- St Andrew Goldfields has outperformed the junior gold mining sector in recent times and stands to continue to do so in 2014.
- This company has solid assets in a safe jurisdiction, outstanding management and a very strong balance sheet.
- We expect St Andrew Goldfields to grow organically and continue to drive down costs.
- There is also a high potential for a takeover that could add considerable value for investors.
St Andrew Goldfields (OTCQX:STADF) is a junior gold miner operating three small(ish) mines feeding one mill in the Canadian Timmins region. The company has been reporting solid results in recent quarters despite ongoing gold price volatility and has been able to maintain a strong balance sheet.
The company has outperformed peers in 2013 and has shown especially strong performance since finding a bottom in early December based on strong operational and financial results in a difficult environment for gold miners.
Analysts are predicting more upside and assign price targets indicating potential for the share price to double from current levels. We believe that analysts are optimistic for very good reasons and second this call.
Furthermore, we believe that due to the recent takeover of Brigus Gold (BRD) by Primero Mining (PPP) St Andrews Goldfields has become a prime bolt-on takeover target and we will explain why in this article.
Our investment thesis for St Andrew Gold Fields is two-fold:
- Strong operational performance, a clean balance sheet and peer-leading cost management make St Andrew Goldfields a very attractive gold-related investment proposition in a low-risk mining jurisdiction.
- The high takeover potential puts a kicker on this investment proposition. If it eventuates some considerable additional upside could be realized.
St Andrew Goldfields is listed on the Toronto Stock Exchange where trading is usually of adequate liquidity. Shares are available in the US via the pink sheets, although trading is not as liquid as north of the border. Investors wishing to trade shares of St Andrew Goldfields are advised to use the TSX for this reason, if possible.
At the time of writing shares are trading for $0.35 which translates into a market capitalization of $129.3M.
The company produces around 100,000 ounces per annum and has been able to cut All-In Sustaining Costs from $1,284/oz in Q1 to $1,086/oz in Q3 this year with a view to cut costs even further. This cost performance and the associated margins and free cash flow render St Andrew Goldfields our number 1 pick among Canadian small-cap gold producers.
At the end of Q3 St Andrew Goldfields had $31.6M in cash on the balance sheet and a $10M revolving credit facility at its disposal. Working capital computed to $19.6M and the current ratio was 1.76. The current portion of the long-term debt plus capital lease obligations added up to $6.7M and long-term debt was reported as $7.2M.
These are all signs of an exceedingly healthy balance sheet. For the September quarter the company reported positive cash flow from operations of $8.9M. The company has been cash flow positive from operations for the past six quarters, a rare field among junior producers in these testing times.
The company has reported annual production of just under 100,000 ounces for 2013 achieving the mid-range level of its guidance. This bodes well for the upcoming earnings call for the fourth quarter and the year 2013.
We keep close watch on analysts' price targets for gold mining companies and have noted that despite the strong recent share price performance St Andrews Goldfields consistently receives higher ratings than peers. At the time of writing analysts' price targets ranged from $0.46 to $0.73 indicating an upside of 31% to 109%; with a median of $0.62 indicating an upside of 77%.
This optimism is remarkable considering the rally which the share price has enjoyed since early December. Your humble scribe shares this optimism, partly due to the strength of the existing operations, but also due to the takeover potential for which we see as a very strong possibility.
Before we get to this takeover scenario, let us briefly have a look at the company's assets.
An attractive land package with claims spanning 120km of the prospective Porcupine-Destor fault make St Andrew Goldfields the largest land holder for gold exploration in the Timmins region.
The following overview of operations will only give the most salient points and will link to the company web site for more detailed information.
The company's flagship asset is the Holt underground mine and the associated mill. A staged expansion program has lifted the output of this mine from 700 tpd in 2011 to 1,000 tpd in 2013. Further increase to 1,200 tpd is planned for 2014. The currently proven and probable reserves indicate a 5+ year mine life, however there are also ample resources and exploration upside to suggest solid production for many more years to come.
The Holloway mine is much smaller in scope producing about a quarter of the gold reported for the Holt mine. The Holloway shaft is only a stroll and a highway crossing away from the Holt mine. Its proximity to the Holt mill and the solid gold grades of the ore allows for economical mining.
Ore from the Hislop mine is also trucked to the Holt mill for processing about 45km to the east. This open pit mine is the smallest contributor to the company's overall gold production tally and output in 2013 has been decreasing year-on-year. However, this mine represents the first of four puzzle pieces for the takeover scenario mentioned in the introduction and we will get back to it later in more detail.
Among the vast land package under the company's control one exploration project stands out, namely the Taylor project. There are currently 173,000 ounces of reserves reported for this project, plus 343,000 in indicated resources and 216,000 ounces of inferred resources. Not a huge project by any means, we admit, but this project still comprises the second puzzle piece in our takeover scenario mentioned above.
Meet the Neighbor: Brigus Gold
Brigus Gold has its mine, mill and projects in the immediate neighborhood of St Andrew Goldfields. In fact, some of the landholdings are inter-twined with very obvious advantages for a consolidation.
The Black Fox mine is Brigus' only operating asset. It has been producing solidly and near mine exploration has turned up some exciting drill results. Only about 4 km away from the Black Fox mine lies the company's Grey Fox project which is destined to become the second operating asset in due time.
The Brigus mill is situated 40km to the west of the two Foxes and ore is trucked from the mine to the processing facility.
Brigus Gold has been suffering from excessive debt. Moreover, the company carries a whopping $227.5M in accumulated deficit on its balance sheet. Note to readers: this accumulated deficit represents the third puzzle piece for our takeover scenario.
Brigus Gold recently announced that the company has entered into a plan of arrangement with Primero Mining whereby Primero will acquire all outstanding shares of the company. The deal has been analyzed by fellow author Investment Doctor who concluded that Brigus shareholders and even more so the bond holders have been offered a favourable arrangement.
Primero is acquiring an operating asset in Canada, plus the promising Grey Fox project (plus some significant debt). Primero has been extremely successful operating the San Dimas mine in Mexico, and has a near-term development project, the El Gallo project which is also located in Mexico.
The Mexican government has just modified its royalty and tax regime for mining companies. This has led to a sector-wide re-think of investments in Mexico.
Note to readers: here comes the fourth puzzle piece. If Primero wishes to postpone investments in Mexico as has been hinted at in the most recent earnings call, then fast-tracking the Grey Fox project ahead of the El Gallo project would make a lot of sense. If this assumption is correct then Grey Fox should move up on Primero's priority list fast as soon as the Brigus acquisition is closed.
Bringing the Puzzle Pieces Together
So far we have counted four puzzle pieces. In this section we would like to bring the 4 pieces together in order to complete the puzzle of our takeover scenario for St Andrews Goldfields.
Puzzle piece 1: The two open pits of St Andrew's Hislop Mine are situated within a stone throw of the property boundary. Near mine drilling has uncovered underground mineralisation to the west, north-west and immediate north of the existing pits, right up to the property boundary. Stepping across the fence one finds himself in the middle of Brigus' (or Primero's) Grey Fox project. Consolidation of the operating Black Fox and Hislop mines with the Grey Fox project and the exploration targets on St Andrew's side of the fence would create a new gold camp of significant size in one of the best mining jurisdictions in the world; a clear value-add for both parties involved.
Puzzle piece 2: The Taylor project is considered a near-term producing asset for St Andrew Goldfields. Ore from this asset will need to be trucked almost 90km to the Holt mill for processing. However, the project is situated literally next door to the existing Brigus mill which currently processes ore from the Black Fox mine. In the event of a business combination the Taylor project could become part of the described mining camp feeding into the Black Fox mill.
Puzzle piece 3: Primero is effectively buying $227.5M in equity deficit as part of the Brigus Gold acquisition. This means that on the first $227.5M Primero earns in Canada, no taxes will have to be paid.
At an average tax rate of 25% this equity deficit has a value of $56.9M. Primero could purchase a profitable mine which is paying income taxes and remove the taxes by offsetting profits against Brigus' losses. Timely expansion in Canada would make a lot of sense in order to take advantage of this tax benefit within a sensible time frame.
Puzzle piece 4: Mexican taxation pressures could be strong enough for Primero Mining to fast track the Grey Fox project ahead of its current El Gallo development project. If this is the case, then consolidating landholdings as described would receive a high priority in order to maximise value.
Looking at the emerging picture we have to conclude that a business combination of St Andrew Goldfields and Primero Mining would make a lot of sense for both parties.
In actual fact, if the described game plan is put into practice then Primero Mining could emerge as the pre-eminent gold miner in the Timmins region giving additional strength to the geographic diversification that was initiated by the Brigus Gold acquisition.
Considering market capitalization, cash and debt we estimate an enterprise value of $110M.
Assuming an 11 year mine life, annual production of 100,000, a all-in sustaining costs of $1,000/oz and an average gold price of $1,300/oz, and an annual discount of 5% we compute an asset value of $199.4M as shown in the attached table.
The enterprise value only reflects 55% of the computed asset value. This is an exceedingly low value compared to peers.
It is also important to note that St Andrews Goldfields has indicated intentions to increase mine output at the Hold mine from 1000 tpd to 1200 tpd in 2014. This possible upside is not included in our valuation.
St Andrew Goldfields has cut costs very successfully throughout 2013 and the company has morphed from a marginal producer into a very profitable gold miner even in the current gold price environment. The market has only partly acknowledged this change and the share price only partially reflects the company's new-found profitability.
We therefore conclude that St Andrew Goldfields still has some catching up to do and we see a high probability for the current rally to continue.
Notwithstanding the described takeover potential we would expect the share price to reflect at least 80% to 90% of the company's asset value. A share price of $0.48 to $0.54 would reflect this expectation. This range represents an upside of 37% to 53%.
Speculating on the described takeover scenario we would expect any serious offer to exceed this price target by a healthy margin. St Andrew Goldfield is not in a distressed state and there is no need to accept a low-ball offer. Remembering the median analyst price target of $0.62 (+77%) we suspect that some probability for a takeover is already factored in.
- The company will release 2013 results on February 13 after market and host an earnings call in the morning on Friday 14. We fully expect these results to provide further impetus for the share price and would not be surprise to see some considerable short-term gain following this event. Your humble scribe will consider taking a speculative position ahead of this earnings call.
- Operations are set to provide strong cash flow throughout the year. The related news flow should underpin a continuing strong share price performance for St Andrew Goldfields throughout 2014.
- A takeover bid by Primero Mining could eventuate at any time and represents the wild card in any investment into St Andrew Goldfields.
The gold price has been volatile, and despite a strong showing so far in 2014 another drop to new lows cannot be ruled out. A gold price of less than $1,000/oz over a prolonged period of time would render operations unprofitable. The company has a very strong balance sheet and could weather such a situation better than most peers; however, the share price would certainly suffer.
Apart from this ubiquitous risk for a gold miner we view St Andrews Goldmines as a remarkably de-risked company.
We have reason to believe that St Andrew Goldfields would comprise an attractive takeover target for Primero Mining. In this article we have listed 4 reasons why such corporate action would make a lot of sense. Investors may consider St Andrew Goldfields as a speculative play on this takeover scenario.
Even discounting this takeover potential we view St Andrew Goldfields as a prime small-cap investment in the gold mining space. We expect the share price to receive a boost when 2013 financial results are released, and expect the share price to remain strong compared top peers throughout 2014.