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The Real Cost of Growth for Gold Miners Part 4


 -- Published: Tuesday, 19 April 2016 | Print  | Disqus 

By: Cipher Research

In this series we turn our attention to growth in the gold mining sector, the most active of which, occurs at the Mid-Tier level.

We study the growth of eight Mid-Tier gold mining companies: B2Gold (TSX:BTO), New Gold (TSX:NGD), Endeavour Mining (TSX:EDV), Oceana Gold (TSX:OGC), Primero Mining (TSX: P), Newmarket Gold (TSX:NMI) , Teranga Gold (TSX:TGZ), and Alamos Gold (TSX:AGI).

In The Real Cost of Growth for Gold Miners – Part 1 we measured and compared the cost of growth of the companies in the peer group. In Part 2 we captured the market value of growth. In Part 3 we turned our attention to the operational health of the eight Mid-Tier miners.

In the final part 4 we present the approach Cipher takes in valuing the Mid-Tiers.

OUR VALUATION APPROACH

In the most basic terms, the value of a gold mineral project is equal to the number of ounces in the ground that will be potentially extracted times the value or price of an ounce in the ground.

Value = Price X Quantity

Establishing Price

To derive the value of an ounce of gold in the ground (Reserves & Resources) we divide the Enterprise Value of a company by the total number of Reserves and Resources (EV/Total Reserves + Resources) and take the average for all companies and all years to use as a benchmark of what an ounce of gold in the ground is worth as a percentage of the price of gold.

The following tables show the historic EV/oz Reserve & Resource and average value of gold in the ground as percentage of the market price of an ounce of gold for our peer group:


EV/Total Reserves + Resources ($/oz)

Company

Current

Q3 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

Ave

GOLD

1,075

1,166

1,266

1,411

1,669

1,572

1,225

972

872

695

603

1,139

Primero

 122

 167

 268

 310

 241

 237

 206

 N/A

N/A

N/A

N/A

 222

Newgold

 79

 94

 125

 139

 222

 222

 182

 73

 140

N/A

N/A

 142

Alamos

 52

 83

 65

 115

 205

 212

 209

 145

 110

 143

 188

 139

B2Gold

 69

 87

 121

 127

 89

 259

 164

 83

N/A

N/A

N/A

 125

Teranga

 27

 32

 39

 37

 114

 189

 221

 N/A

N/A

N/A

N/A

 94

Endeavour

 52

 44

 66

 82

 133

 135

 N/A

N/A

N/A

N/A

N/A

 85

Oceana

 50

 55

 63

 61

 96

 77

 72

 49

 63

 83

N/A

 67

NewMarket

 21

 22

 21

 18

 67

 42

 62

 33

N/A

N/A

N/A

 36

Average

 59

 73

 96

 111

 146

 172

 160

 77

 105

 113

 188

 114

 

EV/Total Reserves + Resources (% of Gold Price)

Company

Current

Q3 2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

Ave

GOLD

1,075

1,166

1,266

1,411

1,669

1,572

1,225

972

872

695

603

1,139

Primero

11%

16%

25%

29%

22%

22%

19%

 N/A

N/A

N/A

N/A

21%

Newgold

7%

9%

12%

13%

21%

21%

17%

7%

13%

N/A

N/A

13%

Alamos

5%

8%

6%

11%

19%

20%

19%

13%

10%

13%

17%

13%

B2Gold

6%

8%

11%

12%

8%

24%

15%

8%

N/A

N/A

N/A

12%

Teranga

3%

3%

4%

3%

11%

18%

21%

 N/A

N/A

N/A

N/A

9%

Endeavour

5%

4%

6%

8%

12%

13%

 N/A

N/A

N/A

N/A

N/A

8%

Oceana

5%

5%

6%

6%

9%

7%

7%

5%

6%

8%

N/A

6%

NewMarket

2%

2%

2%

2%

6%

4%

6%

3%

N/A

N/A

N/A

3%

Average

5%

7%

9%

10%

14%

16%

15%

7%

10%

11%

17%

11%


Based on the results, our peer group benchmark becomes 11% of the price of gold. Currently this equates to about $115/oz per ounce of gold in the ground.

The next step in our valuation is to measure the debt leverage of each company. The debt measure we use is simplified. We divide market capitalization by enterprise value - a numbers close to 1.0 means the company has little or no net debt; above 1.0 mean more cash than debt on the balance sheet.

Multiplying the Cash Adequacy Ratio by the Debt Measure gives us what we call Operational Health Factor The higher the number, the healthier the company.

The following is a chart of the average ratios for each mining company for the period 2013-2015 along with their current discount to the benchmark $115/oz in the ground.  A good way to think of this chart is to view it like a Health Chart.

Health Chart 2013-2015[1]

Company

Cash AR

Debt Measure

Operational Health Factor

Premium (Discount) to Benchmark

Primero

0.88

0.88

0.77

116%

Alamos

1.01

1.19

1.20

24%

Newgold

0.81

0.71

0.58

4%

B2Gold

0.74

0.83

0.61

(3%)

Endeavour

0.80

0.47

0.37

(44%)

Oceana

1.10

0.88

0.97

(48%)

Teranga

0.99

0.75

0.74

(69%)

NewMarket

1.17

0.64

0.75

(82%)

Average

0.94

0.79

0.75

(19%)


Operational Health vs Premium (Discount) to Benchmark for the period 2013-2015

http://news.goldseek.com/2016/goldoperationalhealthminers.jpg

Generally the higher the Operational Health Factor the higher EV/oz with the exception of Oceana, Teranga and NewMarket.  Note however that these three companies are underperforming in terms of R&R growth – number of ounces and speed of growth.

Operational health is an important determinant of market value however size of R&R has an overwhelming significance.  In fact growth in R&R can make up for below average operational health.  This again confirms that size of R&R is essential to the market valuation the companies receive. 

An important point to make is that Operational Health Factors have to be reviewed within the context of the companies’ corporate development.  Short-term decline in operational health might not be a bad thing if it would lead to a longer-term benefit. 

For instance the operational health of B2Gold appears relatively low in the last 3 years however this is the case because a significant amount of their cash is committed to the development of the Fekola Mine in Mali which according to company guidance would nearly double their production by the next 2 years.  Once operational, the Fekola Mine is operational we expect to see a considerable increase in B2Gold’s Operational Health Factor.

CONCLUSIONS

In summary the key findings in the series are:

·         To capture The Real Cost of Growth for Goldmines be sure to pay attention to the Full Shareholder Dilution to date and in the presence of streaming & royalty agreement, include forecasted dilution.

Major market value drivers for mid-tier gold miners are:

·         Size of R&R

·         Speed of growth

Other market value drivers for Mid-Tier gold miners are:

·         Operational health

o   Cash adequacy

o   Debt level

·         Production volumes

·         The Benchmark value for EV/oz for mid-tier mining companies is $115 or 11% or the spot price of gold

Group Average

 

Comments

R&R (Mio z)

14.11

Ranges from 4.24 to 29.10 (Smallest major has ~40 Mi oz)

Production (oz/yr)

345K

Ranges from 187 to 506K (Smallest major has ~800K)

Speed of Growth Mio z/yr)

1.60

Ranges from 0.37 to 4.12

CAR

0.94

Ranges from 0.74 to 1.17 (on average they are not generating positive cash flows)

Net Debt

302

Ranges from 29 to 1,130 Mi

Debt Measure

0.69

Ranges from 0.50 to 0.92

Op Health Factor

0.66

Ranges from 0.40 to 1.01

Delta to Benchmark

(49%)

Ranges from -82% to 6% (benchmark is US$115/oz)

 

Primero

 

Comments

R&R

4.24

Over ½ is P&P, lowest of peer group

Production

215K

Near lowest in peer group, more risk to price drops

Speed of Growth

0.59

One acquisition over 6 years

CAR

0.88

Relatively low CAR

Net Debt

152

Below average

Debt Measure

0.71

Close to average

Op Health Factor

0.62

Below average

Delta to Benchmark

6%

Very highly valued relative to peers and for existing R&R and cash flows

 

New Gold

 

Comments

R&R

29.1

Highest in group, No growth since 2013

Production

405K

Range from 380-405 since 2010

Speed of Growth

4.12

Started with 9.8 Mi in 2008

CAR

0.81

Low CAR well below average

Net Debt

1130

Very high debt especially given low CAR

Debt Measure

0.51

Lowest in group

Op Health Factor

0.41

Lowest in group

Delta to Benchmark

(31%)

Valued above average – appears high relative to health of the operations

 

B2Gold

 

Comments

R&R

20.8

Well above average

Production

500K

Highest in group Fekola to add nearly 400K by 2018 (close to major status)

Speed of Growth

2.97

Started with 3.0 Mi in 2009

CAR

0.74

Lowest in group due to investment in the development of new mine in Mali (expected on-line in 2018)

Net Debt

452

Moderate to high debt

Debt Measure

0.69

Average for group

Op Health Factor

0.51

Low health due to ongoing investment in Fekola mine in Mali

Delta to Benchmark

(40%)

Reasonable value at present, Mali mine production should significantly increase value

 


Alamos

 

Comments

R&R

19.8

Well above average, questionable economics on pre-production resources

Production

370K

Merger with Aurico more than doubled production

Speed of Growth

1.87

Started with 3 Mi in 2005 fairly consistent growth

CAR

1.01

Company had very high CAR prior to merger may not be able to sustain post merger

Net Debt

227

Debt a result of the merger with Aurico

Debt Measure

0.78

Well above average

Op Health Factor

0.79

Reasonable health but to maintain will need higher gold prices

Delta to Benchmark

(55%)

Recently discounted value

 

Endeavour

 

Comments

R&R

10.9

Moderate R&R

Production

506K

High production relative to R&R

Speed of Growth

1.42

Started with 5.2 Mi in 2011

CAR

0.80

Below average CAR

Net Debt

287

Moderate debt

Debt Measure

0.50

Lowest in group

Op Health Factor

0.40

Lowest in group  new mine in Burkina Faso will need to perform well or higher gold price to improve value

Delta to Benchmark

(55%)

Discounted slightly higher than average

 

Oceana

 

Comments

R&R

11.9

Moderate R&R all from producing mines

Production

353K

Average production relative to peers no new production immediately planned

Speed of Growth

0.41

Started with 8.6Mi in 2007

CAR

1.01

Very good CAR

Net Debt

49

Very low debt

Debt Measure

0.92

Very good debt measure

Op Health Factor

1.01

Highest in group

Delta to Benchmark

(57%)

Moderate to highly discounted  would greatly benefit from acquisitions

 

Teranga

 

Comments

R&R

8.42

Low R&R

Production

187K

Production to increase through 2016 as new mine brought on-line in  late 2015

Speed of Growth

1.08

Started with 3 Mi in 2010

CAR

0.99

Very good CAR

Net Debt

91

Very low debt

Debt Measure

0.60

Low debt measure result of low market capitalization

Op Health Factor

0.60

Low health result of low M/C, Stream could further impair health

Delta to Benchmark

(77%)

Highly discounted, proof of health or acquisitions should help value

 

NewMarket

 

Comments

R&R

7.71

Less than 650 K oz P&P at existing operations means mine life in question.  Significant grade drop to M&I  at Fosterville (50% of production) Will require increase IMP to upgrade M&I

Production

225K

Stable production needs new mines for increase

Speed of Growth

0.37

Started with 5.5 Mi in 2009, All attributed to increase in Au price used for calculations

CAR

1.17

Excellent rating – can it be sustained

Net Debt

29.0

Very low debt

Debt Measure

0.82

Dragged down by low MC

Op Health Factor

0.96

Very good, higher M/C would help

Delta to Benchmark

(82%)

Highest discount of group.  Limited upside with current projects.  Needs acquisitions to demonstrate long-term viability

 

http://www.cipherresearch.com/

About Cipher Research

 

Cipher Research Ltd. is an independent research and analysis company covering Metals and Mining markets. We develop comprehensive valuation models applying the disciplines of Geology, Economics, Statistics and Finance ("Geonomics").  Our valuation models have proven to be successful in generating investing and trading strategies.

 

Disclaimer

Cipher Research Ltd. is not a licensed broker, broker dealer, market maker, investment banker, investment advisor, analyst, or underwriter and is not affiliated with any.  There is no assurance the past performance of these, or any other forecasts or recommendations in the reports, will be repeated in the future.  These are high-risk securities, and opinions contained herein are often time and market sensitive.  No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or recommendation to buy or sell any securities mentioned.  While we believe all sources of information to be factual and reliable; we in no way represent or guarantee the accuracy thereof, nor of the statements made herein.  We do not receive or request compensation in order to feature companies in this publication.  We may, or may not, own securities and/or options to acquire securities of the companies mentioned herein.  This document is protected by the copyright laws of Canada and the U.S. and may not be reproduced or for other than for personal use without prior, written consent.  This document may be quoted, in context, provided that proper credit is given.



[1] Simple averages used  2013-2015


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 -- Published: Tuesday, 19 April 2016 | E-Mail  | Print  | Source: GoldSeek.com

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