Investors have been losing interest in gold mining stocks over the last year. I pointed out in my previous article that gold mining stocks are now a bargain at these levels. In this article I will shed light on investment opportunities in the Philippines.
The reason why I chose this country is because I like its fundamentals. The Philippines is one of the most mineralized countries in the world and ranks first in proven mineral resources in South-East Asia (Figure 1). It ranks in the top 5 in gold, nickel, copper and chromite reserves. Its two greatest gold and copper deposits are Tampakan - Indophil Resources (OTC:IPLRF) - and King-King - St. Augustine Gold & Copper Ltd. (OTC:RTLGF). The production growth in the Philippines is enormous. The country is now 2nd in global mining production just after Russia.
|Figure 1: Mining Exploration Activity in the Philippines|
Since 2008 gross production growth of the mining industry in the Philippines has grown 25% per annum.
- 2008: $1.95B
- 2009: $2.6B
- 2010: $3.2B
All of these positive fundamentals haven't been reflected yet in the following world class assets. The stock prices of these 2 companies owning the biggest gold and copper deposits in the Philippines (Indophil Resources and St. Augustine Gold & Copper Ltd.) have been decreasing. Indophil Resources dropped 65% from its high in 2010 (Chart 1). St. Augustine Copper & Gold Ltd. has dropped almost 90% from its high in 2011 (Chart 2). Indophil Resources owns 37.5% of Tampakan (Xstrata owns 62.5%). St. Augustine Gold & Copper Ltd. will have 100% earn-in rights in King-King after the bankable feasibility study.
It's no surprise then that M&A activity is starting to heat up. Zijin Mining (OTCPK:ZIJMF) announced on 29 March 2012 that it is looking to acquire assets in the Philippines and Indonesia. It plans to spend $872 million in acquisitions. It is not something new, in April 2011 Zijin Mining already showed interest in Indophil Resources. With $872 million in M&A capital Zijin Mining could easily buy up both companies: Indophil Resources and St. Augustine Gold & Copper Ltd. combined as their market caps total $US 517 million (Indophil Resources) and $90 million (St. Augustine Gold & Copper Ltd.).
It is a very speculative investment, but if you want to play this M&A theme in gold mines, IRN and SAU would be excellent candidates. The most inexpensive of the two is St. Augustine Gold & Copper Ltd, based on the amount of resources. They just offered shares in the amount of $12.18 million. A year earlier, they had some problems with management. Don Mills joined as Chief Financial Officer on 11 February 2011 but resigned on 8 August 2011.
|Chart 1: Indophil Resources (IRN)|
The Tampakan deposit represents the largest undeveloped copper-gold deposit in the South East Asia - Western Pacific Region. The resource contains 13.5 million tonnes of copper metal and 15.8 million ounces of gold. Xstrata's Final Feasibility Study into project viability was completed during the second quarter of 2010. The Environment Impact Assessment (EIA) study to support the Environmental Impact Statement (EIS) and Environmental Social Impact Assessment (ESIA) for the Mine have been completed. In 2010 Indophil Resources plunged 50% on a ban on open pit mining by the Philippines government. As of January 2012, the ban issue is still unresolved.
St. Augustine Gold & Copper
|Chart 2: Saint Augustine Gold (SAU)|
The King-king deposit is a gold rich copper-gold porphyry deposit located in the southeast of the Philippine Island of Mindanao, 35km east of Davao City and 13 km from the coast. The resource contains 10.3 million ounces of gold and 5.4 billion pounds of copper. The project is listed as one of the top priority projects by the Philippine Mines and Geosciences Bureau. The project has a low strip ratio (0.8:1 compared to an industry average of 2.5:1) and is in advanced stage with 95,651 meters of drilling composed of 291 core and reverse circulation holes, including 6,052 meters of new drilling composed of 14 core holes (and 1 RC) in 2011. King-king has entered into the feasibility stage of development (social, environmental and engineering phases).
Disclosure: I am long OTC:RTLGF.