The board here looks quiet, too quiet. Odd because I'm really seeing some compelling buys opening up in the sector. The next great mines and top flight mid tiers are being formed as we speak. Here's a name I took half a core position in today, and dare 'em to mark it down some more. This was written for Valueinvestorsclub.com., but don't know if they will use it, and since I suspect folks here might, here it is:
Wheaton River has put together a financing and transaction that will make it the 8th largest gold producer in Canada, with going forward production of 483,300 oz Au equiv. and $130 cash cost (*). WHT also enjoys a US listing on the ASE, and is actively traded.
This production profile ranks it in a new pier group along with Glamis (325k), Agnico Eagle (390K), Meridian (580k), and Goldcorp (620k).
Cash costs for WHT will be $130, again nicely comparable to low cost piers: GLG 140, AGE 124, MDG 80, GG 94.
Gold equiv. reserves comparisons:
GLG 5.3m, AGE 4.4, MDG 2.5m, GG 4.8m, WHT 3.3m.
(*) The basis for all analysis in the report is $350 Au, .75 Cu, $4.80 Ag. US$ conversion is used at .67. WHT produces 55% Au, 33% Cu, 12% Ag by value.
Capitalization:
420.6m shares @ .85 US = 357m
net proforma debt = 93m
57.5 wts trading at .40 US = 23m (@ 1.10 US, expire 07)
Enterprise value = 473m
estimated CF using basis prices = 105m
EV/cash flow 4.5x
The investment case for WHT is based on an upward (or correct) rerating towards it's more established piers. WHT is a new company, but is managed by well known mining veteran executives headed by Ian Telfer (founder of TVX, now part of Kinross). I believe Telfer has a unique sense of timing (gets active at bottom of cycle) and value identification, and can tap good mining personnel for his projects. The recent history of gold mining (and really all mining and extraction) has been characterized by a depression, and lack of investment, now followed by an initial resurgence. While TNT feasted during the bubble, this industry starved. As a result there are really only a handful of superlative companies and deposits that have enjoyed the resurgence in the yellow dog. Additionally as gold oriented investors have gone back into the sector they have sought out unhedged, clean, low cost producers. The result has been a narrow door and a funneling of investor funds towards the names mentioned above. In fact valuations are now quite rich in the "blessed names" by historical standards. For comparison:
Enterprise value/cash flow EV/ reserves
GLG 25x $175
AGE 22x $241
MDG 22x $242
GG 17x $370
WHT less than 5x $124
Even as a gold bull, I'm uncertain and doubtful about the valuation justification for the first four piers. I do feel confident however, that as the WHT name gets rolling, a significant upward rerating will occur, primarily because of the funnel effect, US listing and the business proposition that follows.
The Wheaton River assets and story:
WHT now owns three primary production assets. The first transaction was the purchase of Luisman in Mexico in early 2002, before the metals markets woke up. These assets were purchased for $82m cash and securities, and WHT raised capital in the Canadian equity market to finance it. The Luisman mines have a cash cost of $196, which would place it at about the middle of worldwide production curve. Production for 03-05 is anticipated at about 100k oz a year, and average cash flow will run around $24m, making the purchase price look excellent in hindsight. These mines do have some tailings issues and WHT will capex $13m a year during 03-05 to bring them up to World Bank Standards. FCF will run about $11m a year during that period, and higher afterwards. Reserves are currently 840k, but there are over 4m in resources that have historically (mined for four centuries) enjoyed high conversion rates to reserve status. WHT also holds a portfolio of 32 other properties in Mexico. I will mention two in particular. Ventanas lies in the same geological setting as the primary mine San Dimas, one watershed south. There has been historical production, and a resource of 580k has already been identified. Metates (50:50 JV GLG) is a heavily explored deposit that contains a whopping 26m oz resource, that would require $400 Au to be economical. Nevertheless this represents a tantallizing out of the money call on Au for WHT.
The flagship property is Alumbrera in Argentina. WHT has just purchased Rio Tinto's 25% share (along with the Peak Mine in Aust.) for $210m and and assumption of $66m in non recourse project debt. RTP is carrying a $70m LIBOR+2% note for two years for part of the purchase. 230m new shares were recently underwritten at US.97 to fund the purchase. Final closing is expected in mid-March. WHT is credited for 20m of Alumbrera's cash balance. WHT expects to have the RTP note paid back by YE 04 out of operational CF. WHT partners here are BHP (25%), and the 50% operator is MIM of Aus. RTP's rationale for sale: minority ownership(inherited in an earlier acquisition) and it's non-core asset classification. The Peak gold mine in Aus. producing 124,000 oz a year is also really not up to the mutha size standards RTZ seeks.
The Alumbrera mine was built in 1998 with all the bells and whistles, and a $1.2b price tag. It was a product of the last mining boom in 1996-97, and has been described as "overengineered". It would not be built today. WHT's required capex going forward will only be 14m/year. WHT's cut will generate 50m in cash flow a year. Most of that will go in the first two years to pay off the remaining project debt and for capex, but starting in the 2H, 2005, virtually all will flow to WHT as FCF. The mine life is estimated to have 11-12 more years, with few exploration opportunities left. Cash cost using the .75 Cu as a credit is NEGATIVE $46 for the 135,000 oz of Au produced to WHT's account. That increases to negative $20 on 04, and negative $3 in 05. Although Argentina is in depression as a nation, they have strong federally based mining laws and protections for miners. Others (ABX, MDG, AU) are currently pursuing major project developments there.
The Peak mine of Australia is a 123,600 oz producer, with an average three year going forward cost of $189. There is a five year life reserve of 730,000 oz. but WHT feels there is potential for 2-5 year extension. Cash flow is 20m, with a capex of 6m.
In conclusion, total companywide Au equiv production should average 483,000 oz, at $130 cash cost using the Cu credit (.75). Generating $100m CF off an EV of 473m is too cheap. Telfer like a good salesman tries to position WHT as a gold producer. It is primarily, however Cu plays a role, and I don't think a bad one. Should Cu rally to $1.00 that would bring cash costs down below $100 (and CF to 120m). Conversely if Cu sank to .60, cash cost would increase to $160 (CF 92m). Leverage to Au is about $5m per $10 move. Still, WHT has the elements that ought to hit the sweet spot in the precious metal investing world: it's low cost, unhedged, nicely leveraged, and has savvy management that doesn't sit on their hands. And in my work in this sector, it's a real bargain. I anticipate that it will be a core holding among the increasing participants looking for exposure and good value in the sector. |
