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Stock: Gold One International Limited

Stock code: GDO

Share Price: $0.36 (as at Friday 4th March, 2011)

Company investor centre: Gold One International

Broker buys (click links for broker reports):

Investec (18/2/2011, share price was $0.33 that day, target price $0.45)

Hartley’s (28/2/2011, share price was $0.33 that day, target price $0.52)

RBC Capital Markets (31/1/2011, share price was $0.28 that day, target price $0.40) 

Macquarie First South (31/12/2010) 

Chart: Share price over the year to 04/03/2011 versus ASX200 (XJO) 

West African explorers were all the rage last year as resource upgrades from Perseus Mining, Ampella Mining and others attracted attention. Yet some South African miners might offer better value. Gold One International shares are starting to catch up with the emerging producer’s solid progress. The more speculative Continental Coal (to be covered in a later column) is another to follow in 2011.

I wrote about West African gold stocks for TheBull last month and nominated Perseus Mining as the best quality of a growing bunch of ASX-listed explorers trying their hand in Ghana or Burkina Faso. No one doubts the prospectivity of these countries, but valuations for the likes of Ampella and Gryphon Minerals looked a bit rich by year’s end for me.

South African stocks with operations in gold, coal and platinum were tame by comparison. Gold One’s three-year annual average total shareholder return is negative 7.5 per cent. Plantium Australia is negative 38 per cent. Zimbabwe-focused platinum producer Zimplats has returned an average 5.3 per cent annually over three years. Civil unrest or industrial disputes have been common themes.

South Africa is a difficult place to mine. Its gold mines are among the world’s deepest, and some mines are reportedly digging deeper to mine every last ounce and take advantage of high gold prices. There have been strikes in recent years as South African mine workers campaign for better wages and safety conditions. Gold One lost about 6000 ounces of production because of a five-week strike last year; it has lifted the average base salary by 11.5 per cent in 2011 and 26.2 per cent in 2012.

Market concerns about Gold One’s capacity to refinance a convertible bond, resolved through a US$65 million debt facility, also weighed on its share price last year. Gold One eventually did not need the credit facility as its convertible bondholders chose not to exercise their one-off put option to redeem their bonds for cash – in what was a vote of confidence in the company’s prospects.

Gold One’s history might have scared investors. The dual-listed producer (it is also listed on the Johannesburg Stock Exchange) was born from the merger of BMA Gold, which went into administration in 2007, and South African miner Aflease Gold, at the peak of the global financial crisis. BMA emerged from administration, sold assets, and repaid creditors in full.

It has been an extremely challenging two years for Gold One’s board. Still, the new wages agreement and resolution of refinancing risk has removed some significant headwinds and allowed the market to focus fully on Gold One’s core operations for a change, which could explain the jump in its share price from 27 cents in late 2010 to 34 cents. The 52-week high is 42 cents.

As with all African-focused miners, Gold One has higher risk and does not suit inexperienced investors. Sovereign risk is a threat for all miners in stgeloping nations and a reason portfolio investors should stick with diversified miners, such as BHP Billiton and Rio Tinto. And Gold One has disappointed before with production targets and timing.

Those with more risk appetite can consider Gold One’s large and growing resource base, rising production profile and suite of exploration assets working their ways towards production. Gold One’s resource base is 21 million ounces, with about 8.6 million ounces in the measured and inferred category. The 1.53-million-ounces reserve base gives Gold One leverage to a rising gold price.

The company has come a long way in two years. In the 2009 financial year it had one asset in production, mined 17,040 gold ounces and lost $39.5 million in the first half. By February 2011 it had a much larger suite of production and exploration assets, had mined 66,445 ounces (in FY2010). Average cash costs per ounce were much lower. Net profit for the year ended December 31, 2010, released this week, was $12.9 million.

Gold One’s flagship, Modder East Mine, is reasonably shallow by South African standards, at 300-500 metres, and has a 12-year mine life. It and the smaller Sub Nigel 1 project are in production. The next big project, Ventersburg, has an indicated resource of 2.45 million ounces and is undergoing a pre-feasibility study. Gold One expects small first production from Ventersburg in 2014. Ventersburg and East Modder will be Gold One’s earnings backbone.

Gold One recently sold a project, Megamine, to White Water Resources. It will keep 74 per cent of the new company, Goliath Gold, to be formed pending shareholder approval. Megamine, east of Johannesburg, includes Gold One’s medium-depth assets, such as Sub Nigel 1. Spinning out the company, while keeping control, looks a good move. The transaction crystallised $38 million for Megamine.

Gold One’s conceptual production profile more than doubles from about 160,000 ounces in 2012 to more than 250,000 ounces in 2016. The company is already among the lower-cost gold producers in South Africa; average cash costs at Modder East fell from $US484 an ounce in 2010 to US$417 an ounce in 2011. Gold One should have good margins, especially if the gold price rises further as global inflation expectations build and civil unrest in North Africa and the Middle East results in more investors favouring gold.

Gold One has about 807 million outstanding shares for a market capitalisation of $278 million. Another 89.7 million options are issued and US$62 million of convertible bonds with a 2012 maturity could convert into 157 million ordinary shares. Those bonds have a conversion price of US38 cents. Plenty of extra stock issuance is on the way.

Gold One’s has targeted earnings of US$59 million in 2011 (based on an average gold price of US1234 an ounce). If it gets there, Gold One will enjoy a substantial profit lift on 2010.

Prospective investors should consider whether Gold One’s $278-million market capitalisation fully reflects its rising earnings and reducing operational and financing risk profile in the past six months.

On rough comparative valuation metrics, such as enterprise value per ounce of resources and reserves, Gold One looks cheaper that many other African gold stocks, and may be worth examination by long-term value who can stomachs the twists and turns of gold exploration and production in stgeloping nations – and the risk of capital loss.

Tony Featherstone is a former managing editor of BRW and Shares magazines, and a business journalist for almost 20 years. He is not a licensed financial adviser. This column provides general information and ideas on market, sector and company trends, rather than specific financial advice. Readers should not imply stock recommendations from this column. Do further research or consult a licensed financial adviser before acting on information in this column. The author does not own shares in any company mentioned in this article.