth strategy to 500koz pa. Acquiring 100% of
$0.50
2.0
Cracow (CAH has a pre-emptive right) is an obvious short term target, especially in light
of NCM’s recent merger with Lihir Gold. Management’s considered and successful
$0.00
Oct-09
Jan-10
Apr-10
Jul-10
0.0
Oct-10
approach to developing and financing a ~1g/t orebody in Edna May should not go
unnoticed if the Company decided to expand upon its asset base through acquisition.
Recommendation:
Hold
CAH at present, is fairly priced in Argonaut’s view. At spot gold and fx the valuation rises
3% to $2.22.
Analysts:
Tim Serjeant
Troy Irvin
13
Overview
CAH is an emerging ~130koz
pa producer
Catalpa Resources’ (CAH) owns 100% in the Edna May Gold project in Westonia, WA (on
the eastern edge of Wheatbelt region) and a 30% interest in the Cracow Gold project in Qld
in JV with Newcrest Mining (NCM).
CAH has attributable Reserves of 1Moz and Resources of ~2Moz. The Company has cash of
~$35m and debt of $65m with 352koz hedged at ~A$1,557.50/oz (against Edna May only).
The Company commissioned the 2.8Mtpa Edna May open pit ahead of time and on budget
(~$92m capital cost). First gold was poured in April 2010.
Edna May – setting a platform
Edna May – a bulk tonnage,
1g/t open pit…
Edna May is a bulk tonnage, open pit operation optimised at A$1,250/oz at a 0.4g/t cut-off.
Former owner ACM mined the oxides and transitional zone up until the early 1990’s. CAH is
mining the sulphide ore to a pit depth of ~300m at a 2:1 stripping ratio.
Significant gold mineralisation is hosted in gneiss, with the ore body ~100m wide and
~800m long, dipping ~60 degrees north-west and plunging to the north.
First gold in April 2010
A pit wall slip in May delayed the production ramp up. An additional digger and associated
fleet was brought in to flatten pit wall angles and accelerate waste stripping. As such, CAH
has to date been processing lesser grade stockpiles and capitalising mining costs.
The process plant design and flow sheet provide for a conventional carbon in leach (CIL)
process. CAH purchased the Big Bell plant in 2007 for ~$2.5m, which has since been
refurbished and upgraded. Nameplate capacity is 2.8Mtpa, although with additional crushing
capacity and a tailings dam lift (scheduled in 2012 at cost of $12m) could lift output closer
to 3.2Mtpa.
Targeting ~100koz pa at
A$650/oz…
CAH is targeting ~100koz pa open pit production at cash costs of $650/oz (excluding
royalties, equates to ~$24/t).
In conjunction with open pit production from Edna May, CAH has commenced an
underground drilling program (~10,000m) targeting known, high grade vein structures.
…with underground potential
A maiden underground resource is scheduled for January 2011 with a view to progressing
mining studies. The opportunity for CAH is to displace a portion of lower grade (1.1 g/t)
open pit feed with high grade underground tonnes from FY13.
Figure 1: Edna May Longsection – Open pit an underground potential
Source: CAH
14
Cracow JV
30% interest in the Cracow JV
with NCM
CAH acquired a 30% interest and pre-emptive right in the Cracow JV (managed by NCM) in
December 2009 following an agreed merger with Lion Selection.
A high grade epithermal
system
Cracow is a ~2Moz epithermal system, with ~500koz produced since mining operations recommenced in November 2004. High grade gold mineralisation occurs in steeply dipping
low sulphidation epithermal quartz veins, accessed via decline and mined under contract
using open stoping mining methods. Plant capacity is being upgraded to ~550kt pa.
FY10 production was 102koz at ~$540/oz. $9m is being spent by the JV on exploration to
expand the current reserve (~230koz @ 7.7g/t) and resource (~1Moz @ 6.6g/t) base.
Figure 2: Cracow - Western flank in Long Section
Source: CAH
Targeting ~130koz pa and beyond
Aggressive growth strategy to
>200koz pa and beyond
Edna May open pit production combined with current Cracow output takes CAH to ~130koz
pa. Displacing open pit feed with higher grade tonnes from underground from FY13 could
add an additional 30-40koz pa.
Figure 3: Production profile
180
160
140
120
100
80
60
40
20
0
FY11
FY12
FY13
Edna May
FY14
Edna May u/g
FY15
FY16
FY17
C racow (30%)
Source: Argonaut, RRL
Summary
Fairly priced for now
Management’s considered and successful approach to developing and financing Edna May
should not go unnoticed if the Company decided to expand the asset base through
acquisition. However, in Argonaut’s view, CAH is fairly priced for now.
15
Equities Research
Catalpa Resources
Analyst: Tim Serjeant
HOLD
Recommendation
Current Price
Valuation
All Ords (XAO)
Sector
Issued Capital (m)
Market Cap (m)
Updated
$2.14
$2.15
4,740
Materials
162.8
$348.3
11-October-2010
Profit & Loss (A$m) 30 June
Sales Revenue
Other Income
Operating Costs (inc royalty)
Exploration
Corporate/Admin
EBITDA
Depn & Amort
EBIT
Gain/(Loss) on Sale of Assets
Change in value of gold contracts
Other
Net Interest Paid
Operating Profit
Tax expense/(benefit)
NPAT
Normalised NPAT
2010A
22.3
0.8
11.5
1.0
5.8
4.7
6.8
-2.1
0.0
0.0
-2.3
0.1
-4.5
-10.1
5.5
-2.2
2011E
168.0
1.8
103.8
1.4
5.2
59.5
25.4
34.1
0.0
0.0
0.0
6.0
28.1
8.4
19.7
19.7
2012E
177.5
3.2
95.2
1.4
5.2
78.9
27.0
52.0
0.0
0.0
0.0
4.8
47.2
14.2
33.0
33.0
2013E
217.2
5.3
111.2
1.4
5.2
104.7
32.1
72.7
0.0
0.0
0.0
3.0
69.7
20.9
48.8
48.8
Financial Summary
Reported Earnings
Net Profit ($m)
EPS ($)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS ($)
EPS Growth (%)
PER (x)
Cashflow
GCFPS ($)
PCF (x)
Dividend
Dividend ($)
Yield (%)
Franking (%)
2010A
2011E
2012E
2013E
5.5
0.03
62.5
19.7
0.12
17.7
33.0
0.20
10.5
48.8
0.30
7.1
-2.2
0.03
19.7
0.12
253.0
17.7
33.0
0.20
67.8
10.5
48.8
0.30
47.7
7.1
3.8
53.6
0.33
6.5
71.7
0.44
4.9
92.6
0.57
3.8
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
Cash Flow (A$m)
Operating Cashflow
- Capex (+asset sales)
- Exploration Expenditure
- Other
Free Cashflow
- Dividends
+ Equity raised
Net Change in Cash
Cash at End Period
2010A
3.8
-89.8
0.0
2.4
-83.6
0.0
20.8
62.7
2.8
35.1
2011E
53.6
-15.2
-3.0
0.0
35.4
0.0
0.0
-15.0
20.4
55.5
2012E
71.7
-24.2
-3.0
0.0
44.5
0.0
0.0
-15.0
29.5
85.0
2013E
92.6
-9.2
-3.0
0.0
80.4
0.0
0.0
-20.0
60.4
145.4
Financial Ratios
Interest Coverage (x)
2010A
2011E
2012E
2013E
44%
-
28%
5.7
15%
10.9
5%
24.5
-10%
-1%
-2%
12%
14%
11%
19%
18%
14%
22%
20%
15%
Balance Sheet (A$m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
222.0
61.2
83.3
138.7
2011E
251.8
49.9
72.6
179.2
2012E
291.1
34.9
58.2
232.9
2013E
361.8
14.9
38.8
323.0
Production Stats
Edna May (inc u/g)
Cracow (30%)
Production
Realised Price (A$/oz)
Cash Cost (inc royalty) (A$/oz)
Gross Cash Operating Margin (A$/oz)
2010A
9.8
22.1
31.9
1,427
0
1,427
2011E
82.5
29.8
112.3
1,496
921
575
2012E
90.7
29.8
120.5
1,473
769
704
2013E
119.6
29.8
149.5
1,453
728
725
Mt
Reserves & Resources
Reserves
Edna May
Cracow (30%)
TOTAL
27.3
0.3
27.6
g/t
1.1
7.7
1.2
koz
954
70
1,024
Resources
Edna May
Cracow (30%)
Greenfinch
TOTAL
47.9
1.4
4.0
53.3
1.0
6.6
1.0
1.2
1,530
305
130
1,965
62.5
Valuation Summary
Edna May
Edna May u/g
Cracow - 30%
Tax Losses
Exploration
Corporate
Unpaid Capital
Cash & Bullion
Debt
Total @ 7.7% Discount Rate
A$m
257
35
61
20
35
-34
5
35
-65
A$/sh
1.58
0.22
0.38
0.12
0.22
-0.21
0.03
0.22
-0.40
350
2.15
Directors
Name
Peter Maloney
Bruce McFadzean
Murray Pollock
Barry Sullivan
John Rowe
Graham Freestone
Position
Chairman
Managing Director
Nil
%
0.0%
0.0%
0
REALISED PRICE & COST PROFILE
GROUP PRODUCTION PROFILE
150
1,800
125
1,500
100
1,200
75
900
50
600
25
300
0
0
FY10A
FY11E
Edna May (inc u/g)
FY12E
FY10A
FY13E
FY11E
Cracow (30%)
16
FY12E
FY13E
Research
Focus Minerals
BUY
11 October 2010
$0.055
$0.080
Current Price:
Valuation:
Ticker:
FML
Sector:
Materials
2,865.5
Market Cap ($m):
157.6
Net Cash ($m):
10.0
The Coolgardie kid
Site visit:
FML’s Coolgardie project, 35km west of Kalgoorlie, delivered FY10 production of 62koz at
cash costs of $792/oz.
147.6
Four underground orebodies (Perseverance, Empress, Countess and Tindals) are
52 wk High/Low:
$0.08
$0.04
34.17
currently mined via a single decline. Underground ore is supplemented with additional
feed from ~1.5Mt of >1g/t surface stockpiles, and processed at the 1.2Mtpa Three Mile
Hill plant. FML is investigating numerous open pit opportunities across the consolidated
Key Metrics
10A
P/E (x)
EV/EBITDA (x)
11F
12F
14.5
5.6
5.0
6.1
2.7
2.4
tenement package.
The Mount, 4km from Widgiemoltha, is a potential 50-60koz pa underground operation.
There are three main lodes, developed to a maximum depth of 40m. A planned
Financials:
exploration will aim to increase the ozpvm to >1,000 via the identification of parallel
lodes. Barminco will start stripping the decline in November to accommodate larger
Revenue ($m)
70.4
131.9
149.5
EBITDA ($m)
24.3
54.2
61.5
trucks. Risks include consistency / continuity of lodes, and the requirement for selective
NPAT ($m)
10.9
28.1
31.7
mining practices.
Net Assets ($m)
99.7
117.9
140.7
Op CF ($m)
27.8
35.9
39.6
Mount. The FY11 exploration budget is $12m.
EPS (cps)
0.4
1.0
1.1
Impact:
DPS (cps)
0.0
0.0
0.0
Div Yield
0.0%
0.0%
0.0%
0.5
1.7
1.9
FY11 production guidance is 100koz at cash costs of $750/oz, including ~20koz from The
Per Share Data:
CFPS (cps)
Positive
The business plan has been significantly de-risked over the past 12 months. In August
2009, FML was hamstrung by three “evils” - debt, hedging, and toll milling. Two months
Share Price Graph
later the debt had been repaid and the hedge book retired. The toll milling of FML ore at
500.0
$0.08
Greenfields was eliminated when Three Mile Hill was commissioned in January 2010.
$0.07
400.0
$0.06
View:
$0.05
Neutral
300.0
FML has received little reward for its efforts with the stock cheap compared to peers,
$0.04
200.0
$0.03
especially given the strategic value of the plant.
The value proposition is clouded by the small reserve base, misunderstood mining and
$0.02
100.0
$0.01
exploration plans, and a sub-optimal capital structure (2.8b shares on issue) that invokes
“penny dreadful” status.
$0.00
Oct-09
Jan-10
Apr-10
Jul-10
0.0
Oct-10
Recommendation:
Buy
The stock is trading at a 31% discount to Argonaut’s valuation of $0.08. At spot gold and
fx the valuation rises to $0.085.
Analysts:
Troy Irvin
Tim Serjeant
17
Exorcism of three evils
Business plan de-risked…
…with debt, hedging, and toll
milling retired
FML has significantly de-risked its business plan over the past 12 months. When Argonaut
visited the Tindals Mining Centre in August 2009 FML was hamstrung by three “evils” debt, hedging, and toll milling. By early October 2009 the debt had been repaid and the
hedge book had been retired. And the need to toll mill FML ore at Greenfields was
eliminated when the 1.2Mtpa Three Mile Hill plant was commissioned on time and within
budget on the 10th January 2010.
Figure 1: Three Mill Hill plant
Source: Argonaut
The Three Mile Hill plant offers
strategic value
The Three Mile Hill plant reached its full operating capacity in June. Costs are approaching
a target of $20/t treated (actual $22/t at the time of the site visit). Availability and
recoveries are each running at >95%. The plant offers strategic value given the lack of
milling infrastructure in the wider Coolgardie region.
Improving production
Production has grown from
41koz in FY09…
Production has grown from 41koz in FY09 to 62koz in FY10. The FY11 target is 100koz at
cash costs of $750/oz. Near-term performance is underpinned by operational flexibility at
Tindals (four stopes), and ~1.5Mt of >1g/t surface stockpiles.
Figure 2: Tindals portal
…to a FY11 target of 100koz at
cash costs of $750/oz
Source: Argonaut
18
The Mount
Potential 50-60kozpa standalone operation at the Mount
The 8g/t Mount project provides a second operational centre at Widgiemooltha, 80km
south of Coolgardie. The Mount has rapidly advanced from an early exploration project to
a potential 50-60kozpa stand-alone operation.
15 parallel lodes open in all
directions and at depth
The Mount is made up of 15 parallel sub-vertical lodes, with just three (Main, German and
Fuchs) yielding ~500ozpvm. The deposit is open in all directions and at depth.
Figure 3: The Mount
Source: Argonaut
Limited exploration at depth
Opportunity to take advantage
of limited drilling below 200m
Although historic mining has been prolific in the formerly piecemeal 2.6Moz Coolgardie
gold belt, the opportunity for FML is to take advantage of limited deep drilling below 200m
(similar to the strategy Avoca has successfully applied to Higginsville).
Figure 4: Limited testing at depth
Source: FML
Summary
Value leakage stems from an
inefficient capital structure
FML has received little reward for its efforts with the stock cheap compared to peers.
Market concerns include the small reserve base, a mine plan that is difficult to articulate,
and the La Mancha toll treating arrangement (now expired).
However the biggest hurdle is arguably an inefficient capital structure (2.8b shares on
issue) that invokes “penny dreadful” status and ensures the stock remains captive to day
traders. A share consolidation would be well received.
A key step forward is to further
de-risk the mine plan by adding
to the 207koz reserve base
fx the valuation rises to $0.085. A key step forward is to further de-risk the mine plan by
adding ounces to the 207koz reserve base.
19
Equities Research
Focus Minerals
BUY
Recommendation
Current Price
Valuation
All Ords (XAO)
Sector
Issued Capital (m)
Market Cap (m)
Updated
$0.055
$0.080
4,740
Sales Revenue
Other Income
Exploration
Corporate/Admin
EBITDA
Depn & Amort
EBIT
Other
Net Interest Paid
Operating Profit
NPAT
Normalised NPAT
2010A
70.4
5.6
49.2
0.0
2.4
24.3
12.2
12.1
0.0
0.0
0.0
-1.2
10.9
0.0
10.9
10.9
2011E
131.9
0.0
69.9
5.4
2.4
54.2
14.1
40.2
0.0
0.0
0.0
0.0
40.2
12.1
28.1
28.1
2012E
149.5
0.0
80.2
5.4
2.4
61.5
16.1
45.4
0.0
0.0
0.0
0.0
45.4
13.6
31.7
31.7
2013E
165.8
0.0
90.0
5.4
2.4
68.0
17.8
50.2
0.0
0.0
0.0
0.0
50.2
15.1
35.1
35.1
Cash Flow (A$m)
Operating Cashflow
- Other
Free Cashflow
- Dividends
+ Equity raised
Net Change in Cash
Cash at End Period
2010A
27.8
-35.7
-6.3
0.2
-13.9
0.0
8.3
-8.5
-14.1
6.4
2011E
35.9
-10.0
-12.0
0.0
13.9
0.0
0.0
0.0
13.9
20.3
2012E
39.6
-10.0
-12.0
0.0
17.6
0.0
0.0
0.0
17.6
37.9
2013E
42.9
-10.0
-12.0
0.0
20.9
0.0
0.0
0.0
20.9
58.8
Balance Sheet (A$m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
115.3
0.1
15.6
99.7
2011E
133.8
0.0
15.9
117.9
2012E
157.0
0.0
16.3
140.7
2013E
183.9
0.0
16.7
167.2
Production Stats
Three Mile Hill (koz)
2010A
62.3
2011E
93.7
2012E
107.6
2013E
118.4
62.3
1,169
831
338
93.7
1,401
756
645
107.6
1,389
745
644
118.4
1,400
760
640
Total Production
Reserves
0.2
2.3
2.5
g/t
3.8
2.5
2.6
koz
24
184
208
0.3
12.3
11.1
23.6
5.6
2.2
2.9
2.6
48
881
1,041
1,970
Mt
Proven
Probable
TOTAL
Resources
Measured
Indicated
Inferred
TOTAL
Materials
2,865.5
$157.6
11-October-2010
Financial Summary
Reported Earnings
Net Profit ($m)
EPS ($)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS ($)
EPS Growth (%)
PER (x)
Cashflow
GCFPS ($)
PCF (x)
Dividend
Dividend ($)
Yield (%)
Franking (%)
2010A
2011E
2012E
2013E
10.9
0.00
14.5
28.1
0.01
5.6
31.7
0.01
5.0
35.1
0.01
4.5
10.9
0.00
14.5
28.1
0.01
158.4
5.6
31.7
0.01
12.9
5.0
35.1
0.01
10.7
4.5
27.8
0.00
11.1
35.9
0.02
3.3
39.6
0.02
3.0
42.9
0.02
2.7
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
Financial Ratios
2010A
2011E
2012E
2013E
0%
-
0%
-
0%
-
0%
-
15%
10%
11%
21%
30%
24%
21%
29%
23%
21%
27%
21%
Valuation Summary
Three Mill Hill (inc The Mount)
Nepean
Exploration
Tax Losses
Corporate
Unpaid Capital
Cash
Debt
A$m
153
10
62
0
-13
6
10
0
A$/sh
0.05
0.00
0.02
0.00
0.00
0.00
0.00
0.00
229
0.080
Board and Management
Name
Don Taig
Campbell Baird
Chris Hendricks
Phil Lockyear
Position
Executive Chairman
Chief Executive Officer
Nil
%
140
6.0
1,500
120
1,250
5.0
100
1,000
4.0
80
750
60
3.0
500
40
2.0
250
20
0
1.0
0
FY10A
FY11E
Three Mile Hill (koz)
FY12E
FY10A
FY13E
Head Grade (g/t)
FY11E
20
FY12E
FY13E
Research
Integra Mining
HOLD
11 October 2010
$0.64
$0.49
Current Price:
Valuation:
Ticker:
IGR
Sector:
Materials
755.8
Market Cap ($m):
483.7
Net Cash ($m):
15.3
Enjoying a Majestic run
Site Visit:
Integra Mining (IGR) is the most recent Western Australian gold producer, pouring first
gold from the Randalls project in September 2010.
468.4
IGR is ramping up production to ~90koz pa at sub $600/oz cash costs.
The Phase 2
target of ~140koz pa envisages a 50% increase in plant capacity to 1.2Mtpa, with
52 wk High/Low:
$0.65
$0.22
3.64
additional feed from underground production sources.
Key Metrics
P/E (x)
EV/EBITDA (x)
10A
11F
12F
-22.8
33.9
13.4
-189.5
16.9
7.6
Impact:
Positive
The Salt Creek open pit underpins production for the first 3 years of production.
Financials:
IGR had previously only focused on open pit production sources for Phase 1
Revenue ($m)
0.0
77.0
117.8
EBITDA ($m)
-2.5
27.7
61.9
NPAT ($m)
-21.2
14.3
36.0
Net Assets ($m)
105.2
111.7
155.9
-4.3
27.9
52.1
development. However, systematic drilling to date of the BIF hosted Maxwells, Santa and
Cock-eyed Bob deposits has confirmed depth extensions (typically 200m) below current
resource estimates.
Additional catalysts include:
Op CF ($m)
x
Successfully negotiating the commissioning phase
x
Resource upgrade scheduled for late CY10, which will include depth extentions to
Per Share Data:
EPS (cps)
0.2
1.9
4.8
DPS (cps)
0.0
0.0
0.0
Div Yield
0.0%
0.0%
0.0%
3.7
6.9
CFPS (cps)
0.0
Maxwells, Cock-eyed Bob and Santa as well as a maiden resource for Majestic
x
Ongoing exploration newsflow – particularly from Majestic where IGR are spending
$8m of $15m FY11 exploration budget
Share Price Graph
50.0
$0.70
View:
Neutral
$0.60
40.0
IGR has come along way since Argonaut last visited site in June 2008. The mine set-up
$0.50
and plant layout impressed.
30.0
$0.40
The opportunity to displace open pit feed in the later stages of Phase 1 development with
$0.30
20.0
$0.20
higher grade underground material is significant.
Although the Phase 1 development plan buys IGR time, the longer term mine plan
10.0
$0.10
requires further evaluation. With a track record of exploration success, expansion to a
Phase 2 target of ~140koz pa is plausible.
$0.00
Oct-09
Jan-10
Apr-10
Jul-10
0.0
Oct-10
Recommendation:
Hold
Pending resource upgrades and ongoing newsflow from drilling the Majestic discovery
should go someway to IGR justifying the premium it’s currently awarded (relative to
peers). Argonaut values to stock at $0.49, which rises 6% to $0.52 under spot gold and
fx assumptions.
Analysts:
Tim Serjeant
Troy Irvin
21
Overview
IGR is the
producer
latest
WA
gold
…pouring
first
gold
from
Randalls in September 2010
Integra Mining (IGR) is the most recent Western Australian gold producer, having recently
commissioned the 100% owned Randalls project located ~60km south-east of Kalgoorlie.
Following a revised feasibility study in July 2009, IGR has proceeded with a staged
development of Randalls. Phase 1 is slated to deliver ~90koz pa at ~$600/oz cash costs,
predominantly from two open pits over the first four years. The Phase 2 target of ~140koz
pa envisages a 50% increase in plant capacity to 1.2Mtpa, with additional feed from
underground production sources.
IGR has Reserves of 320koz and Resources of 1.8Moz. At 30 June 2010, the Company had
~$30m cash and debt drawn to $15m with 92koz hedged at $1,359/oz.
Randalls – the flagship
Targeting
90koz
<A$600/oz…
pa
at
The Phase 1 production target of 90koz pa at a diluted head grade of 3.1 g/t is based on
development of the Salt Creek and Maxwells open pits.
Salt Creek was virgin discovery in 2006, sitting beneath 30m of cover. IGR has since
defined a Reserve of 2.6Mt @ 2.7 g/t (for 224koz) over a ~1km strike to depth of 150m.
Gold mineralisation is predominantly hosted within a quartz-magnetic rich dolerite, although
gold does report to a shale-unit that sits close to surface outside the Reserve base. This
material is being stockpiled and will be processed at a later date.
…from two open pits…
Maxwells (which sits 15km south east of Salt Creek) was mined by General Gold in 1990’s.
IGR is proposing to mine a small, but high grade extension to the existing pit, having
defined a Reserve of 560kt @ 5.2g/t for 93koz. Gold mineralisation is associated with
banded-iron formation (BIF) hosted quartz veins typically 2-5m wide.
A conventional carbon-in-pulp (CIP) processing facility is located at Salt Creek. The former
New Celebration mill has been downsized and refurbished by GR Engineering. Nameplate
capacity is 0.8Mtpa, although minimal capital is required to lift output closer to the Phase 2
target of 1.2Mtpa (installation of another ball mill and elution tank).
Figures 1 & 2: Salt Creek and Maxwells open pits – September 2010
Source: Argonaut
Underground opportunities to drive production expansion
… with potential to add ounces
from underground sources
Previously IGR had only focused on open pit production sources for Phase 1 development.
However, systematic drilling to date of the BIF hosted Maxwells, Santa and Cock-eyed Bob
deposits has confirmed depth extensions (typically 200m) below current resource
estimates.
Although largely conceptual at this stage, IGR plans to displace open pit feed in the later
stages of Phase 1 development with higher grade underground material from Cock-eyed
Bob and Santa. Maxwells is anticipated to provide incremental tonnage (as well as
additional open pit sources) to justify the Phase 2 plant expansion to 1.2Mtpa.
22
Majestic
Spending $8m on the Majestic
discovery in FY11
The Majestic discovery (IGR 85%, Newcrest 15%) is a large (2km x 2.5km), shallow,
anomolous intrusion with widespread gold enrichment.
Although early stage, it shapes as a future open pit production source 22km north of the
processing plant. IGR is devoting ~$8m of its $15m FY11 exploration budget to the project,
with 2 aircore, 2 RC and a diamond rig currently on site.
Figures 3 & 4: Majestic – Cross Section & Gravity data
Source: IGR
Phase 2 production contingent on exploration upside
Exploration will determine the
tangibility of Phase 2 140koz
pa target
Phase 1 production provides IGR with an achievable platform on which to grow. However,
the longer term mine plan requires further evaluation. With a track record of exploration
success, expansion to a Phase 2 target of ~140koz pa is plausible.
Figure 5: Modelled production profile
140
120
100
80
60
40
20
0
FY11
FY12
FY13
Open pit
FY14
FY15
Underground
FY16
FY17
Source: Argonaut
Summary
Attracting
a
premium
exploration potential
for
Pending resource upgrades and ongoing newsflow from drilling the Majestic discovery
should go someway to IGR justifying the premium it’s currently awarded (relative to peers).
23
Equities Research
Integra Mining
HOLD
Recommendation
Current Price
Valuation
All Ords (XAO)
Sector
Issued Capital (m)
Market Cap (m)
Updated
$0.64
$0.49
4,740
Materials
755.8
$483.7
11-October-2010
Sales Revenue
Other Income
Exploration
Corporate/Admin
EBITDA
Depn & Amort
EBIT
Other
Net Interest Paid
Operating Profit
NPAT
Normalised NPAT
2010A
0.0
1.4
0.0
0.1
3.9
-2.5
0.4
-2.8
0.0
-22.7
-3.9
0.1
-29.5
-8.3
-21.2
-21.2
2011E
77.0
1.0
39.5
6.8
4.0
27.7
4.8
22.9
0.0
0.0
0.0
2.6
20.4
6.1
14.3
14.3
2012E
117.8
1.0
49.3
3.6
4.0
61.9
8.6
53.3
0.0
0.0
0.0
1.9
51.5
15.4
36.0
36.0
2013E
125.1
1.7
55.7
3.6
4.0
63.5
9.3
54.1
0.0
0.0
0.0
-0.3
54.4
16.3
38.1
38.1
Financial Summary
Reported Earnings
Net Profit ($m)
EPS ($)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS ($)
EPS Growth (%)
PER (x)
Cashflow
GCFPS ($)
PCF (x)
Dividend
Dividend ($)
Yield (%)
Franking (%)
2010A
2011E
2012E
2013E
-21.2
-0.03
-22.8
14.3
0.02
33.9
36.0
0.05
13.4
38.1
0.05
12.7
-21.2
0.00
14.3
0.02
867.6
33.9
36.0
0.05
152.6
13.4
38.1
0.05
5.7
12.7
-4.3
0.00
27.9
0.04
17.4
52.1
0.07
9.3
50.0
0.07
9.7
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
Cash Flow (A$m)
Operating Cashflow
- Other
Free Cashflow
- Dividends
+ Equity raised
Net Change in Cash
Cash at End Period
2010A
-4.3
-41.3
-19.6
-1.7
-66.9
0.0
66.5
12.2
11.8
30.3
2011E
27.9
-39.5
-15.0
0.0
-26.6
0.0
0.0
10.0
-16.6
13.7
2012E
52.1
-7.0
-8.0
0.0
37.1
0.0
0.0
-20.0
17.1
30.8
2013E
50.0
-17.0
-8.0
0.0
25.0
0.0
0.0
-15.0
10.0
40.8
Financial Ratios
2010A
2011E
2012E
2013E
12%
-
22%
8.9
3%
28.2
-5%
-200.4
-2%
-20%
19%
13%
13%
31%
27%
23%
30%
25%
20%
Balance Sheet (A$m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
155.0
12.2
49.8
105.2
2011E
175.2
25.0
63.6
111.7
2012E
200.4
5.0
44.5
155.9
2013E
218.9
-10.0
30.5
188.4
Production Stats
Production
2010A
-
2011E
55.6
1,379
706
672
2012E
85.8
1,373
574
799
2013E
93.5
1,339
595
743
Mt
2.6
0.6
3.2
g/t
2.6
5.2
3.1
koz
224
93
317
7.1
10.8
2.0
19.9
2.2
3.3
2.0
2.8
500
1,130
130
1,760
328.2
Valuation Summary
Randalls
Hedging
Exploration
Tax Losses
Corporate
Unpaid Capital
Cash & Bullion
Debt
A$m
271
-2
92
18
-27
3
30
-15
A$/sh
0.36
0.00
0.12
0.02
-0.04
0.00
0.04
-0.02
371
0.49
Reserves
Salt Creek
Maxwells
TOTAL
Resources
Aldiss
Randalls
Mt Monger
TOTAL
Directors
Name
Graeme Beissel
Chris Cairns
Peter Ironside
Rowan Johnston
Richard Maltman
Position
Chairman
Managing Director
Executive Director
Director Operations
Acorn
Baker Steel
JP Morgan
%
8.7%
7.6%
5.5%
4.0
100
1,500
3.5
1,250
80
3.0
1,000
2.5
60
2.0
40
750
1.5
500
1.0
20
250
0.5
0
0
0.0
FY11E
FY12E
Production
FY11E
FY13E
FY12E
Head Grade (g/t)
24
FY13E
Research
Ramelius
HOLD
11 October 2010
$0.78
$0.84
Current Price:
Valuation:
Ticker:
RMS
Sector:
Materials
291.2
Market Cap ($m):
227.1
Net Cash ($m):
55.0
Australia’s highest grade gold mine
Site visit:
Ramelius (RMS) operates Australia’s highest grade gold mine at Wattle Dam, 25km south
west of Kambalda.
172.1
FY10 production was 60koz at cash costs of $482/oz, with an average head grade of
52 wk High/Low:
$0.92
$0.36
1.24
Key Metrics
10A
P/E (x)
11.3
11F
12F
5.8
5.4
24g/t. The ore is trucked 65km to the RMS’s 180ktpa Burbanks plant, 10km south of
Coolgardie. 60-70% of the gold is recovered via the gravity circuit.
The key technical risk is resource / reserve estimation. Wattle Dam is an atypical
Goldfields deposit with a large amount of coarse free gold making grade modelling
3.7
2.6
2.4
difficult.
10A
11F
12F
Revenue ($m)
61.3
112.2
152.9
hosted in challenging ultramafic rocks.
EBIT ($m)
28.7
56.4
60.4
NPAT ($m)
20.2
39.5
42.3
110.3
153.3
167.2
38.9
73.1
79.6
10A
11F
12F
EV/EBITDA (x)
The mining team is maximising mining recoveries and minimising dilution given the ore is
Financials:
Net Assets ($m)
Op CF ($m)
Although the mine life is limited (based on February 2010 resources of 131koz), high
grade drill data suggests plunge repetitions are likely at depth e.g. 8m @ 91g/t from
155m and 15m @ 27g/t from 159m.
Impact:
Per Share Data:
14.5
Positive
EPS (cps)
6.5
13.6
DPS (cps)
0.0
0.0
0.0
Strong free cash flow from Wattle Dam coupled with a $40m gain from “losing” the
Div Yield
0.0%
0.0%
0.0%
takeover battle with Avoca for Dioro Exploration (DIO) enabled RMS to acquire
CFPS (cps)
12.6
25.1
27.3
Harmony’s Mount Magnet gold project for $40m and deliver a capital return of 5cps
($14.5m).
Share Price Graph
$1.00
25.0
The Company’s growth plans are centred on Mount Magnet. The acquisition included
Resources of a 3.3Moz (modest purchase price of $12/oz), Reserves of 474koz and a
$0.90
$0.80
20.0
$0.70
1.7Mtpa mill. Historic production is 5.6Moz since 1891.
RMS has set a production target at Mount Magnet of 100kozpa from open pits following
$0.60
15.0
an intensive $5m drill campaign and a ~$35m investment on the plant and pre-stripping.
$0.50
$0.40
10.0
Including Mount Magnet RMS offers 3.5Moz Resources and 474koz Reserves.
$0.30
$0.20
5.0
View:
$0.10
$0.00
Oct-09
Feb-10
Jun-10
0.0
Oct-10
Positive
RMS offers excellent leverage to the gold price with the robust balance sheet reducing
downside risk. Price catalysts include extensions to the Wattle Dam mine life and drilling
success at Mount Magnet.
Recommendation:
Hold
fx the valuation rises to $0.97.
Analysts:
Troy Irvin
Tim Serjeant
25
Australia’s highest grade gold mine
In FY10 Wattle Dam delivered
60koz at cash costs of $482/oz
Wattle Dam is a tidy, shallow (maximum depth ~200m) underground gold mine that
delivered 60koz at cash costs of $482/oz in FY10.
The bottom-up longitudinal panel and fill mining method is working well in the 12m wide
ultramafic-hosted ore body. Ore extraction is appropriately focused on quality not
quantity, the goal being to maximise mining recovery given high grades (June Q 24g/t).
The ore is trucked 65km to the 180ktpa Burbanks plant.
The current mine plan features two stoping blocks: A (80% stoped out) and B (6-8 months
fully developed ore).
Estimation risk but plunge repititons likely
A high “nugget factor” makes
resource estimation
challenging
Wattle Dam is an atypical Goldfields deposit with large amount of coarse free gold. The
high “nugget factor” makes sampling and resource / reserve estimation challenging.
Although the mine life is limited (based on February 2010 resources of 131koz), ongoing
diamond drilling suggests plunge repetitions are likely at depth.
Figure 1: Wattle Dam deep drilling
Although the mine life is
limited, drilling suggests
plunge repetitions at depth
Source: RMS
Decline development is
underway to access a third
stoping block
A resource estimate is imminent for C block. At the time of Argonaut’s visit decline
development had just recommenced from the bottom of B block.
Figure 2: Decline face approaching C block
Source: Argonaut
26
Growth plans centred on Mount Magnet
Mount Magnet includes
resources of 3.3Moz, reserves
of 474koz and a 1.7Mtpa mill
Mount Magnet is located 600km north east of Perth on the sealed Great Northern Highway.
The project, which includes the historic Hill 50 gold mine (mined to 1,500m below surface)
and covers 225km², has produced 5.6Moz since its discovery in 1891.
RMS intends to conduct a major drilling program aimed at:
A decision to recommence
production could be made as
soon as April 2011
x
Increasing the open-cut gold resource position and mineable reserves especially in the
Galaxy mining area, which includes the Saturn, Mars and Perseverance open pits
(current resource 1.4Moz)
x
Testing the underground resource potential below current pits where high grade ore
shoots have been identified
Figure 3: Mount Magnet upside – Saturn pit
Source: RMS
A decision to recommence production could be made as soon as April 2011.
200kozpa by FY14
RMS has set an aggressive
conceptual production target of
200kozpa by FY14
RMS has set an aggressive conceptual production target of 200kozpa by FY14 (pending
exploration success). This assumes 50koz from Wattle Dam and 150koz from Mount
Magnet.
Summary
RMS offers excellent leverage to the gold price with the robust balance sheet reducing
downside risk.
Price catalysts include
extensions to the Wattle Dam
mine life and drilling success at
Mount Magnet
Price catalysts include extensions to the Wattle Dam mine life and drilling success at
Mount Magnet.
The stock is trading at a 7% discount to Argonaut’s valuation of $0.84. At spot gold and fx
the valuation rises to $0.97.
27
Equities Research
Ramelius Resources
Analyst: Troy Irvin
Recommendation
Current Price
Valuation
All Ords (XAO)
HOLD
2010A
61.3
9.8
22.5
9.5
0.7
8.7
47.1
18.5
28.7
0.0
0.0
28.7
8.5
0.0
20.2
20.2
2011E
112.2
4.5
39.1
7.6
5.0
0.0
65.0
8.6
56.4
0.0
0.0
56.4
16.9
0.0
39.5
39.5
2012E
152.9
5.3
73.3
7.7
5.1
0.0
72.1
11.7
60.4
0.0
0.0
60.4
18.1
0.0
42.3
42.3
2013E
202.2
8.1
112.8
7.9
5.2
0.0
84.4
15.7
68.7
0.0
0.0
68.7
20.6
0.0
48.1
48.1
Operating Cashflow
- Capex
- Asset Purchases (+ Asset Sales)
Free Cashflow
- Dividends
+ Equity Raised
+ Debt Drawdown (- Repaid)
+ Other
Net Change in Cash
Effect of Exchange Rates
Cash at End Period
2010A
38.9
23.9
3.4
-42.5
54.1
0.0
0.0
0.0
-0.6
53.6
0.0
80.2
2011E
73.1
8.1
7.6
14.6
42.9
0.0
0.0
0.0
0.0
42.9
0.0
123.2
2012E
79.6
58.0
7.7
0.0
13.9
0.0
0.0
0.0
0.0
13.9
0.0
137.1
2013E
89.4
13.6
7.9
0.0
67.9
0.0
0.0
0.0
1.0
68.9
1.0
206.0
Balance Sheet ($m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
130.7
0.0
20.4
110.3
2011E
181.3
0.0
28.0
153.3
2012E
249.9
0.0
82.7
167.2
2013E
325.8
0.0
90.7
235.1
Gold Production Summary
2010A
61
0
2011E
80
0
2012E
60
50
2013E
51
101
2011E
51
101
61
0
482
170
1262
80
0
488
553
1401
110
152
662
692
1389
744
0
1333
152
303
80
453
Sector
Issued Capital (m)
Market Cap (m)
Updated
$0.78
$0.84
4,740
Sales Revenue
Other Income
Operating Costs
Exploration Expense
Corporate/Admin
Change in inventories
EBITDA
D&A
EBIT
Finance Expenses
Impairment of Assets
Operating Profit
Tax Expense
Minorities
NPAT
Normalised NPAT
Cash Flow ($m)
Wattle Dam (koz)
Mount Magnet (koz)
Total Gold
Brazil Iron Ore (kt)
Gold Total Cost (US$/oz)
Financial Summary
Reported Earnings
Net Profit ($m)
EPS (cents)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS (cents)
EPS Growth (%)
PER (x)
Cashflow
GCFPS (cents)
PCF (x)
Dividend
Dividend (cents)
Yield (%)
Franking %
Materials
291.2
$227.1
11-October-2010
2010A
5.9
Financial Ratios
Interest Cover (x)
Acid test ratio (x)
2011E
2012E
20.2
6.5
11.3
39.5
13.6
5.8
42.3
14.5
5.4
2013E
48.1
16.5
4.7
20.2
6.5
39.5
13.6
42.3
14.5
48.1
16.5
11.3
5.8
5.4
4.7
38.9
12.6
6.2
73.1
25.1
3.1
79.6
27.3
2.9
89.4
30.7
2.5
0.0
0.0
100
0.0
0.0
100
0.0
0.0
100
0.0
0.0
100
2010A
2011E
2012E
2013E
0.0
0
6.2
0.0
0
3.6
0.0
0
3.2
0.0
0
3.7
32.9
56.8
18.3
35.2
97.0
25.8
27.7
53.6
25.3
23.8
57.4
20.5
Valuation Summary
Wattle Dam
Mount Magnet
Exploration
Investments
Forwards
Corporate
Unpaid Capital
Cash Estimate
Debt
1300 Total @ 7.7% discount rate
A$m
98.9
79.9
20.0
0.0
0.0
-8.5
0.0
55.0
0.0
A$/sh
0.34
0.27
0.07
0.00
0.00
-0.03
0.00
0.19
0.00
245
0.84
453
553
1300
Directors
Reserves
Mount Magnet
Mt
8.9
Total
g/t
1.7
Au (koz)
474
8.9
1.7
474
Resources
Mount Magnet
Wattle Dam
Mt
50.9
0.2
g/t
2.0
18.0
Au (koz)
3345
131
Total
51.1
2.1
3476
EV / Reserve($/oz)
Robert Kennedy
Ian Gordon
Reg Nelson
Kevin Lines
Joe Houldsworth
Chairman
Chief Executive Officer
Sprott Asset Management
Beach Petroleum
$363
$50
%
16.5%
7.3%
GOLD PRODUCTION
160
1500
140
1200
120
900
A$/oz
koz
100
80
60
600
40
300
20
0
0
2010A
2011E
Mount Magnet
2012E
2013E
2010A
Wattle Dam
2011E
Gold price
28
2012E
2013E
Cash cost
Research
Regis Resources
HOLD
11 October 2010
$1.73
$1.67
Current Price:
Target Price:
Ticker:
RRL
Sector:
Materials
423.9
Market Cap ($m):
731.2
Net Cash ($m):
-30.5
761.6
Putting the band back together
Site Visit:
Regis Resources (RRL) has hit the ground running, commissioning the Moolart Well
project, on time and on budget. First gold pour was achieved in August 2010.
Mining is reconciling well, with gold mineralisation hosted predominantly within a shallow
laterite ‘blanket’ that requires no blasting. The 2Mtpa plant has consistently rated 10-
52 wk High/Low:
$1.75
$0.45
0.94
20% above nameplate design while mill availability and recoveries are meeting feasibility
estimates. RRL is forecasting 90-100koz pa production at ~A$560/oz cash costs.
Key Metrics
10A
11F
12F
-30.9
21.1
17.6
-146.6
13.3
11.1
Revenue ($m)
0.0
105.7
129.9
EBITDA ($m)
-5.2
57.3
68.9
-18.8
34.6
41.5
Net Assets ($m)
81.8
133.2
134.8
Op CF ($m)
-3.5
62.4
74.0
P/E (x)
EV/EBITDA (x)
Financials:
Impact:
Positive
Whilst Moolart Well provides a stable production base, the step change for RRL has been
NPAT ($m)
the 1.2Moz Garden Well discovery, located 35km further south.
37,000 m of drilling since discovery in November 2009 has defined mineralisation over an
~1km strike length and depth of 180m. The ore body remains open along strike to the
south and at depth.
RRL are progressing Garden Well with the intention of it becoming a standalone, second
mining operation. First gold could be in early FY13, with capital and operating costs
Per Share Data:
expected to be similar to that at Moolart Well.
EPS (cps)
-5.6
8.2
9.8
DPS (cps)
0.0
0.0
0.0
Div Yield
0.0%
0.0%
0.0%
0.0
14.7
17.5
CFPS (cps)
Share Price Graph
$1.80
20.0
The Company is targeting a reserve build to ~2Moz (currently 762koz) over the next 12
months. This appears achieveable given:
x
An initial Reserve for Garden Well is due December Q 2010
x
Conversion of Moolart Well oxides from Resource (859koz) into Reserve is only 17%
due to a lack of drilling density
$1.60
16.0
$1.40
$1.20
x
A further 1.2Moz in Resources (across 7 deposits) all on granted mining leases that
are yet to be rationalised
12.0
$1.00
$0.80
8.0
$0.60
$0.40
4.0
$0.20
$0.00
Oct-09
View:
Positive
Converting the Garden Well discovery into a second mining operation will provide RRL
with an enviable organic growth profile, catapulting it beyond the crowded ranks of the
Jan-10
Apr-10
Jul-10
0.0
Oct-10
100-150koz pa producers.
Recommendation:
Hold
The RRL story has justifiably garnered strong market support, given the demonstrated
track record of management and operating team in developing gold mines in Australia
and abroad (most recently with Equigold).
Whilst retaining a positive qualitative view on RRL, we struggle to derive a valuation that
Analysts:
Tim Serjeant
Troy Irvin
justifies a BUY recommendation. At spot gold and fx our target price rises to $1.77.
29
Overview
Regis Resources’ (RRL) Duketon Gold Project lies ~350km N-NE of Kalgoorlie near Laverton.
Recently joined the producer
ranks
The Company has recently commissioned the ~90koz pa Moolart Well project, on time and
on budget (~$73m capital cost). First gold was poured in August 2010. The Garden Well
discovery, ~35km south of Moolart Well is shaping up as RRL’s second operation.
RRL has current Reserves of 762koz and Resources of ~3.6Moz. At 30 June 2010, the
Company had cash of $10m and debt drawn to $15m ($45m available) with 190koz hedged
at ~A$1,350/oz. Newmont owns ~15%, which stems back to 2002 when Normandy
(subsequently bought by Newmont) held security over the Duketon tenements.
Management has built an
enviable track record
The core management group, led by Chairman Nick Giorgetta, Managing Director Mark
Clark and Operations Director Morgan Hart, has a demonstrated track record in developing
and operating gold assets in Australia and abroad - most recently with Equigold (EQI),
purchased by Lihir Gold (LGL) in June 2008 for ~$850m.
Moolart Well – Hitting the ground running
Argonaut’s recent site visit to Duketon confirms the solid start RRL has made to life as a
producer.
RRL has hit the ground running
at Moolart Well
Open pit mining is contracted to MACA. No blasting is required in the shallow laterite
‘blanket’ which sits ~5m below surface and forms the bulk of the current reserve base. The
2Mtpa plant has consistently rated 10-20% above nameplate design while mill availability
and recoveries are meeting feasibility estimates. Operating cash costs are forecast to be
A$562/oz (inc royalties).
Figures 1 & 2: Mining at Moolart Well and the Duketon plant
Source: Argonaut
Garden Well – A standalone, second mining operation
1.2Moz Garden Well discovery
Whilst Moolart Well provides a stable production base, the step change for RRL has been the
1.2Moz (19.6Mt @ 1.9 g/t) Garden Well discovery, located 35km south of the current plant.
RRL commissioned a 16-hole Aircore drilling program in November 2009 to follow up
previous anomalous results. The two discovery holes were 73m @ 3.61g/t from 51m and
69m @4.26g/t from 42m.
Following ~37,000m of drilling since (53 RC, 314 aircore holes), mineralisation has been
defined over a ~1km strike length and depth of 180m. The orebody remains open along
strike to the south and at depth
Shallow oxide gold mineralisation has been defined as a broad ~70m wide zone, below 2530m of cover, and dipping moderately to the east. Better grades are seen in the upper
portion of the oxide zone.
Deeper RC drilling indicates the gold mineralisation continues into fresh rock (sheared,
mixed ultramafic and sediments) although grades are lower than present in the oxides.
30
Figure 3: Garden Well – Discovery Line in Cross Section
Source: RRL
A second standalone operation
– first gold FY13
RRL are progressing Garden Well with the intention of it becoming a standalone, second
mining operation. An initial reserve is targeted for the end of CY10, with full feasibility and
financing by the end of June 2011. Allowing for a 12-month construction phase, first gold
from Garden Well could be in early FY13.
Argonaut models ~900koz production from Garden Well (75% conversion) supplemented by
Erlistoun (275koz in Resource) ~10km further south. We envisage capital and operating
costs similar to that at Moolart Well (~$70m capex and $562/oz cash costs).
Platform to >200koz pa production and 2Moz in Reserve
Catapulted beyond the crowded
ranks of 100-150koz producers
Converting the Garden Well discovery into a second mining operation provides RRL with an
enviable organic growth profile and catapults it beyond the crowded ranks of the 100150koz pa producers
300
250
200
150
100
50
0
FY11
FY12
Moolart Well
FY13
FY14
FY15
Garden Well
FY16
FY17
Source: Argonaut, RRL
Targeting reserve build to
2Moz
Targeted reserve growth to 2Moz (currently 762koz) over the next 12 months appears
achieveable. An initial Reserve for Garden Well is due December Q 2010. Further growth
can be realised through the conversion of Moolart Well oxides from Resource (859koz) into
Reserve (only 17% currently) as well as rationalising the additional ~1.2Moz that sit in the
resource base.
Summary
Whilst Argonaut retains a positive qualitative view on RRL, we struggle to derive a valuation
above current trading levels to warrant a BUY recommendation.
31
Equities Research
Regis Resources
HOLD
Recommendation
Current Price
Target Price (1.2x NPV)
All Ords (XAO)
Sector
Issued Capital (m)
Market Cap (m)
Updated
$1.73
$1.67
4,740
Sales Revenue
Other Income
Exploration
Corporate/Admin
EBITDA
Depn & Amort
EBIT
Other
Net Interest Paid
Operating Profit
NPAT
Normalised NPAT
2010A
0.0
1.3
0.0
0.1
6.4
-5.2
0.0
-5.2
0.0
0.0
-13.6
0.0
-18.8
0.0
-18.8
-18.8
2011E
105.7
1.4
44.7
2.2
3.0
57.3
5.8
51.5
0.0
0.0
0.0
2.0
49.5
14.8
34.6
34.6
2012E
129.9
3.3
59.3
2.2
3.0
68.9
7.1
61.8
0.0
0.0
0.0
2.6
59.2
17.8
41.5
41.5
2013E
280.8
4.3
121.9
2.2
3.0
158.0
15.6
142.4
0.0
0.0
0.0
1.9
140.5
42.2
98.4
98.4
Cash Flow (A$m)
Operating Cashflow
- Other
Free Cashflow
- Dividends
+ Equity raised
Net Change in Cash
Cash at End Period
2010A
-3.5
-55.1
-5.1
-1.8
-65.4
0.0
59.9
10.4
4.9
9.5
2011E
62.4
-32.0
-4.8
0.0
25.6
0.0
0.0
20.0
45.6
55.2
2012E
74.0
-80.0
-4.8
0.0
-10.8
0.0
0.0
0.0
-10.8
44.4
2013E
163.2
-10.0
-4.8
0.0
148.4
0.0
0.0
-30.0
118.4
162.8
Balance Sheet (A$m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
126.7
14.6
45.0
81.8
2011E
184.1
30.5
50.8
133.2
2012E
186.2
30.5
51.4
134.8
2013E
318.8
0.5
21.9
296.9
Production Stats
Moolart Well (koz)
Garden Well (koz)
Total Production
2010A
-
2011E
76.8
0.0
76.8
1,369
581
788
2012E
94.7
0.0
94.7
1,373
593
780
2013E
88.7
119.3
208.0
1,350
587
763
Mt
12.5
2.0
14.5
g/t
1.5
2.4
1.6
koz
604
158
762
110.0
20
1.9
131.5
1.0
1.9
3.7
0.9
3,375
1,211
224
4,810
Reserves
Moolart Well
Erlistoun
TOTAL
Resources
Moolart Well
Garden Well
Erlistoun
TOTAL
Materials
423.9
$731.2
11-October-2010
Financial Summary
Reported Earnings
Net Profit ($m)
EPS ($)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS ($)
EPS Growth (%)
PER (x)
Cashflow
GCFPS ($)
PCF (x)
Dividend
Dividend ($)
Yield (%)
Franking (%)
2010A
2011E
2012E
2013E
-18.8
-0.06
-30.9
34.6
0.08
21.1
41.5
0.10
17.6
98.4
0.23
7.4
-18.8
-0.06
34.6
0.08
-246.3
21.1
41.5
0.10
19.7
17.6
98.4
0.23
137.3
7.4
-3.5
0.00
62.4
0.15
11.7
74.0
0.17
9.9
163.2
0.39
4.5
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
Financial Ratios
2010A
2011E
2012E
2013E
18%
-
23%
25.4
23%
24.1
0%
73.9
-4%
-23%
33%
28%
26%
32%
33%
31%
35%
45%
33%
-30.9
Valuation Summary
Moolart Well
Garden Well
Hedging
Exploration
Tax Losses
Corporate
Unpaid Capital
Cash & Bullion
Debt
A$m
190
356
-5
50
37
-21
13
10
-40
A$/sh
0.45
0.84
-0.01
0.12
0.09
-0.05
0.03
0.02
-0.09
588
1.39
88.7
156.2 Total @ 7.7% Discount Rate
244.9
1,459
587 Directors
872 Name
Nick Giorgetta
Mark Clark
Morgan Hart
Mark Okeby
Ross Kestel
Position
Managing Director
Operations Director
Newmont
Seamans Capital
%
15.3%
7.1%
3.0
1,500
2.5
1,250
2.0
1,000
1.5
750
1.0
500
0.5
250
0.0
0
200
150
100
50
0
FY11E
Moolart Well (koz)
FY12E
Garden Well (koz)
FY11E
FY13E
FY12E
Head Grade (g/t)
32
FY13E
Research
Saracen
BUY
11 October 2010
$0.68
$0.76
Current Price:
Target Price:
Ticker:
SAR
Sector:
Materials
491.0
Market Cap ($m):
331.4
Net Cash ($m):
32.2
299.2
The quiet achiever
Site Visit:
Saracen Mineral Holdings (SAR) has made a steady start to life as a producer.
Re-commissioning of the 2.4Mtpa Carosue Dam Operations (CD) in November 2009 went
smoothly, coming in on time and under budget. The operation has produced over 60koz
since at cash costs of ~$700/oz.
52 wk High/Low:
$0.66
$0.28
1.53
Since acquiring the processing plant from St Barbara (SBM) in 2005, SAR has built up a
dominant tenement position within the South Laverton gold field, with 885koz in Reserve
Key Metrics
P/E (x)
EV/EBITDA (x)
10A
11F
12F
-10.6
7.5
7.5
19.9
4.7
4.7
(~7 years mine life) and in excess of 3Moz in Resouces across four production districts.
Impact:
Financials:
Revenue ($m)
31.4
168.3
EBITDA ($m)
15.1
64.1
64.1
-25.4
44.0
43.9
Net Assets ($m)
57.0
110.3
164.0
Op CF ($m)
12.3
55.8
52.4
NPAT ($m)
177.7
Positive
SAR is targeting a gradual step-up in production (from 100-120koz pa in FY11) to
>150koz pa by 2015.
The ‘game-changer’ in the portfolio could be Red October - a potential high grade
underground project at the northern extent of the tenement package. Red October sits
~15km south of AngloGold Ashanti’s ~400koz pa Sunrise Dam operation along the Dolly
Fault.
Per Share Data:
EPS (cps)
2.7
9.0
8.9
SAR has committed $20m to Red October development, which includes an underground
DPS (cps)
0.0
0.0
0.0
drilling program and trial mining exercise, starting in late CY11 (~12 months of
Div Yield
0.0%
0.0%
0.0%
3.1
15.2
14.5
dewatering required). Red October may ultimately command a mill of its own (rather
CFPS (cps)
than trucking to CD) particularly if other proximal opportunities such as Butchers Well
stack up.
Share Price Graph
$0.70
40.0
$0.60
32.0
View:
Positive
24.0
SAR has been the ‘quiet achiever’ amongst the noisy ASX junior gold mining space.
$0.50
$0.40
Management’s considered approach to development and production thus far has served
$0.30
16.0
shareholders well.
Exploration looms as the key to de-risking the production profile moving forward. The
$0.20
8.0
$0.10
Company has committed ~$17m in FY11 targeting both brownfields and greenfields
growth. The tenement package remains substantially under-explored at depth within a
$0.00
Oct-09
Jan-10
Apr-10
Jul-10
0.0
Oct-10
setting that has defined ~23Moz of gold in the last 15 years.
The key risk to monitor is mining. With the plant rating up to 15% above nameplate
capacity the challenge is to match mining and milling rates without sacrificing head
grade.
Recommendation:
Buy
The stock continues to trade at undemanding multiples relative to peers. At spot gold and
Analysts:
Tim Serjeant
Troy Irvin
fx the target price rises to $0.78.
33
Overview
SAR has made a steady start to
life as a producer…
Saracen Mineral Holdings’ (SAR) Carosue Dam Operations are located ~120km NE of
Kalgoorlie within the South Laverton gold field. Carosue Dam was originally commissioned
by Pacmin (later acquired by Sons of Gwalia) in 2000. SAR purchased the 2.4Mtpa plant
and bulk of the land package from St Barbara (SBM) in 2005 for ~$17m.
…commissioning Carosue Dam
on time and under budget
Re-commissioning of the plant began in November 2009, with the first gold pour achieved
in January 2010. The total capital outlay for the commissioning phase was $20.9m ($3.5m
below budget). The operation produced ~15koz in the March Q and ~25 koz in June Q.
Today, SAR has 885koz in Reserves (~7 years mine life) and in excess of 3Moz in Resouces
within a substantial tenement position encompassing the Laverton and Keith-Kilkenny
Tectonic Zones. The Company has $30m cash, no debt and hedging in the form of puts
(long 144koz) and calls (short 85koz) at A$1,250/oz.
Figures 1 & 2: Project Location Map and the 2.4Mtpa Carosue Dam Plant
Source: SAR, Argonaut
Targeting >150koz pa by 2015
FY11 production target of 100 120koz
SAR has devised a staged development plan, with production over the first 3-5 years
coming predominantly from the Carosue Dam and Porphyry District (within ~50km of the
plant).
180
160
140
120
100
80
60
40
20
0
2010
2011
2012
Porphry
C arosue
2013
Safari Bore
2014
2015
Red October
Source: Argonaut, SAR
34
Current production sources are the previously mined Porphyry and virgin Whirling Dervish
open pits. The Stage 2 target of >150koz (no plant upgrade required) envisages a further
3-5 years of production sourced from cutbacks of existing open pits as well as potential
higher grade underground opportunities such as Red October.
Key risk to monitor is mining
The key risk to monitor is mining. With the plant rating up to 15% above nameplate
capacity the challenge is to match mining and milling rates without sacrificing head grade.
Exploration the key value driver
$17m committed to exploration
in FY11…
Exploration looms as the key to de-risking the production profile. The tenement package
remains substantially under-explored at depth within a setting that has defined ~23Moz of
gold in the last 15 years. SAR has committed ~$17m to exploration in FY11, targeting down
dip extensions to known mineralisation and unexplored zones within the tenement package.
… targeting high grade
opportunities like Red October
But the ‘game-changer’ in the portfolio could be Red October – a potential high grade
underground project at the northern extent of the tenement package. Red October sits
~15km south of AngloGold Ashanti’s ~400koz pa Sunrise Dam operation along the Dolly
Fault.
Sons of Gwalia mined a high grade (6.5g/t to a depth of ~ 90m) open pit in the late 1990’s.
Very little drilling has been done in the district since. The deepest hole is ~390m (we note
Sunrise Dam starts at ~600m). The current resource stands at 756kt @ 8.4g/t for 204koz.
Figure 4: Red October Long Section
Source: SAR
SAR has committed $20m to Red October development, which includes an underground
drilling program and trial mining exercise, starting in late CY11 (~12 months of dewatering
required).
Attractively priced across a range of metrics
SAR remains attractively priced
relative to peers
The ‘quiet achiever’ amongst the noisy ASX junior gold space is attractively priced across a
range of valuation metrics relative to peers.
35
Equities Research
Saracen Mineral Holdings
BUY
Recommendation
Current Price
Target Price (1.1x NPV)
All Ords (XAO)
$0.68
$0.76
4,740
Sector
Issued Capital (m)
Market Cap (m)
Updated
Sales Revenue
Other Income
Exploration
Corporate/Admin
EBITDA
Depn & Amort
EBIT
Other
Net Interest Paid
Operating Profit
NPAT
Normalised NPAT
2010A
31.4
1.0
14.1
0.0
3.2
15.1
2.9
12.2
0.0
-31.3
-4.9
-1.4
-25.4
0.0
-25.4
10.8
2011E
168.3
0.0
92.4
7.8
4.0
64.1
1.3
62.9
0.0
0.0
0.0
0.0
62.9
18.9
44.0
44.0
2012E
177.7
0.0
105.1
4.5
4.0
64.1
1.3
62.7
0.0
0.0
0.0
0.0
62.7
18.8
43.9
43.9
2013E
164.2
0.0
106.6
3.6
4.0
50.1
1.2
48.8
0.0
0.0
0.0
0.0
48.8
14.7
34.2
34.2
Cash Flow (A$m)
Operating Cashflow
- Other
Free Cashflow
- Dividends
+ Equity raised
Net Change in Cash
Cash at End Period
2010A
12.3
-30.7
-8.3
-0.7
-27.5
0.0
30.2
8.0
1.4
29.0
2011E
55.8
-19.5
-17.3
0.0
19.0
0.0
12.2
-8.0
23.2
52.2
2012E
52.4
-11.0
-10.0
0.0
31.4
0.0
0.0
0.0
31.4
83.6
2013E
41.8
-8.0
-8.0
0.0
25.8
0.0
0.0
0.0
25.8
109.4
Balance Sheet (A$m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
107.9
8.0
50.9
57.0
2011E
154.3
0.0
44.0
110.3
2012E
209.1
0.0
45.1
164.0
2013E
254.3
0.0
46.2
208.1
Production
Carosue Dam Ops (koz)
Other (koz)
Total Production
2010A
39.8
0.0
39.8
1,294
718
2011E
126.3
0.0
126.3
1,331
730
601
2012E
130.9
0.0
130.9
1,358
803
554
2013E
123.2
0.0
123.2
1,333
865
468
Mt
Reserves
Carosue Dam
TOTAL
16.6
16.6
g/t
1.7
1.6
koz
885
885
Resources
Measured
Indicated
Inferred
TOTAL
7.8
41.4
13.5
62.7
1.5
1.7
1.6
1.7
365
2,203
711
3,279
0
41.8
-8.0
-8.0
0.0
25.8
0.0
0.0
0.0
25.8
109.4
Materials
491.0
$331.4
11-October-2010
Financial Summary
Reported Earnings
Net Profit ($m)
EPS ($)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS ($)
EPS Growth (%)
PER (x)
Cashflow
GCFPS ($)
PCF (x)
Dividend
Dividend ($)
Yield (%)
Franking (%)
2010A
2011E
2012E
2013E
-25.4
-0.06
-10.6
44.0
0.09
7.5
43.9
0.09
7.5
34.2
0.07
9.7
10.8
0.03
n/a
24.9
44.0
0.09
231.1
7.5
43.9
0.09
-0.2
7.5
34.2
0.07
-22.2
9.7
12.3
0.03
n/a
55.8
0.15
4.4
52.4
0.15
4.7
41.8
0.11
5.9
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
0.00
0%
0%
Financial Ratios
2010A
2011E
2012E
2013E
14%
-
0%
-
0%
-
0%
-
34%
11%
19%
26%
41%
40%
25%
30%
27%
21%
19%
16%
Valuation Summary
Carosue Dam
Hedging
Exploration
Tax Losses
Corporate
Unpaid Capital
Cash & Bullion
Debt
A$m
198
-9
120
16
-20
2
32
0
A$/sh
0.40
-0.02
0.24
0.03
-0.04
0.00
0.07
0.00
339
0.69
123.2 Total @ 7.7% Discount Rate
0.0
123.2
1,333 Directors
865 Name
468 Guido Staltari
Ivan Hoffman
Carl Thompson
Barrie Parker
Position
Executive Chairman
Baker Steel
Clodene
Renaissance Capital
%
6.7%
5.9%
5.8%
5.7%
140
2.5
120
2.3
100
1,500
1,250
2.0
1,000
80
1.8
750
1.5
500
1.3
250
1.0
0
60
40
20
0
FY10A
FY11E
Carosue Dam Ops (koz)
FY12E
Other (koz)
FY13E
FY10A
Head Grade (g/t)
FY11E
36
FY12E
FY13E
Research
Silver Lake
BUY
11 October 2010
$2.40
$2.85
Current Price:
Target Price:
Ticker:
SLR
Sector:
Materials
It’s a kind of Magic
Site visit:
178.8
Silver Lake Resources (SLR) delivered FY10 production of 60koz at cash costs of $636/oz
Market Cap ($m):
429.0
from the Mount Monger project, 50km south of Kalgoorlie.
Net Cash ($m):
31.3
397.7
52 wk High/Low:
$2.69
The Daisy Milano (DM) underground mine is the dominant ore source. The mine life is 8-
$0.74
10 years based on the current 1.1Moz Resource, drilled to 800m depth. SLR employs
0.66
selective hand-held mining methods to minimise dilution and achieve high average head
grades of ~10g/t. Ore is trucked 45km to the 600ktpa Lakewood plant (currently rated
Key Metrics
10A
P/E (x)
11F
36.5
EV/EBITDA (x)
11.9
16.2
12F
7.7
6.4
4.0
for up to 130koz pa from 400ktpa hard rock / 200ktpa oxide feed).
Near term production growth stems from ramping up Daisy East (40m to the east of DM)
and the addition of open pit ore from deposits such as Costello (25koz @ 3.2g/t, mining
Financials:
study nearing completion) and Mount Monger (80koz @ 2.9g/t, mining study underway).
10A
11F
12F
Revenue ($m)
69.1
139.7
243.4
EBIT ($m)
16.8
51.5
79.5
upgrade due June Q 2011), Daisy East is wider than DM (3 veins in the face compared to
NPAT ($m)
11.7
36.0
55.7
1 or 2) and is therefore amenable to lower cost / more productive mechanised mining.
Net Assets ($m)
75.5
93.6
170.1
Op CF ($m)
19.8
69.7
110.3
In addition to offering a second independent working area (post a $5m ventilation
Longer term production growth could stem from the identification of a third independent
working area (potentially Emma or Rosemary) proximal to existing underground
infrastructure. Another opportunity is the early stage but promising Magic discovery.
Per Share Data:
10A
EPS (cps)
11F
5.8
17.7
12F
27.4
DPS (cps)
0.0
0.0
0.0
Div Yield
0.0%
0.0%
0.0%
9.7
34.3
54.3
CFPS (cps)
Impact:
Positive
Quality people impart tangibility to SLR’s aggressive conceptual growth target of 300koz
pa by FY14 (~200koz pa from Mount Monger and ~100koz pa from Murchison). Key
Share Price Graph
$2.70
15.0
executives Les Davis and Chris Banasik are proven miners who have also performed well
in the corporate arena.
$2.40
12.0
$2.10
At the Murchison project the base case production plan is 1.2Mtpa at 3.0g/t from multiple
open pits. A study should be delivered in late 2010. Argonaut anticpates ~$50m capex
$1.80
9.0
$1.50
($40m to reassemble / refurbish the plant, $10m pre-strip).
$1.20
6.0
$0.90
View:
$0.60
$0.30
$0.00
Oct-09
Positive
3.0
With grade (underground ~7-10g/t, open pit ~3.0g/t), low cash costs ($650-700/oz) and
Feb-10
Jun-10
0.0
Oct-10
exploration success on its side SLR is hard to beat among the ‘new kids on the block’.
Over the past 12 months the Company has delivered a West African-like resource build,
adding 1Moz at a discovery cost of <$10/oz.
Recommendation:
Buy
fx the target price rises to $3.24.
Analysts:
Troy Irvin
Tim Serjeant
37
Successful turnaround
The successful application of
hand-held mining at Daisy
Milano…
The Mount Monger project includes the Daisy Milano (DM) underground mine, with
historical production of 316,000t @ 16.7g/t. Perilya acquired the mine in January 2005,
but battled with dilution due to the application of mechanised bulk mining techniques to
the thin quartz vein hosted mineralisation. Operations were suspended in March 2007.
…has maximised the grade and
operating cash flows
SLR purchased the mine in August 2007 for $12.8m. The Company turned the operation
around by employing hand-held mining techniques to minimise dilution and achieve high
average head grades (FY10 9.2g/t, FY09 10.0g/t). This translated into FY10 operating cash
flow of $19.8m.
The mine life is ~10 years based on the current 1.1Moz Resource, drilled to 800m depth.
Near term growth to 100koz pa
Near term growth stems from
ramping up Daisy East and the
addition of open pit ore
Near term production growth stems from ramping up Daisy East (40m to the east of DM)
and the addition of open pit ore from deposits such as Costello (25koz @ 3.2g/t, mining
study nearing completion) and Mount Monger (80koz @ 2.9g/t, mining study underway).
In addition to offering a second independent working area (post a $5m ventilation upgrade
due June Q 2011), Daisy East is wider than DM (3 veins in the face compared to 1 or 2)
and is therefore amenable to lower cost / more productive mechanised mining.
Longer term growth could stem
from Emma or Rosemary…
Longer term growth could stem from the identification of a third independent working area
(potentially at Emma or Rosemary) proximal to existing underground infrastructure.
Figures 1 & 2: Daisy East mechanised mining and third independent working area
Source: SLR
Magic happens
…or the early stage but
promising Magic discovery…
Another opportunity is the early stage but promising Magic discovery 3km south of DM.
Figure 3: Mount Monger target zones
Source: SLR
38
…with high grades intercepted
100m west of the current
resource
The deposit has reported a best drill hit of 11m @ 59g/t, and high grade intercepts were
recently reported 100m west of the current 152koz resource.
Figure 4: Recent Magic intersections – Outside of the resource
Source: SLR
Reinvigorating the Murchison field
A Murchison study should be
delivered in late 2010
At the Murchison project the base case production plan is 1.2Mtpa @ 3.0g/t from multiple
open pits. A study should be delivered in late 2010.
In August 2010 SLR purchased a 2.5Mtpa milling circuit for $3m. Argonaut anticpates
~$50m capex ($40m to reassemble / refurbish the plant, and $10m for pre-stripping) will
be required to bring the project into production.
300kozpa by FY14
Aggressive conceptual growth
target of 300kozpa by FY14
SLR has set an aggressive growth target of 300koz pa by FY14 (pending exploration
success). This assumes 200koz pa from Mount Monger and 100koz pa from Murchison.
With grade (underground ~7-10g/t, open pit ~3.0g/t), low cash costs ($650-700/oz) and
exploration success on its side SLR is hard to beat among the ‘new kids on the block’.
Over the past 12 months the Company has delivered a West African-like resource build,
adding 1Moz at a discovery cost of <$10/oz. Group resources are 2.5Moz @ 4.4g/t. The
next resource upgrade is anticipated in January 2011.
With people, grade, low cash
costs and exploration success
on its side SLR is hard to beat
The stock is trading at a 16% discount to Argonaut’s target price of $2.85 (1.2x NAV). At
spot gold and fx the target price rises to $3.24.
39
Equities Research
Silver Lake Resources
Analyst: Troy Irvin
BUY
Recommendation
Current Price
Target Price (1.2x NAV)
All Ords (XAO)
Sector
Issued Capital (m)
Market Cap (m)
Updated
$2.40
$2.85
4,740
Sales Revenue
Other Income
Operating Costs
Exploration Expense
Corporate/Admin
EBITDA
D&A
EBIT
Finance expenses
Impairment of assets
Operating Profit
Tax expense
Minorities
NPAT
Normalised NPAT
Cash Flow ($m)
Operating Cashflow
- Capex
- Asset purchases (+ asset sales)
Free Cashflow
- Dividends
+ Equity raised
Net Change in Cash
Cash at End Period
2010A
69.1
0.9
43.0
0.1
2.2
24.6
7.7
16.8
0.2
0.0
16.6
4.9
0.0
11.7
11.7
2011E
139.7
2.7
70.0
5.0
5.0
62.3
10.8
51.5
0.0
0.0
51.5
15.4
0.0
36.0
36.0
2012E
243.4
3.5
133.1
10.3
5.1
98.5
18.9
79.5
0.0
0.0
79.5
23.9
0.0
55.7
55.7
2013E
300.6
8.2
173.2
10.5
5.2
120.0
23.9
96.0
0.0
0.0
96.0
28.8
0.0
67.2
67.2
2010A
19.8
7.7
17.8
-0.8
-4.9
0.0
17.9
-0.1
12.9
29.5
2011E
69.7
46.6
5.0
0.0
18.0
0.0
0.0
-0.3
17.8
47.2
2012E
110.3
23.6
10.3
0.0
76.5
0.0
0.0
-0.3
76.2
123.4
2013E
127.5
14.7
10.5
0.0
102.3
0.0
0.0
0.0
102.3
225.8
Balance Sheet ($m)
Total Assets
Total Debt
Total Liabilities
Shareholders Funds
2010A
97.2
0.6
21.7
75.5
2011E
169.8
0.4
76.2
93.6
2012E
271.9
0.1
101.9
170.1
2013E
376.7
0.0
104.3
272.4
Gold Production Summary
Mount Monger (koz)
Murchison (koz)
2010A
60
0
2011E
100
0
2012E
125
50
2013E
125
100
60
0
636
662
1257
100
0
702
751
1401
175
225
755
777
1389
768
Total Gold
Brazil Iron Ore (kt)
Gold Total Cost (US$/oz)
Financial Summary
2010A
Reported Earnings
Net Profit ($m)
EPS (cents)
PER (x)
Normalised Earnings
Net Profit ($m)
EPS (cents)
EPS Growth (%)
PER (x)
Cashflow
GCFPS (cents)
PCF (x)
Dividend
Dividend (cents)
Yield (%)
Franking %
Financial Ratios
2012E
36.0
17.7
11.9
55.7
27.4
7.7
2013E
67.2
33.1
6.4
11.7
5.8
36.0
17.7
55.7
27.4
67.2
33.1
36.5
11.9
7.7
6.4
19.8
9.7
24.6
69.7
34.3
7.0
110.3
54.3
4.4
127.5
62.8
3.8
0.0
0.0
100
0.0
0.0
100
0.0
0.0
100
0.0
0.0
100
2010A
2011E
2012E
2013E
0.8
83.2
2.6
0.4
1204.1
1.8
0.1
4281.8
2.4
0.0
10119.1
3.2
17.0
24.9
15.5
25.8
42.1
38.5
22.9
53.6
32.7
22.4
63.6
24.7
Valuation Summary
A$m
Mount Monger
Murchison
Exploration
Forwards
Corporate
Unpaid Capital
Cash at 30 June 2010
Debt
252.9
107.2
35.0
0.0
-8.5
7.3
31.9
-0.6
A$/sh
1.41
0.60
0.20
0.00
-0.05
0.04
0.18
0.00
425
2.38
1333
Reserves & Resources (30 June 2010)
Directors
Mt
3.6
13.7
0.6
17.8
Comps
2011E
11.7
5.8
36.5
Interest Cover (x)
Acid test ratio (x)
Total @ 7.7% discount rate
Resources
Mount Monger
Murchison
Rothsay
Total
Materials
178.8
$429.0
11-October-2010
g/t
9.4
3.0
7.0
4.4
Au (koz)
1081
1322
133
2536
Paul Chapman
Les Davis
Chris Banasik
Brian Kennedy
Peter Johnston
David Griffiths
Managing Director
Executive Director - Exploration and Geology
Table x: Kalgoorlie gold producers – Summary sheet
Baker Steel
Eye Investment Fund
$169
%
9.5%
7.1%
6.8%
GOLD PRODUCTION
250
1600
200
A$/oz
koz
1200
150
100
800
400
50
0
0
2010A
2011E
Murchison
2012E
2013E
2010A
Mount Monger
2011E
Gold price
40
2012E
2013E
Cash cost
Appendix A: Map of Goldfields Projects
41
Appendix B: Summary of Stocks
Company
Code
Managing Director
Avoca
Catalpa
Focus
Integra
AVO
CAH
FML
IGR
Chris Cairns
Rohan Williams
Bruce McFadzean
Campbell Baird
Market Cap
$m
877
348
158
484
EV
$m
880
378
148
468
Project(s)
Trident
Edna May
Tindals
Aldiss-Randalls
South Kalgoorlie
Cracow (30%)
The Mount
0
Frog's Leg (49%)
0
0
0
Reserve
Moz
1.3
1.0
0.2
0.3
Grade
g/t
4.0
1.2
2.7
3.2
Resource
Moz
6.7
2.0
2.0
1.8
Grade
g/t
2.5
1.2
2.7
2.8
Production
Status
Production
Production
Production
Production
FY11F
280
112
94
56
Cash Costs^
FY11F
628
921
756
706
Production Target
koz pa
400
200
130
140
Yr
2013
2012
2013
2013
1,478
Timing
EV/Reserve
$/oz
673
369
800
EV/Resource
$/oz
132
193
75
266
EV/Production FY11F
$/oz
3,143
3,369
1,575
8,422
Adj EV/Production Target
$/oz
2,512
2,116
1,366
3,803
x
0.95
1.00
0.69
1.30
No
352koz @ A$1,557/oz
No
92koz @ A$1,359/oz
Pala - 22%
Nil
Nil
Acorn - 8%
Colonial - 7%
0
0
Baker Steel - 7.5%
P/NPV
Hedging
Major Shareholders
Company
Code
Managing Director
0
0
0
JP Morgan - 5.5%
Ramelius
Regis
Saracen
Silver Lake
RMS
RRL
SAR
SLR
Les Davis
Ian Gordon
Mark Clark
Guido Staltari
Market Cap
$m
227
731
332
429
EV
$m
172
762
300
398
Wattle Dam
Moolart Well
Carosue Dam
Mt Monger
Mt Magnet
Garden Well
0
Murchison
0
0
0
0
Moz
0.5
0.8
0.9
0.0
Grade
g/t
1.7
1.7
1.7
#DIV/0!
Resource
Moz
3.5
4.8
3.3
2.5
Grade
g/t
2.2
1.2
1.7
4.6
Project(s)
Reserve
Status
Production
Production
Production
Production
Production
FY11F
80
77
126
100
Cash Costs^
FY11F
488
581
730
702
Production Target
koz pa
200
250
155
300
Yr
2014
2013
2015
2014
EV/Reserve
$/oz
363
1,000
339
#DIV/0!
EV/Resource
$/oz
50
158
92
157
EV/Production FY11F
$/oz
2,149
9,924
2,376
3,988
Adj EV/Production Target
$/oz
1,211
3,327
2,194
1,792
x
0.93
1.24
0.98
1.01
No
190koz @ A$1,352/oz
144koz puts, call 85koz @ A$1,250
No
Directors - 14%
Timing
P/NPV
Hedging
Major Shareholders
Sprott - 14%
Newmont - 15%
Baker Steel 8%
Beach Energy - 6%
Directors & Mgmt - 12%
Sprott - 7%
Sprott - 9.5%
Directors - 6%
Libra Advisors - 5%
Directors - 6%
Baker Steel 7%
Adj EV = EV + Capex
^ inc royalties
Source: IRESS, Company Reports, Argonaut estimates
42
Appendix C: Peer Comparisons
Adj EV/Revenue (x)
Adj EV/EBITDA (x)
9.0
20.0
8.0
7.0
15.0
6.0
5.0
10.0
4.0
3.0
2.0
5.0
1.0
0.0
RRL
IGR
SLR
AVO
CAH
2011
2012
RMS
SAR
0.0
FML
IGR
P/E (x)
RRL
SLR
CAH
2011
AVO
2012
SAR
RMS
FML
Adj EV/Production ($/oz)
12,000
25
10,000
20
8,000
15
6,000
10
4,000
5
2,000
0
0
IGR
RRL
CAH
SLR
2011
AVO
2012
SAR
RMS
RRL
FML
IGR
SLR
Adj EV/Production Target ($/oz)
CAH
AVO
2011
2012
RMS
SAR
FML
EV per oz
4,000
1,200
3,500
1,000
3,000
800
2,500
600
2,000
1,500
400
1,000
200
500
0
0
IGR
RRL
AVO
SAR
CAH
SLR
FML
IGR
RMS
RRL
FML
AVO
CAH
Adj EV/Prodn Tgt
Reserve
Grade (g/t)
Cash Costs (A$/oz)
5
900
4
800
3
700
2
600
1
500
RMS
SAR
SLR
Resource
400
0
SLR
AVO
IGR
FML
Reserve
RMS
SAR
RRL
CAH
CAH
Resource
FML
SAR
IGR
2011
43
SLR
AVO
RRL
RMS
2012
Contact Details
General Disclosure and Disclaimer
Research:
This research has been prepared by Argonaut Securities Pty Limited (ABN 72 108 330
650) (“ASPL”) for the use of the clients of ASPL and its related bodies corporate (the
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any other person. If you are not the intended recipient you must not use or disclose the
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Licence No. 274099 and is a Market Participant of the Australian Stock Exchange Limited.
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Director Research
+61 8 9224 6872
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Director Research
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Associate Director
+61 8 9224 6806
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Analyst
+61 8 9224 6824
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44

Argonaut Metals and Mining - New Kids on the Block

Transcription

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