and amid the gold carnage little ECO manages to make money for the first time in 5 Years!!!
~ August 3, 2000
Echo Bay Mines (ECO)
ECO: Surprise Return to Profitability on Lupin 3S (Neutral, Speculative)
Restart, Gold Hedges. Mkt Cap: $132.2 mil.
August 3, 2000 SUMMARY
* Echo Bay Mines reported second quarter EPS of $0.04,
PRECIOUS METALS upending our ($0.04) estimate and a uniformly negative
John H. Hill, CFA consensus. It has been five years since ECO was
profitable, and this represents a significant
accomplishment.
* Results benefited from the restart of the original
"company maker" Lupin mine, solid performances at core
operations, and gold hedges.
* Total production was 188,000 ounces at a net total cash
cost of $199 per ounce, a significant improvement over
past averages.
* Liquidity has improved, and near-term debt is
manageable. The capital securities continue to loom over
the balance sheet, and will likely force a
recapitalization or deal -- eventually. Shareholders
equity remains negative.
* The company is positioned to wait or take up a
transaction on better terms. Maintaining 3S (Neutral,
Speculative) rating and cutting price target to $2.00.
FUNDAMENTALS
P/E (12/00E) 94.0x
P/E (12/01E) NA
TEV/EBITDA (12/00E) 3.5x
TEV/EBITDA (12/01E) 4.8x
Book Value/Share (12/00E) NA
Price/Book Value (4.3x)
Dividend/Yield (12/00E) NA/NA
Revenue (12/00E) $294.2 mil.
Proj. Long-Term EPS Growth 0%
ROE (12/00E) NA
Long-Term Debt to Capital(a) 119.0%
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (8/2/00) $0.94 Current Rating 3S
52-Week Range $2.44-$0.88 Prior Rating 3S
Shares Outstanding(a) 140.6 mil. Current Target Price $2.00
Convertible No Previous Target Price $2.75
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/99A Actual ($0.06)A ($0.07)A ($0.07)A ($0.06)A ($0.26)A
12/00E Current ($0.04)A $0.04A $0.01E $0.00E $0.01E
Previous ($0.04)A ($0.04)E ($0.02)E ($0.01)E ($0.11)E
12/01E Current NA NA NA NA ($0.06)E
Previous NA NA NA NA ($0.06)E
12/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/00E ($0.10); 12/01E ($0.07); 12/02E NA
IT'S BEEN FIVE YEARS SINCE ECHO BAY TURNED IN POSITIVE EPS.
Echo Bay Mines turned in a surprise positive EPS result of $0.04, upending
our ($0.04) estimate and a uniformly negative consensus. Net income was
bolstered by a successful restart of the original "company-maker" Lupin mine,
continued solid performance at Round Mountain and McCoy/Cove, and gains from
prior hedge closeouts. Silver ounces inventoried during the first quarter
flowed through the income statement in the second, adding roughly $0.03 per
share. It has been five years since Echo Bay turned in positive earnings,
and this represents a significant accomplishment by a lean, re-focused
management team -- particularly given the stark realities of the gold market.
LUPIN RESTART SUCCESSFUL; ROUND MTN REVERTS TO NORMAL; MCCOY/COVE FINISHING
STRONG.
Echo Bay produced 188,000 ounces of gold at a net total cash cost of $199,
plus 3.6 million ounces of silver. The break below $200 per ounce cash costs
is notable, as this is an important dividing line in a sustained sub-$300 per
ounce gold price environment. Round Mountain continued its rebound from a
stripping-inhibited 1999, with costs climbing marginally from the first
quarter on higher diesel costs. Tons stacked increased 18% over the first
quarter, while grades improved and mill throughput eased. Hometake's (HM, 2H
-- $5.25) purchase of the Case Pomeroy 25% interest in the mine was a
disappointment and may hint at the future. McCoy/Cove turned in another
strong quarter with above-plan silver production, and total cash costs
climbing slightly to a still-impressive $172 per ounce. Operations are
benefiting from higher grade ores accessible due to clearing of waste
material from a 30 million ton 1996 pit wall failure. The two pits will be
depleted by year-end, and production will fall in 2001 as lower grade
stockpiles are processed. The upper zone of the Cove South Deep underground
will be mined out early next year, but given the poddy nature of
mineralization and other accessible targets we would expect some additional
tonnage. The mature Kettle River mine also logged a respectable performance,
with total cash costs dropping significantly to $215 per ounce from $242 in
the first quarter. Additional resource tonnage was added to the northeast of
the K-2 deposit, with promise for next year. Echo Bay swapped properties
with Newmont, exchanging a 50% interest in the large, low-grade Kuranakh
project in Russia for 75% of the Golden Eagle property located some 15 miles
from Kettle.
Lupin was restarted on time, on budget at $12.4 million with first gold
poured in April. Thus far, cash costs of $228 per ounce are well below the
historical average -- and targets offered in restart plans. Reported costs
of $213 are net of profitable Canadian exchange hedges. Performance drivers
are more efficient shift scheduling, lower headcount, better materials
handling, fewer weekly flights to the site, and lower winter road haulage
costs due to cooperation with diamond explorers/developers in the region.
The Aquarius project in Timmins, Ontario is taking on a greater aspect of
reality following completion of feasibility and permitting. In keeping with
recent industry transactions, we would expect Aquarius to leverage off the
joint milling scenarios being discussed by Kinross Gold Corp. (KGC, 3S --
$0.56) and Placer Dome Inc. (PDG, 2H -- $8.38). A tolling deal, joint
venture, or outright sale of the property are possibilities, as the
standalone capital cost of $80-90 million is prohibitive.
Echo Bay has revised its annual production target upwards to 700,000 ounces
at lower costs of approximately $200 per ounce. Given year-to-date average
costs, this implies a rise to the $220 level in the second half -- although
Echo Bay has made a practice of under-promising and over-delivering in recent
years.
LIQUIDITY IS IMPROVING, BUT CAPITAL SECURITIES CONTINUE TO OVERHANG THE
BALANCE SHEET.
Echo Bay closed the second quarter with a much-improved near term liquidity
position, but with dark clouds continuing to loom over the balance sheet.
Cash was $11 million, while working capital was $21 million for a current
ratio of 1.4x. "Cash" long term debt stood at $36 million due next year,
which was reduced by $4 million in July. We treat the company's $100 million
face value quasi-debt/quasi-equity capital securities as long term debt under
US GAAP, yielding a total of $194 million and a +100% LTD/total capital
ratio. This is somewhat misleading, as the $11 million in annual interest on
these securities has been deferred for five out of the 10 consecutive semi-
annual period allowed under their indenture -- and principal payments are
pushed out to 2027. We expect the interest deferral provisions to force a
recapitalization or corporate transaction -- eventually. Shareholders'
equity remains negative.
Operating cash flow was $18 million before working capital items, while
bottom line cash flow was $8 million after $3 million in capex and $7 million
in net debt repayments. Results were bolstered by cash hedge realizations of
$302 per ounce gold and $5.18 silver -- further enhanced by non-cash revenues
recognized from prior profitable position closeouts. The company has added
roughly 30,000 net ounces to its book, for 30% cover at $314 for the balance
of the year.
DEALT A WEAK HAND, MANAGEMENT HAS POSITIONED THE COMPANY WELL.
Echo Bay shares have been punished by the grinding attrition of a protracted
gold bear market, falling 61% from their 52-week high of $2.44 during last
October's failed rally. The perception of high costs, declining production,
and a dwindling reserve base have exacerbated the visibility problems
inherent to all mid-tier players in the fragmented, out-of-favor gold sector.
Nevertheless, management's measured, disciplined approach to the asset base
has disproved the critics, preserved value, and allows the company the
flexibility to weather the downturn a while longer or take up a corporate
transaction on better terms. With industry consolidation themes heating up,
the Round Mountain and Aquarius assets could have appeal -- yet considerable
financial engineering would be required. Raising EPS estimates and
maintaining 3S (Neutral, Speculative) rating, while cutting price target to
$2.00. |
