Stock: Alacer Gold
Stock code: AQG
Share Price: $9.45 (as at close Friday)
Market Cap: $718,000,000
Argonaut – BUY, price target $14.50
UBS – BUY, price target $11.20
Deutsche – BUY, price target $10.40
Chart: Share price over the year versus ASX200 (XJO)
Investor Centre: Alacer Gold
Company news: Alacer Gold Limited
Over the past two weeks of turmoil on global markets investors have joined central banks around the world in grabbing gold, no matter the price. Last year marked the first year in more than two decades where central banks were net buyers of gold (by 76 tonnes), with massive purchases by countries such as Bolivia and Sri Lanka.
Just last week South Korea more than doubled its holdings with a 25 tonne purchase; this year Mexico, Russia and Thailand have hoarded more and more gold.
This year central banks will probably be net buyers for the second year running; holdings have increased by 203.5 tonnes with four months left in the year. As you can see from the chart below, central bank buying has tripled the gold price in five years to a whopping $1,800.
Gold companies like Alacer Gold (AQG), Australia’s second largest listed gold producer, are likely to benefit as they ramp up production in the heat of the gold rush.
Alacer Gold Corp. was formed following the merger of Anatolia Minerals Development, a Canadian-listed company and Avoca Resources, Australia’s third largest ASX listed gold producer. The merger was completed on February 18, 2011.
The new entity Alacer Gold is a leading global gold producer and explorer with mines in Australia and Turkey. The company forecasts production of 600,000 ounces of gold in CY2013, with an expected increase to 800,000 ounces in CY2015. Current gold reserves of 3.5 million ounces with gold resources approaching 15 million ounces.
Alacer has three operating gold mines in Australia, namely the Higginsville and South Kalgoorlie operations; and a 49% interest in the Frog’s Leg underground mine. The South Kalgoorlie operations and the Frog’s Leg interest were acquired following the successful takeover of Dioro Exploration NL, which was completed in March 2010. The Australian operations are targeting 280,000 ounces of gold in 2011.
Alacer is recognized as a leader in exploration and development in Turkey and, with the startup of Çöpler, will soon be among Turkey’s leading gold producers. Çöpler is 95% owned by Alacer and 5% by Lidya Mining. Initial plans at Çöpler are to produce approximately 1.42 million leachable ounces of gold at costs consistent with the lower end of industry standards. Average annual production is expected to be about 175,000 gold ounces. Additional production expansion from the sulfide gold reserve is expected to add 2.25 million ounces. A detailed feasibility study is underway. In addition, Alacer holds a significant pipeline of prospective gold and base metal projects.
Alacer Gold claims that it is on a significant growth path. After delivering 400,000 ounces in 2011 it believes this will double to 800,000 quality ounces by 2015. A stellar quarter saw AQG increase gold production by 11% over the previous quarter to 101,348 attributable ounces of gold, with group cash operating cost of $542 per gold ounce.
This meant that Alacer mines generated $89 million in cash operating margin and cash and cash equivalents at end of June totalled $137.5M. Higginsville and Çöpler Gold Mine (on 100% basis) both produced over 40,000 ounces of gold. What’s more, AQG says that drilling at Çöpler and Trident has identified important resource extensions and drilling at Shirl West near Kalgoorlie has discovered shallow high-grade mineralisation.
“A terrific effort by each of our operations resulted in the company achieving the milestone of producing more than 100,000 ounces of gold in one quarter and comfortably exceeding our guidance of 90,000 – 95,000 ounces for the quarter,’ said Edward Dowling, President and CEO of Alacer. ‘The outlook is for the Company to continually improve the gold production and maintain our trend for the rest of 2011…this will result in a sustainably increased gold production from our four current operations.’
Dowling pointed out that 2nd quarter operating costs were 11% better than the first quarter and 8% better than annual guidance of $590/ounce. ‘Management is focused on operating cost leadership and a major company-wide cost and efficiency improvement effort has been launched during the quarter,’ he said.
Note that the historical financial information is for Alacer’s operational activities only (i.e. a “stand-alone” basis) to December 31, 2010 and therefore does not take account of Avoca’s operations during the reporting period. Reporting for future financial periods, beginning with the three-month period ended March 31, 2011, will include the results of the combined entity from the Merger date of February 18, 2011.
UBS, Argonaut, Deutsche and RBS are very bullish on the stock. Argonaut has the highest price target at $14.50, a 53.4% premium to Friday’s closing price.
UBS’s target is lower at $11.20, although it’s still a solid 18.5% premium to the current price. After a site visit to its operations in South Kalgoorlie, the broker reiterated its buy on the miner.
Argonaut has a buy with a price target at a lofty $14.50 because it sees the Çöpler project in Turkey as a growing asset, with the potential to increase the tonnes, grade and ounces in the current resource. ‘AQG also has a large exploration portfolio in Turkey, including the Cevizlidere and Karakartal copper gold porphyry deposits near Çöpler,’ it says. ‘With execution risk at the oxide mine diminishing, and the sulphide project advancing Çöpler is well positioned to underpin group production growth to 800koz pa by 2015.’ Argonaut believes that near term price catalysts are ongoing drill results at Çöpler, drill results and open pit production at Higginsville, mill expansion at South Kalgoorlie, and a reserve upgrade at Frog’s Leg.
Meanwhile Deutsche Bank also has a buy on AQG after visiting the company’s mines, saying that it is impressed with its growth potential. It has a more modest $10.40 price target, up from $10.25.
Based on Thomson Reuters data, eight analysts have a buy on the stock, three have a hold, none have a sell.
With the gold price showing no signs of slowing and share prices depressed following the market downturn over the past few months, it’s not just a matter of looking at the growth prospects of the gold miner – the chances of AQG becoming a takeover target have also increased markedly. James Wilson senior resources analyst with RBS Morgans believes M&A activity in 2011 will centre around iron ore, copper and gold. “The domino effect of big fish being eaten by even bigger rivals means the M&A deals are likely to increase on both frequency and magnitude,” says Wilson. He notes that the premium applied to gold explorers has come off by around 20-25 per cent so the gold sector is back into buying territory. Wilson believes that AQG’s production profile makes it particularly attractive to big-end miners.
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