In dollar amount both companies paid the same price. However in terms of shareholder dilution the prices paid are very different; Company A has to give up 10% of its equity ownership while Company B has to give up 43% ownership.

In order to capture the costs each company paid to achieve growth we use Full Shareholder Dilution.  This is measure of actual plus potential (in the case of streaming) equity dilution companies undergo to develop and/or acquire the ounces of gold in the ground (R&R). A good way to think about this measure is instead of only asking the question “what cost did the company pay for growth, to ask “what did the company forgo and/or will forgo in the future in order to achieve this growth?” To derive the Full Shareholder Dilution cost we convert all existing debt financings including all present and future streaming obligations into equity at current share price. Once we complete the conversion we can compare what the eight companies have given up in exchange for the growth they accomplished.

Full Shareholder Dilution

To convert all regular debt from the balance sheet into equity we simply convert net debt into number of shares using the current share price.

Streaming agreements are not as straightforward. In a typical metals stream financing, a streaming company makes an upfront payment to a resource company in return for the right to purchase a fixed percentage of future production of one or more metals produced by a project, and makes on-going payments for each unit of metal delivered equal to the lesser of a fixed price and the prevailing market price at the time of delivery. Streaming transactions are generally long term in nature and are often for the life-of-mine.

Taking into account only the upfront payment for the development & production does not reflect the full cost to shareholders. Shareholders will forgo future revenues even after the upfront payment is repaid.

To illustrate, Teranga Gold entered into a streaming agreement with Franco Nevada to acquire and build the OJVG project.  In exchange for an upfront payment of US$ 135 million, Franco Nevada will receive 22,500 oz of gold annually for the first 6 years (135,000 oz in total) and after that will be receiving 6% of the annual production for up to 34 years.  Currently the OJVG project contains 3.63 Mi oz in Reserves and Resources combined.   If the full amount is mined and no further resources discovered, an additional 80,000 oz will be delivered to Franco Nevada.  At today’s prices (US$ 1,100/oz) this would yield Franco Nevada US$ 186 million (based on current Reserves) or US$ 475 million back (based on current Reserves + Resources) in the latter case costing shareholders US$ 340 million in addition to repaying the upfront payment of US$ 135 million.

Three of the companies in our group have streaming agreements: New Gold and Teranga Gold entered into streams in 2013 while Primero purchased both of its mines with streams already attached.

In our calculation of Full Equity Dilution for all three companies we have included the upfront payment as well as the present value of lost future cash flows to stream (long term Au price used is US$ 1,100/oz).

Full Shareholder Dilution = Total Shares Outstanding + Net Debt Fully Converted into Shares + Present Value of Future Streaming/Royalty Obligations Fully Converted into Shares

The following table compares percentage growth in Reserves & Resources and percentage growth in gold production for each company relative to the percentage growth in Full Shareholder Dilution since the time each one commenced production:

That table shows that:

·         Oceana has the lowest dilution since it commenced production. Production has nearly doubled and given the lack of increase in R&R it is most likely a result of the developing of pre-existing R&R. The marginal increase in R&R is due to a higher price of gold used for the calculation.

·         New Market’s production increase comes at a high dilution price (all in the early years of operations).  The R&R growth is again attributable to increases in gold price used to calculate them.  The company used the money to increase production from pre-existing R&R.

·         Endeavour’s increase in production is was also highly dilutive for shareholders; there is no significant increasing R&R. 

·         Primero’s and Teranga’s levels of dilution seem disproportionately high compared to the increase in R&R and production levels.  In the case of Primero, the growth and dilution were a result of one acquisition. Similarly, Teranga’s increase in R&R is the result of one acquisition.  The increases in production were attained in the early years as the producing mine was fully developed.   It appears that both companies paid a high price for what they purchased. 

·         Newgold’s percentage increase in dilution was nearly the same as their increase in R&R and twice that of production. Newgold’s growth however was a product of mergers among equals rather than capturing upside potential.

·         Alamos and B2Gold have created the most value to their shareholders.  Both increased R&R by nearly twice percentage increase in dilution and production by the same percentage as the dilution. 

In Part 2 of The Real Cost of Growth for Gold Miners we will show how growth is reflected in market value.

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 -- Published: Tuesday, 5 April 2016 | E-Mail  | Print  | Source: GoldSeek.com

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