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I began my career as a professional money manager in September 2000, just after global stockmarkets peaked and started investing in commodity shares in 2003. My interest in commodities arose a couple of years after I started reading Jim Rodgers and Richard Russell. I have been investing for 15... More
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  • Centamin - An Undervalued Gold Producer

    This was first published on commodityshares.net:

    commodityshares.net/watchlist-centamin-an-undervalued-gold-producer/

    One company that has received a huge amount of attention in the gold sector is Centamin, which operates Egypt's only producing gold mine and is a company I have followed closely over the last decade. Centamin is currently subject to a rather spurious court case, from Hamdy Fakharanyan Egyptian lawyer who is questioning the validity of Centamin's licence. This lawyer is a well known trouble maker in Egypt and it is highly probable that Centamin will win the case, which is increasing looking like a waste of everyone's time. The company has stated that they have the relevant licence documentation. The ironic thing is Centamin's licence can only be changed by an Act of Parliament not a small time administrative court.

    In situations like this, it is important to focus on facts. Centamin floated on the stockmarket with a resource of around 1m oz and has now increased this to around 14m oz and reserves of nearly 10m oz. To put this into context, its Sukari mine is the 24th largest gold mine in the world and there is still plenty of exploration upside.

    Last year, the company produced 262,000 oz, which was above their forecast of 250,000oz. There doesn't seem to be many mining companies that meet expectations these days, but what is even more impressive is that this was achieved despite a temporary suspension of mining operations. In the last quarter of 2012, the mine produced a record 85,000 oz. For 2013, the management is forecasting around 360,000 oz, as they work towards increasing to 500,000 oz. Cash costs are a very respectable $700/oz. In Centamin's latest corporate presentation there is a slide, which compares their Return on Investment Capital (NASDAQ:ROIC) with peers in the sector. Centamin's ROIC is an impressive 23%, which is over double most of other companies.

    Before Centamin first encountered these issues last year the share price had recovered to around 100p (their all time high is 200p). The share price is currently 54p, which puts the shares on a PE ratio of 4. Now whilst this is clearly due to the political risk in Egypt, this discount to other miners seems too steep. Once the court case is resolved then hopefully the perceived political risk will reduce. The next hearing is 6th March and it looks increasing likely that the case will be resolved by the end of March. Centamin can then focus on ramping up production. Full Year results are due on 27th March and will impressive growth in earnings.

    A profit sharing agreement (NYSE:PSA) with the Egyptian government is due to kick in shortly and this should boost relations further. Centamin have highlighted that over the next 20 years, the Sukari mine should generate around $8bn in government revenues. Egypt does not have the required skills to run this mine without Centamin and given that the terms of the PSA are already in favour of the government, it is hard to see how they will nationalise the mine. Throughout this saga the Egyptian Mineral Resource Authority (EMRA) has provided valuable support to Centamin and they clearly have a good working relationship.

    Quite clearly, Centamin is not going to appeal to all investors given the political risk. However, it is an excellent operation with a world class deposit so worth keeping an eye on. If Sukari was in another country, the share price would be 3-4 times the current level. It is worth highlighting that the CEO (Josef El Raghy) owns around 7% of the company. Given the current market capitalisation of around £500m, he has a huge amount of "skin in the game" and his interests will be aligned with other shareholders.

    Tags: Gold stocks
    Feb 24 6:33 AM | Link | Comment!
  • An Introduction To Sandstorm Gold

    I first posted this article on commodityshares.net

    Sandstorm aims to complete gold purchase agreements with gold mining companies that have advanced stage development projects or operating mines. Sandstorm will make an upfront cash payment to the company and in exchange, Sandstorm receives the right to purchase a percentage of the gold produced for the life of the mine, at a fixed price per ounce. Sandstorm is the only 100% pure gold streaming company. Given the lower risk diversified business model, I have made this the largest holding in the portfolio.

    Sandstorm was founded by Nolan Watson (President & CEO) and David Awram (Executive Vice President) who originated the streaming model at Silver Wheaton. They played a leading role in building the royalty company, which now has a market cap of around $14bn and is the largest in the world. Mr Watson was the youngest CFO of a billion dollar company on the NYSE. In 2009, he left to found his own company, Sandstorm Resources, which then split into Sandstorm Gold & Sandstorm Metals and Energy and the latter became the first company to apply the streaming model to the oil sector.

    Sandstorm has been able to create value by the efficient allocation of capital. As streams have come online, operating cash flow has risen strongly. Unlike its larger peers, Sandstorm focuses on less well known assets that have significant production and exploration upside. They have now acquired nine gold streams (five of which are producing) and three NSR gold royalties and has a market cap of around $1bn. The streams provide leverage to the gold price and exposure to production rate and exploration upside. In my view, the most important thing about these streams is that Sandstorm only pays around $400-$500 an oz so with the gold over $1700; the company is generating very healthy profits.

    Developing and running mines is notoriously difficult. There are often operational issues and many mines suffer from capital expenditure overruns. In addition, sustaining capital requirements and rising costs are some of the other challenges that mining companies when trying to generate shareholder returns. Sandstorm's role is to provide financial expertise, so the mining company can focus on building and operating the mine.

    The advantage of the gold streaming model is that it substantially reduces the risk of investing in mining as Sandstorm has no obligation to contribute additional capital after the upfront payment has been made and Sandstorm's cash costs are fixed forever. The environment for raising mining finance is tough at present as banks are either unwilling or unable to lend (or the terms are very onerous) and raising equity when share prices are depressed is not desirable. Therefore, there is a huge opportunity for streaming companies to select the best deals they wish to invest in on attractive terms.

    Sandstorm has recently reported third quarter earnings, announcing revenues of $15.1 million on gold sales of 9,066 ounces. Cash flow was strong at $10.6 million. Margins decreased slightly on gold sales as the cost per ounce was $408, resulting in cash operating margins of $1258 per ounce. Based on existing gold stream agreements, the forecast for attributable production in 2012 is 31,000 to 34,000 ounces of gold, increasing to over 60,000 ounces of gold equivalent per annum by 2015. The company estimate Free Cash Flow will rise to $85m by 2015 based on $1750 gold. However, this takes no account of future streams. The company is in an early growth stage so there is no dividend at present but this is likely in the next couple of years.

    Management aim to continue growing and has $130m cash (pre the Mutiny stream) in addition to an unused $50m revolving line of credit to spend on new streams. This follows a $150m equity financing in September. Sandstorm have stated clearly that they will only invest in politically safe jurisdictions and the current streams are all in Canada, US, Mexico and Brazil. Sandstorm focuses on streaming deals with low cost producers and this gives them an extra margin of safety, should the gold price fall or operating costs rise. On average Sandstorm will invest in one or two projects for every 100 they access so clearly have a strict criteria. Management have stated that they are more deals in the pipeline and are clearly very prudent regarding how much they are prepared to pay per oz of gold, with the average cost below $500 an oz.

    The following is an overview of the company's main assets.

    Aurizona Stream (Brazil) - Sandstorm has a 17% interest in Luna Gold's Brazilian Mine and paid Luna $17.8m in cash and 5.5m shares (pre-consolidation*) of the company upfront. Initially the mine life was projected to be 8 years but Luna now has resources of over 3m oz, which is around 20 years of production. Annual production for 2012 is forecast to be around 60k oz growing to 125k oz in 2013 and there is potential to increase this further in due course. According to Luna's September 2012 investor presentation they are working on Phase II scoping study suggesting Aurizona has the long-term potential to produce as much as between 300,000 to 500,000 ounces of gold annually. This production upside is not build into Sandstorm's forecasts.

    St.Elena (Mexico) - Sandstorm has a 20% streaming interest in Silvercrest's, St. Elena mine at $350/oz. They were originally forecast to produce 30k oz for 10 years + but have now expanded and aiming to produce 35k oz in 2012. Sandstorm acquired the stream in May 2009 and made an upfront payment of $12m in cash and 700,000 ordinary shares (3.5m pre-consolidation). Silvercrest have the option to develop an underground mine and Sandstorm will have the right (but not the obligation) to purchase 20% of the gold for an upfront payment equal to 20% of the upfront capex made by Silvercrest plus ongoing payments of $450/oz.

    Black Fox (Canada) - In late 2010, Sandstorm acquired two streaming deals from Brigus Gold. They made an upfront payment of $56.3m and will pay $500/oz for the right to buy 12% of the gold production from the main Black Fox mine plus an additional 10% on the life of mine production on the of the Black Fox extension. Brigus is forecast to produce 80k oz in 2012, increasing to 110k oz next year. In October, Brigus repurchased 4% of the gold stream for $24.4m, so Sandstorm will now be entitled to 8% of production. They have an option to repurchase a further 2% until the end of 2012 for $12.2m.

    Bachelor Lake (Canada) - In January 2011 Sandstorm paid Metanor $20m in exchange for a 20% streaming interest with an on-going purchase price per oz of $500/oz for the life of the mine. Initially the mine was forecast to produce 60k oz per annum, however, studies showed this was possible at only 66% capacity. The mine is likely to produce around 30k oz in 2013 before rising to 60k in 2014. There is scope for expansion and production could increase to 75-80k pa.

    Summit Mine (NYSE:USA) - Sandstorm paid $4m upfront and has the right to pay 22% of the life of the mine at a cost of $400/oz. This is a non-core asset but Summit will produce 10-12,000 oz pa an initial 12 year period, so Sandstorm would receive around 2,400oz.

    Ming Mine (Canada) - In August 2010 Sandstorm paid Rambler Metals and Mining $20m in exchange for 25% of annual production until 175,000 oz gold, and 12% of the life of mine gold produced thereafter. Ming is forecast to produce 10k oz in 2012 and 13k oz pa from 2013 onwards. There is no ongoing cost per oz for the gold delivered from the Ming Mine. Rambler has guaranteed that within 24 months of starting production they will have produced and sold a minimum of 24,000 oz of gold or Sandstorm can have a partial refund of the upfront deposits. Sandstorm is also entitled to receive minimum cash flows from the gold stream of $3.6m in the first and second years and $31m in the third year.

    Serra Pelada (Brazil) - This is Sandstorm's latest stream and is a high quality high grade gold-platinum-palladium deposit that should be in producing gold by Q4 2013 and platinum by end of 2014. Sandstorm has bought 1.5% of gold production at $400 oz and 35% of all platinum production at $200 oz for the life of the mine. Sandstorm made an upfront payment of $60m for the stream in September 2012. Until 1 April 2015, Colossus has the option to repurchase up to 50% of by paying $48.75m, which would decrease Sandstorm's entitlement to 0.75% and 17.5% respectively.

    Deflector (Australia)- Sandstorm has just announced an agreement to purchase 15% of the life of mine gold produced from Mutiny Gold's deflector mine at a per oz price of $500. Sandstorm will make an upfront payment of US$38 million to acquire the stream.Like some of the other streams Mutiny has an option to buy back 50% of the stream within 36 months. Deflector is a high-grade gold and copper deposit located South Murchison, Western Australia. Mutiny are aiming to initially produce 55,000 ounces pa over a 7.5 years but there is potential to expand from this level. Using a discounted cash flow valuation method, assuming a gold price of $1,700 and production of 50,000 oz from 2014, rising to 75,000 oz until 2023 gives a value of $71m. I believe this is an attractive deal as this is one of the first streaming deals to be done in Australia, which is a politically stable country.

    Conclusion

    On a Free Cash Flow multiple of around 18x for 2013 and 13x for 2015 Sandstorm does not look cheap. However, this is a discount to larger peers such as Royal Gold and Franco Nevada, which trade on multiples of 17x and 20x for 2015. As Sandstorm continues to grow and announces more accretive streams, I would expect this gap to narrow. It is my view that Sandstorm will be trading on the same multiple within the next 2-3 years. Encouragingly, the top 5 institutions own around 27% and management also have sizeable holdings.

    Over the next few years gold attributable to Sandstorm will rise from 30,000 to over 60,000 oz and this does not take into account expansion from existing mines and new deals that are in the pipeline. At present the majority of production comes from Canada, whilst 33% comes from the Aurizona mine in Brazil but this will reduce substantially over the next few years. I have total confidence in the management team and expect them to continue growing the business over the next 5 years. Given the positive outlook for the gold price, this is an excellent buy and hold stock and should be a core part of a portfolio for investors looking for exposure to precious metals without the operational risks that mining companies face. For disclosure, this is my largest personal holding.

    * Earlier this year the company did a five for one share consolidation.

    Disclosure: I am long SAND.

    Dec 17 5:53 PM | Link | Comment!
  • Medusa Mining - Low Cost Gold Producer

    I first posted this article on commodityshares.net. Medusa used to be listed on the TSX and is one of the lowest cost gold producers in the world

    Medusa is an Australian company that has been focused on mining in the Philippines since 2006. It is part of the MSCI Australia 200 index as well as having a secondary full listing on the London stock exchange. The company has grown rapidly over the past five years and in the Financial Year to June 2011 produced 101,474 of gold at a cash cost of $189/oz and 60,595 oz at a cash cost of $261/oz in FY 2012. Management are forecasting 100,000 to 120,000 oz for the current FY at a cash cost of around $210/oz.

    Medusa stands out from its peers due to its low cost of production, strong balance sheet, stable country of production and exploration potential. The company's corporate strategy is to become a mid-tier, 400,000 ounce per year, low-cost gold producer by 2015/16.

    MML operates the Co-O narrow vein underground gold mine. At the end of 2010 they announced that they would be expanding the mine to produce around 200,000 oz pa from mid 2013. For the last year the mine has been running in "development" mode which partly accounts for the production fall in the last year. MML has also witnessed two natural events: a typhoon last December closed the road between the Co-O mine and mill, and an earthquake in February caused four leach tanks to tilt (these have since been replaced). The exceptional rain, described locally as a once in a lifetime event, did not affect the mine, but did impact production as a result.

    The development of Co-O is going well and the Chairman's address at the recent AGM confirmed that the key Saga shaft is now in the final stages of construction and due for commissioning before the end of 2012. The Chairman has referred to this as a "game-changer" which is strong language from someone so reserved. Construction of a large new leach tank has been completed and commissioned and the foundations for the SAG mill, crusher and detoxification plant are now complete. The major equipment items are also on site.

    MML now has a resource base of over 3m oz for the first time. 2m of these ounces are from Co-O (at an average grade of 10.1 g/t) and management are aiming to increase this to 2.5m oz, which will provide an on-going mine life of approximately 10 years based on an 80% conversion factor from resources to reserves through continuing development. The company strategy is to replenish at a minimum, the 200,000 oz of annual production. Being a narrow vein miner, MML will never have a huge reserve and this currently stands at 568,000 oz but management have issued a conceptual exploration target of 3-7m oz based on certain strike lengths, depth and aggregate vein widths. What is clear is that the mine is open at depth and should be producing for many years. In my view the Co-O mine stands out from others in an industry that is suffering from declining grades and rising costs. The geology is similar to the Diwalwal mine that is about 60km's away and has produced around 10m oz.

    MML's second project is the Bananghilig open pit deposit, which has 1.1m oz of gold at an average grade of 1.63 g/t. They continue to drill the property and intersections have been very encouraging to date. MML aims to have a 1m oz reserve for an initial 5 year mine life, before producing a feasibility study in 2013. At this stage, management estimate Capex will be around $200m, which will be 100% self funded from Co-O's cashflow so there will be no debt or equity issued. Bananghilig is set to enter production in mid 2015 and this is forecast to double production in the 2016 FY to 400,000 oz. Management believe the deposit will be far larger than 1m oz and this is just a starter to get the deposit into production and generating cashflow as soon as possible.

    Last year MML spent $37m on exploration, which was more than justified by the increased resource base. The budget for this year is $30m and there should be positive exploration news from both Co-O and Bananghilig. In addition, MML has 7 early stage copper projects and are hoping to prove up a resource at their Linging deposit, which they will look to monetise by selling on to a specialist copper miner. The company has said that some of the proceeds will be distributed to shareholders.

    One slight cautionary note is the government review of the Phillipines mining industry was completed in July this year and guidelines for future changes to its operation issued by the President of the Philippines in Executive Order number 079. This will not have an immediate effect on Co-O but the company have cautioned that, under current guidelines, timely receipt of the permits Bananghilig will require the government to pass new tax measures aimed at increasing its revenue before construction permits can be issued. However, the company should have the approvals by the end of 2013, although it is possible that royalty payments could increase from 3% to 5% adding $50/oz to costs but would be offset by a new four year tax holiday. Despite this, the Philippines government is keen to revitalise mining and foreign investment is increasing with several projects having come into production.

    As at end of June, Medusa had $51.3m of cash and gold on account and is debt free. Given the temporary production fall this is a healthy cash position. MML pay a dividend and although the final dividend was cut in the 2012 FY, the interim dividend is likely to be maintained, as production set is to increase. The board have indicated that they will review the dividend policy in 2014 once they have sufficient cash for Bananghilig.

    Conclusion:

    MML has strong growth prospects and is highly profitable, which explains why the current market capitalisation is around A$1bn. The top 20 shareholders account for around 64% of the company and 70% is owned by institutions. Based on 200,000 oz pa, cash costs of $200 and a gold price of $1700, MML will conservatively be generating profits of $200m in 2014. Analyst consensus forecasts are for eps of $0.72c to June 2013 and $1.16 to June 2014, which puts the shares on undemanding multiples of 8x and 5x. This is a significant discount to larger peers. As the sentiment towards the gold sector in general improves and the company starts moving towards their 200,000 oz pa, I would expect the shares to re-rate. In addition, as the second mine comes into fruition this could see a further re-rating as analysts start to factor this into their share price targets and the company is de-risked. The share price has been consolidating for the last 12 months and now is an attractive buying opportunity for those with a medium to long term time horizon. A PE of 12, which is not unreasonable for a growth stock, would give a share price of $14 - or a capital return of 140% from the current level. Having met management several times, I am confident they will deliver.

    Disclosure: I am long OTCPK:MDSMF.

    Dec 17 5:53 PM | Link | Comment!
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