Stock: Beaconsfield Gold
Market Cap: $64m
Recommendation: Spec Buy
Long term trends have been torn to shreds over the last 12 months, however there is one asset where a bull market is still in force – Gold. The yellow metal’s decade long uptrend remains intact, and after breaking over US$1000/oz for only the second time in history during recent weeks, the gold bugs are naturally getting excited.
Strong gold prices are benefiting Australian gold producers in particular because of our weaker currency. The Australian Dollar gold price recently shot to record highs of over AUD$1500/oz, which, combined with easing cost pressures in the mining sector – have been a boon for local gold producers. Margins and cash flows have expanded, and if maintained, should bode well for earnings and share prices in the sector.
High cost producers tend to benefit the most from commodity price strength as their bottom lines experience more incremental growth for each percentage price increase than low cost producers. With this in mind, Beaconsfield Gold (BCD) comes across as one stock that could benefit handsomely should gold prices remain firm.
Beaconsfield is a low debt, unhedged Australian gold miner. Its principal operations at the Beaconsfield Gold Mine are nestled away in the north-east of Tasmania atop the richest gold vein in Australia. Mining activity first commenced at the site in 1877 and ceased in 1914. Beaconsfield was involved in the mine’s resurrection in 1999 through a joint venture (JV) with Allstate. Production problems and debt saw both companies fall into administration in 2001. As the production issues were amendable, the administrators continued operating the mine to the benefit of creditors. Beaconsfield was recapitalised and rejoined the ASX in 2004. The company spent the next few years paying down debts and pursuing legal claims against its Joint Venture partner, certain suppliers, and insurers.
Tangled in a web of litigation, the company’s luck well and truly disappeared when its mine suffered a well publicised rock collapse in April 2006 that trapped two miners and killed another. Although a recently released Coroner’s report stated that no one was to blame for the collapse, the stigma of the event is still somewhat of an obstacle for the company to overcome.
Following a safety inquiry, the company spent most of 2007 recommissioning the mine and consolidating its ownership structure. Beaconsfield took over its JV partner Allstate, also purchasing its outstanding debts, moving to an effective 100% ownership of the mine.
With production slowly ramping up to full capacity over the last 12 months, the company seems to have acquired a fresh lease of life. Increased safety measures are employed to prevent tragedy from striking again. Malaysia Smelting Corporation Berhad (MSC) has come on board as a major shareholder (18.9%), injecting $20m into the company, while cash flows from operations recently allowed the redemption of convertible notes worth $4m.
All previous hedging commitments have been closed out and bank debt has fallen to $3.5m. The mine is now operating at full capacity and generating strong cash flows. Reserves at the mine are estimated to be 416,000 oz and for January ’09, a total of 7,699 oz of gold was extracted at a cash cost of A$643/oz. The company is on track to produce a forecasted 80 000 – 90 000 oz of gold this financial year, which at the current Australian Dollar gold price over $1400/oz should yield a handsome margin if costs are kept under control.
The key risks are of course the gold price and potential production issues, as the company is no longer hedged and the mine life does need extending. However in light of the strong cash flows being generated at current gold prices, the risk to reward proposition appears favourable. The share price appears to be breaking out of its decade long downtrend, reflecting its improved fundamentals, and in anticipation of further gains we rate it a ‘spec buy’.
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Tim Morris is an analyst at wise-owl.com, one of Australia’s leading independent stockmarket research houses. Click here for your complimentary report.