Medusa Mining: Producing Gold For $230 An Ounce

| About: Medusa Mining (MDSMF)

Medusa Mining is a low-cost gold producer with a focus on the Philippines. It is a dual-listed company with listings on the Australian Stock Exchange (ASX: MML), the London Stock Exchange (LSE: MML), and the pink sheets under the ticker OTCPK:MDSMF.

Medusa Mining has been producing gold from its Co-O Mill for a cash cost of under $200 an ounce as found in the table below and in its annual report. The company is currently remodeling the Co-O Mill site to double gold production to 200,000 ounces per year. Because of the interruptions of the remodeling, the gold produced this financial year is forecast to be 25% lower than the previous financial year.

The current financial year is the only year that is forecast to have a lower production, with the full benefit of the extra capacity of the remodeled mine site to be reached in fiscal year 2014. As can be seen in the table below, if gold price averages $1,700 an ounce over the next three years then the earnings per share for Medusa Mining will be US$0.58, US$0.95 and US$1.57, for a total of US$3.10 over the three years. At the moment a share is trading on the Over the Counter market for US$6.55, which is significantly undervalued.

Medusa Mining Actual and Forecast Production and Earnings Per Share

Actual Actual Forecast Forecast Forecast
Year 2010 2011 2012 2013 2014
Co-O Mill output in ounces 89,679 101,474 75,000 120,000 200,000
Cost Per Ounce $184 $189 $230 $210 $220
EPS if Gold $1,300 an ounce $0.42 $0.69 $1.14
EPS if Gold $1,500 an ounce $0.50 $0.82 $1.36
EPS if Gold $1,700 an ounce $0.58 $0.95 $1.57

Medusa Mining is unhedged against gold price movements, so it benefits from any upwards movement in the price of gold and a downwards movement is unfavorable. As Medusa Mining has such a low cost base to produce gold, even if the average price of gold over the next three years is only $1,300 an ounce, the earnings per share will still be a respectable US$0.42, US$0.69 and US$1.14, for a total of US$2.26 over the three years.

The Co-O mine site has many years of production left, as it has indicated and inferred resources of two million ounces, and Medusa Mining has a policy to maintain the level of resources by continued exploration of the site.

In addition to the Co-O mine site, Medusa Mining is also developing a mine called Bananghilig Mill. The additional site is forecast to start producing gold from 2016, with an additional output of 200,000 ounces of gold per year taking the total output of the combined mine sites to 400,000 ounces per year.

The Co-O redevelopment is estimated to cost US$70 million and the Bananghilig site is estimated to cost US$200 million. These costs will be self-funded out of the current operations, with no need for debt or raising capital from shareholders. As on 31st December 2011, Medusa Mining had no long term debt and with cash/gold bullion on hand of US$80 million.

Medusa Mining is a dividend paying stock, over the last eighteen months it has paid three lots of AUD$0.05. Australian-listed companies pay dividends twice a year compared to American companies where four payments a year is the standard. At the current price of AUD$6.05, the yearly yield equals 1.65%.

In summary, the earnings per share that Medusa Mining is forecast to earn in the future, means that Medusa Mining is extremely undervalued at the current price. Producing gold for a very low cost means the company is able to withstand a severe correction in the price of gold. This makes Medusa Mining a safer gold producer compared the other gold miners. On the other hand, as it is unhedged, Medusa Mining will benefit from any upwards movement in the price of gold.

All data has been has been sourced from the annual report.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCPK:MDSMF over the next 72 hours.