Takeover Targets – 7 Gold Miners Under Watch

Should gold stocks be lumped in with speculative resource stocks as risky investments to avoid? But what does that say about gold’s recent run up?

The gold price dipped below $USD1200 per ounce in June but has been trending up ever since, currently sitting at USD$1371.90. The following chart from the ASX shows the movement of the XGD, a subsidiary index of the ASX Metals and Mining Index (XMM) comprised of Aussie gold miners.  Here is the chart:

XGD, S&P/ASX ALL ORDINARIES GOLD (SUB INDUSTRY)

The chart of daily prices over 6 months for security XGD

As you can see, an advancing gold price has seen a corresponding lift in share prices for many gold stocks. Increased merger and acquisition activity could see further share price spikes for a select group of stocks. But which stocks are likely takeover targets?

An ideal target is a smaller company with substantially more cash than debt, trading below its book value.  The following table lists seven gold miners that meet those criteria.  Here is the table:

Resolute Mining Ltd (RSG) has the largest market cap of any stock in our table at $598 million.  The company has three operating gold mines, with the open pit Syama Gold project in Mali its principal asset.  Resolute also operates the Ravenswood Mine in Queensland and the Golden Pride Mine in Tanzania, scheduled to cease operation this year.

The company claims its average cash cost for gold production in FY 2012 was A$761 per ounce.  In the company’s Half Year 2013 results released back in February the average cash cost for the period was A$787 per ounce.  Revenues were up 14% and net profit after tax was up 86%.  Resolute bought back $70 million in shares through mid-2013 and paid a $0.05 per share dividend, its first in 13 years.

In a July 2013 investor presentation the company reiterated its 2014 production guidance at an average cash cost of A$890 per ounce.  The average cash cost is obviously a key to a miner’s profitability but industry-wide there have been variations in how the figure is calculated.  In June 2013 the World Gold Council published guidelines for two new metrics, “all-in sustaining costs” and “all-in costs” in an attempt to provide more transparency and clarity for investors.  Using these new metrics will be up to the individual mining companies.  

Resolute appears to qualify as a low cost producer and despite its recent run-up in share price is still trading slightly below book value.  The shares are up close to 30% over the last three months.  Here is the price chart:

Perseus Mining (PRU) began its first commercial gold production from its mine in Ghana in January of 2012.  The company also has exploration assets under development in Côte d’Ivoire.  In its June 2013 production report Perseus cut its production guidance at the Ghana mine and announced it would miss its total cash cost forecast of U$1,100 per ounce.  Africa has become a “hot spot” for mining and perhaps because of that PRU’s share price had been outperforming our top gold miner Newcrest Mining (NCM) for some time.  Here is a five year comparison chart:

Perseus has a market cap of $350 million and wildly divergent opinions from Australia’s major analysts.  The most recent recommendation was an upgrade from UNDEPERFORM to OUTPERFORM from Macquarie on 20 August.  The analyst likes the fact Perseus is shielding its balance sheet by delaying some of its expansion plans and sees operational improvements leading to better days ahead.  The price target was raised from $0.60 to $1.00.

At the other extreme you have Citi that downgraded the stock to SELL from NEUTRAL and lowered the price target from $1.60 down to $0.50 on 17 July.  The analyst  slashed targets due to higher than expected production costs and the same project delays seen as a favorable move at Macquarie.

Silver Lake Resources (SLR) has a market cap of $220 million and is currently trading at a fraction of its book value per share.  In January 2013 the company finalised its merger with Integra Mining, resulting in a combined resource base of 6.6 million ounces and 2014 forecasted production of more than 400,000 ounces.  Integra’s Randalls gold projects are adjacent to Silver Lake’s mining and exploration assets at Mount Monger.

On 11 March 2013 CIMB Securities began covering SLR with an OUTPERFORM recommendation and a price target of $2.65.  The broker sees the merger leading to higher gold production in 2013 ranging from 170 to 190 koz.  Additional positives cited include over 6 million ounces in reserves and a planned dividend policy.  The long range production goal of SLR’s “aggressive” management is 440 koz per annum.

Following the release of the company’s June production report Deutsche Bank downgraded the stock from HOLD to SELL, lowering the target price from $0.65 to $0.60.  The problem for Deutsche Bank is rising cash costs at the producing Mount Monger operation and development costs  at the Murchison project.  Silver Lake reports “all-in costs” which currently stand at A$1168 per ounce.  On 02 August Silver Lake warned it might be forced to take an A$370 million write down in assets next month.  Despite a brief drop, the news failed to disrupt SLR’s upward trend that began in June.  The stock is up 40% for the period.  Here is a three month chart:

Saracen Mineral Holdings (SAR) is a Western Australia based gold producer with a market cap of about $149 million.  The company’s June production report was solid, if not spectacular, with production meeting guidance and promising drilling results in exploration projects.  You may have noticed from the table it is the only company listed with more debt than cash.  We included Saracen for a reason.  On 09 August the company responded to an ASX price query asking for any information relating to a 19% jump in the share price in a single day.  Here is a chart showing the spike:

Could Saracen be a takeover target?  Such speculation could stem from comparing SAR’s tiny market cap to its production guidance of between 120,000 and 130,000 ounces in FY2014 and 125,000 ounces to 135,000 ounces for FY2015.  In addition, the company is trading below book value and has a comfortable current ratio and modest gearing.

Focus Minerals (FML) is a “penny dreadful” that could be an attractive takeover target.  The stock price is down 66% year over year; the company’s cash and liquidity position is solid; and it is trading far below book value.  In July this Western Australia based gold producer announced the closing of one of its producing mines; the third closing in the last three months.  How can that be a good thing?  Focus Minerals CEO explained the decision was made to preserve the company’s cash position until the gold price allows a return to profitable operation.  

In the meantime, the company will use its strong balance sheet to explore potential opportunities for further growth, including acquisitions.  The company’s more than 4 million ounce resource base throughout two of Australia’s top gold producing regions could make it an ideal takeover target.

The remaining companies in our table are both junior miners.  Gryphon Minerals (GRY) has a market cap of $76.1 million and Ramelius Resources (RMS) has a market cap of $64.03 million.

Gryphon has assets in Africa with the Banfora Gold Project in the development stage with additional exploration projects in West Africa.  The Banfora Project boasts a 4.9 million ounce resource and the company recently reported it has a ‘significant number of debt funding proposals” from a variety of interested parties.  On 30 July Credit Suisse reiterated its OUTPERFORM rating on Gryphon, noting the companies total cash, down to $52 million from the most recent quarter’s $77 million, might be enough to see the company through until conditions improve.  Citi and CIMB Securities also have BUY ratings on GRY, with Citi adding a High Risk caution.

On 29 July Ramelius issued a warning to investors it expect about $58 million in write downs for FY2012 and a profit loss before tax of around $70 million.  The good news for investors was a forecasted production increase of 34% for FY2013-2014.  The company has two operating mines in Western Australia at Wattle Dam and Mt. Magnet as well as a treatment plant.  Ramelius has five additional exploration projects underway in the area and one joint venture.  Our final price chart compares the three month performance of these two junior miners:

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