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Fox-Davies Capital maintains 'buy' rating for Lydian Intl after Newmont buyout

Fox-Davies Capital (FD Capital) issued a note on Lydian International (TSX: LYD) after the company bought out Newmont Mining’s (NYSE:NEM) 50% stake in the Amulsar project, viewing it as a very positive outcome for Lydian as even though the project is currently smaller than the broker anticipated, the company now at least has control of it and will avoid the possible dilution to 30% or lower. It maintains a 'buy' rating on the stock.

Whilst the resource has grown to 1.4 million ounces, the emphasis has been on defining the size of the ore body, not expanding the current resource or converting it to reserves, FD Capital said. "Now that Lydian owns the ore body we expect this philosophy to change. We understand that for the 2010 drilling season 3 rigs will be used. One will tighten up the drill hole spacing on the resource from 80 to 40m, another will look to expand the existing resource and the third will define other known targets. As a consequence we expect the resource to be upgraded by the end of 2010."

However, Newmont’s exit from the project comes at a cost for Lydian, which will now have to pay US$15 million for Newmont’s interest with US$5 million payable at the end of August 2010, another US$5 million due by the end of 2011 and the remaining US$5 million payable before the end of 2012 or after the completion of the bankable feasibility study along with the issue of 3 million shares to Newmont.

At production, Lydian can buy out Newmont’s interest for another US$16 million, or pay a 3% NSR (net smelter royalty) or 20 quarterly instalments of US$1 million each.

The research report said that the valuation model has been altered “extensively” due to the inclusion of the payments to Newmont and the deferral of the start of the mine to 2013, which is some 18 months later than the broker’s original estimate. The costs are also expected to be modestly higher than the initially projected US$400/oz.

However, Newmont’s exit led to the decline of the forecast capital requirement, which dropped to US$30 million along with the general & administrative costs. FD Capital projects revenues of £0.7 million for 2010 after none in 2009, which is then expected to increase to £1.6 million in 2011 and move down to £1.1 million in 2012. Losses per share are expected at 3.4 pence this year compared to 3.2 pence last year, which are forecast to increase to 4.4 pence in 2011 and 4.6 pence in 2012.

As a result, FD Capital maintains its 'buy' recommendation for the stock, while reducing the price target to C1.22 from C$1.76. Shares in Lydian last traded at C$0.69.

Disclosure: The author holds no positions in the company