Date: Sat Feb 05 2000 13:20
flierdude (i think its a good time to repost this on DROOY) ID#341249:
Copyright ¸ 1999 flierdude/Kitco Inc. All rights reserved
Date: Mon Jan 17 2000 07:20
Wotan ( Updated Durban Deep analysis ) ID#17753:
Copyright ¸ 1999 Wotan/Kitco Inc. All rights reserved
Because of the recent acquisitions of Dome Resources ( Australasian region , domeresources.com.au )
Durban Deep is now in a even better shape to make significant profits in this Gold price environment. With Dome
Resources cash costs below $ 150/oz this acquisition gives Deeps the flexibility to survive in a low price environment. I
hope we won't see lower prices, of cause. Therefor I calculated the share price based on NPV of Deeps in a higher
price environment. Because Deeps is partly hedged, I also considered their hedge book in my calculations ( as of
November ) . In a recent announcement, Durban CEO Prinslow stated that they won't hedge more production and that
banks will meet the margins ( through credit lines ) if POG should rise. This is certainly very positive news concerning the
hedge policy. All assumptions are conservative ... you might check that.
Following assumptions were made:
Start level: $ 300 / oz
Tax rate 35 %
Reserves at $ 300: 19 m oz
Growth of reserves per $25 increase: 9 %
Increase in costs per $25 increase: 2 %
Real discount rate: 8 %
Number of shares: 115 million
Years of production: 20
Costs next year: $ 255 / oz
Hedge book: valued with intrinsic values of forward and option positions. Time value of options is low, therefor
neglected.
This leads to the numbers:
Gold price ? Share price
300 ..... 2.39
350 ..... 4.81
400 ..... 8.23
450 .... 12.95
500 .... 19.26
550 .... 27.61
600 .... 38.42
These price targets are HIGHER than before the Dome Resources acquisition, esp. below $400.
The leverage of Deeps @ $300 is approx. 7 and decreases to 5 @ $600. The theoretical leverage of a 100% move in
Gold is around 16 ( with Durban @$1.60 and POG @285 it is even 20 ) . I try to show a realistic picture what one can
expect. All these numbers should be seen as the lower bound of the share price ( as said, conservative NPV ) . I don't
account for e.g. a falling Rand, closing of hedge book positions, market perceptions of higher Gold prices, ... all this
would increase the price of Deeps. The hedge book is fairly OK ( they effectively HAD to hedge, it was a survival
strategy which is appropriate for smaller producers with high costs ) and management is certainly keen on giving
investors full participation of a rising Gold price.
What I like with Deeps is their expansion in the Australasian region ( they were the first SA there ) , of course the Harties
deal, and a possible future Rangy deal and that management is focussed on driving costs down. Also it is not impossible
that Harmony might bid for them. What I don't like ... well ... Kebble junior, you know the story ( but that is past! ) .
IMHO Deeps is the best company of the big producers ( it really is now a big one, compared with Deeps a few years
ago! ) . It will give shareholders the best returns in a rising POG environment. In the next few days a Harmony analysis
will follow. Harmony improved significantly with Randfontein.
Now I'd like to discuss an ? I hope so ? interesting thought that I had: by holding shares of Durban, you effectively hold
a series of call options on the POG because Durban will be able to mine more oz should the price rise and sell them into
the market. This real option is not accounted for in the above analysis. I only calculated NPVs at the corresponding
POG levels. Therfor, these values of options should be added to the above price targets. By using very low volatilities (
compared to historical ) and expiries not longer than 10 years ( actually these REAL options never expire ) I get for the
value of these options with POG $300 ... slightly below $1 per share. This might seem astronomic, but please compare
the current valuation of Durban ( this consideration holds for Harmony, as well ) with NA producers.
Appreciating comments,
Wotan |
