Seeking Alpha
Recommended for you:
Profile| Send Message|
( followers)  

After the market cheered Yamana Gold Inc.'s (NYSE:AUY) purchase of Extorre Gold Mines Limited (XG) last week, it would seem that the entire group of junior gold miners looks ripe for acquisition. After a horrendous slide in the first half of the year, junior gold miners as a group are cheaper than at any time since the end of the financial crisis.

As I documented in a previous article, Yamana's Post-Acquisition Bounce Shows The Way To Value in Gold Miners, Yamana's acquisition of Extorre was so cheap that Yamana's stock went up for two days post-acquisition, in contrast to the typical behavior of previous mining acquisitions. With the market now cheering acquisitions, the stage looks set for a few more senior players to take advantage of market weakness to add reserves and secure future production at attractive pricing.

With that in mind, I have attempted to put together a model to determine the best values among potential buyout candidates. The basic methodology has been to determine value by determining a discounted cash flow for the first year of full production for each miner and then dividing it by the total acquisition cost to give a rough metric for cash flow yield. In determining discounted cash flow (the numerator), I have chosen to use the first full year of production rather than production over the life of the mine in order to simplify the model and speed up the research.

However, in most cases, the first year production provides a good relative estimate of value, and early year production would in any case be given higher weight in a length of mine model due to discounting. To determine the total acquisition cost (the denominator), I have used the current company market cap less the cash on the balance sheet plus debt and expected capital expenditure to develop the asset. This gives a good estimate of the total cost for an acquirer to bring an asset to production. The ratio of discounted cash flow (DCF) to total acquisition cost is a valuation proxy for a potential buyout.

I have also chosen to include two qualitative factors: exploration potential and risk bias. These are completely subjective, with exploration potential being mostly based on unexplored land position and deposit type and risk bias being a combination of political risk, regulatory risk, and financing risk. Finally, to round out the methodology, I have assumed gold price of $1,600 and a relatively high discount rate (DF) of 10% per year in order to help price in the extra risk associated with early stage development projects. All information has been taken predominantly from company presentations and technical reports. Without further ado, the results beginning with cash flow, acquisition costs, and then final results:

Ticker

Prod Oz

Cash Cost/oz

1st Yr of Prodn

Cash Flow (M)

DF

DCF

BRD

100000

700

2012

90

1.00

90

CGR

60000

1200

2012

24

1.00

24

EGI

120000

700

2015

108

1.33

81

GBG

350000

600

2014

350

1.21

289

JAG

180000

800

2013

144

1.10

131

KBX

95000

500

2016

105

1.46

71

NG

1300000

450

2017

1,495

1.61

928

RBY

180000

520

2015

194

1.33

146

THM

600000

600

2018

600

1.77

339

VGZ

250000

600

2014

250

1.21

207

XRA

700000

18

2017

1,107

1.61

688

XG

250000

300

2015

325

1.33

244

Ticker

Mkt Cap

Cash

Debt

Capex

Total Cost

BRD

185

34

70

27

248

CGR

112

16

19

8

123

EGI

86

15

5

120

196

GBG

391

42

278

80

707

JAG

104

50

260

100

414

KBX

65

3

0

120

182

NG

1,500

336

128

3,700

4,992

RBY

890

239

0

214

865

THM

248

39

0

1,615

1,824

VGZ

208

16

0

676

868

XRA

143

66

0

4,800

4,877

XG

410

40

0

210

580

Ticker

DCF/Ac Cost

Expl Potential

Risk Bias

BRD

0.36

High

Low

CGR

0.20

High

Low

EGI

0.41

Neutral

High

GBG

0.41

Low

Med

JAG

0.32

Low

Med

KBX

0.39

Neutral

Med

NG

0.19

Neutral

High

RBY

0.17

High

Low

THM

0.19

High

Med

VGZ

0.24

High

Low

XRA

0.14

Neutral

High

XG

0.42

High

High

The overall results give a broad picture of relative valuation among junior gold miners. Extorre Gold is provided at bottom with the valuation being at the buyout price for comparison against a recent buyout. The results are not definitive, but give a solid overall picture of valuation. While none of these companies will be able to be acquired quite as cheaply as Extorre due to the takeover premium that is not reflected here, there are definitely several candidates in the same general valuation range as Extorre. The general conclusions are that Brigus Gold Corp. (BRD), Entrée Gold Inc. (NYSEMKT:EGI), Great Basin Gold Ltd (NYSEMKT:GBG), and Kimber Resources Inc (KBX) all look attractive relative to near-term production. Now for a few brief comments on each company.

Brigus Gold Corp: Low risk, cash flow positive to support further exploration in the Red Lake Mining District. Cheap on the basis of current production and with considerable exploration upside. Few negatives to speak of, and difficult to predict when positive catalysts will come in the form of drilling results.

Claude Resources, Inc (NYSEMKT:CGR): Also relatively low risk but high cash costs limit current cash flow. Production scheduled to expand moderately but exploration is the big value driver. At present limited visibility for future production growth and cost decrease.

Entrée Gold: Very difficult to value due to the lack of quality information. I was forced to estimate production, first year of production, and required capex and therefore have low confidence in the valuation. Will be interesting to follow…still at a very junior stage.

Great Basin Gold: A current holding of mine. Properties are well explored so exploration upside is limited. Burnstone mine has been slow to produce but management comments indicate recent problems have been solved. Most capital expenditure is complete and there is potential for significant near term cash flows. Positive catalysts in the next two quarters if results show Burnstone mine back on schedule.

Jaguar Mining Inc. (JAG): A fairly cheap valuation that could get even cheaper if cash costs come down. Significant upside at the Gurupi Project. Biggest risks are high cash costs and debt load. Lacking a near-term catalyst as the company is in the process of a major restructuring.

Kimber Resources: I own a small position. Project economics look great. Biggest issue is financing, as the company will need several capital raises to continue exploration and move on to production. This might make it an ideal buyout candidate. Agnico-Eagle Mines Limited (NYSE:AEM) has a project nearby and a former executive on the board at Kimber. Big question is how dilutive any financing will be toward current shareholders.

NovaGold Resources, Inc (NYSEMKT:NG): I have credited a $4B reduction against capex due to the likelihood that Galore Creek will be sold to finance Donlin. This is a very rough estimate of the likely value of NG's stake in Galore Creek. Obviously, the biggest issue with NG is the capex. Based on the type of deposit it would likely operate longer than the current mine plan but this is not going to be an easy project to develop.

Rubicon Minerals Corporation (NYSEMKT:RBY): Great land position, well financed, but the price already reflects significant potential. Until such potential is confirmed it is difficult to see how the price goes much higher.

International Tower Hill Mines Ltd (NYSEMKT:THM): A large deposit but relatively high cost, difficult to develop, and a long way from production mean the Livengood mine is unlikely to be a major target unless gold prices go much higher.

Vista Gold Corp. (NYSEMKT:VGZ): Similar to Kimber Resources but not quite as cheap and with more exploration potential. Asset sales would likely help fund the Mt. Todd project but it still carries a significant price tag. Would be attractive at the right price.

Exeter Resource Corporation (NYSEMKT:XRA): Huge deposit but huge capex to go along with the Caspiche project. Difficult to see how the financing will be obtained without huge dilution or a buyout. Spinoff of Extorre Gold may have been a mistake as monetizing Extorre Gold assets could have gone a long way toward financing Caspiche. Low cash costs make the project very interesting for a major looking to bring down cost structure but relatively few companies can afford to make such a big investment.

Extorre Gold: The benchmark for valuation. Clearly a great deal for Yamana from a valuation standpoint although Argentina raises questions that made Yamana perhaps the only one interested. But the bottom line is that this sort of valuation makes sense to the market.

Overall, the model seems to indicate that Brigus Gold, Great Basin, and Kimber Resources are cheap relative to their peers. Entrée Gold also looks interesting, but based on the low confidence of the valuation, must be viewed with skepticism. Given that Brigus and Great Basin are currently producing and are expected to be cash flow positive, they are probably less vulnerable to acquisition as they can demand a higher premium from the current market valuation.

However, with Kimber Resources in need of financing to get its flagship Monterde project off the ground, it would seem an ideal candidate for acquisition by one of the mid-tier gold producers. Low acquisition cost and low capex, combined with relatively low cash costs, make Kimber quite attractive to a bigger firm.

Source: Measuring The Acquisition Prospects Of Junior Gold Miners