In a white-hot gold sector, leading producers are likelier to be takeover predators than prey. But some stocks that have lagged the gold-sector rally must look interesting to larger global companies that want to add to their gold reserves and production.
I outlined a bullish medium-term view on gold for The Super Switzer Report in April 2015 and again in June 2016 (though cautioned against chasing gold bullion higher in the short term). The S&P ASX/All Ordinaries Gold Index is up 110% over one year.
Gold Road Resources (GOR), included in this report’s takeover portfolio in July 2015, is up 77% over one year. Evolution Mining (EVN), nominated for this report as one of three top small- or mid-cap resource stocks in April 2016, has rallied 42% since that column.
The bad news, however, is that soaring valuations will surely deter suitors in gold stocks, even though the medium-term outlook for gold bullion is favourable, given continued equity and currency volatility and rising demand for safe-haven assets.
Gold predators will have to work hard to find explorers and producers that are trading well below their intrinsic value, have an improving outlook and have been overlooked by the market.
The recent proposed tie-up between Canada’s Terranga Gold and Gryphon Minerals (GRY), a one-time member of The Super Switzer Report takeover portfolio, suggests more deals are on the way.
Perseus Mining (PRU) could be one of them. Regular readers of this column will recall I included Perseus in the takeover portfolio upon its launch in April 2014. The gold producer had a short-lived stay; I dropped it from the portfolio in July 2014 after a quick 21% gain.
That was fortuitous. Apart from a brief rally earlier this year, Perseus has mostly tracked sideways amid ongoing operational challenges at its flagship Edikan mine.
To recap, Perseus owns the Edikan Gold Mine in Ghana, West Africa and the less advanced Sissingue Gold Project in Cote d’Ivoire.
Perseus envisages average production of 220,000 ounces per annum at Edikan at US$865 an ounce (all-in site costs) over 7.5 years. The approved full-scale development of Sissingue will add 75,000 ounces annually at US$632 an ounce. That’s serious leverage to the gold price.
All up, Perseus has 6 million ounces of measured and indicated mineral resources at Edikan and Sissingue and 5.2 million ounces at its pre-development stage Yaoure Project in Cote d’Ivoire, which was acquired through Perseus’ $85 million takeover of London-listed Amara Mining in April 2016.
Perseus is transitioning from a one-mine, one-country gold producer to a multi-mine, multi-country, mid-tier producer in a famed gold region. It’s a smart strategy.
Perseus is well positioned to fund Sissingue, begin construction on the plant this quarter and pour the first gold in the December 2017 quarter if all goes to plan. Sissingue and further production upgrades at Edikan would, in turn, provide the cash flow to develop Yaoure and lift Perseus’ annual production to around 500,000 ounces.
Perseus has an interesting production profile for a larger offshore gold producer that seeks a bigger foothold in West Africa and can snap up the company after a challenging few years operationally at Edikan and as it is being de-risked through new projects.
Perseus tumbled this month after it disappointed with a $35.6 million loss for FY16 because of lower foreign-exchange gains, exploration writedowns and reduced gold production at Edikan. Some broking firms had expected a small profit.
At 49 cents a share, Perseus is capitalised at $501 million. It has $166 million in cash and gold bullion (16.5 cents a share) at the end of FY16 and no borrowings. Gold producers with substantially more cash than debt stand out to acquirers.
Macquarie Equities Research has an outperform recommendation on Perseus and a 12-month share-price target of 90 cents. The company looks undervalued compared with similar-sized Australian gold stocks and the development of Sissingue could be a catalyst for a re-rating or for a global predator to swoop.
Perseus clearly suits speculators. African mining has higher sovereign risk because of the threat of civil war or governments changing mining royalty arrangements. Investors who flocked to West African gold stocks in 2011 – when the market was full of Africa-focused exploration floats and hype abounded – learned a painful lesson in risk management.
Source: Yahoo
From African gold to tissues and tampons
Asaleo Care (AHY) has disappointed since its $655 million Initial Public Offering in April 2014 at $1.65 a share. The maker of personal care and tissues products has slumped from a 52-week high of $2.33 to $1.50 after a disappointing earnings guidance downgrade in July crunched the stock.
Increased competition in its markets and higher pulp prices, due to the weaker Australian dollar, damaged its FY16 result, which had been earlier well flagged to the market.
Although a defensive business, Asaleo’s lack of pricing power is concerning as more aggressive price discounting in its product categories emerges. It will have to work hard to rebuild its reputation as a defensive stock and a re-rating catalyst is hard to find.
For all its challenges, Asaleo has latent strategic value as the number one or two player in the personal care and hygiene markets in Australia and New Zealand. Its key brands include Libra in female hygiene, Sorbent in tissues, and Handee in paper towels.
Asaleo looks slightly undervalued after the market wiped almost a third off its share price this year. The median share-price target is $1.60, based on the consensus of a handful of broker firms that cover the stock.
Faced with declining pricing power, Asaleo would benefit from greater scale as part of a larger global consumer-products group. Sweden’s SCA Group Holdings, a 34% shareholder, is a potential acquirer. With Asaleo back below its issue price, it might be time for SCA or a large consumer goods company to pounce.
In the interim, an expected grossed-up yield of about 8%, which should be reliable given Asaleo’s defensive qualities, will placate long-term investors. Its strong balance sheet, reflected in its recent share buyback, is another comfort.
[1]Source: Yahoo
Portfolio update
The Super Switzer Report takeover portfolio continues to outperform the market, up 16% over one year compared with a 9% total return in the S&P ASX 200 index.
Most pleasing is the improving performance of stocks that had weighed on performance: iSelect, Santos, South32, Ardent Leisure Group, Ansell and WorleyParsons, for example.
Perseus Mining and Asaleo Care are added to the portfolio this month.
Tony Featherstone is a former managing editor of BRW and Shares magazines. All prices and analysis at August 31, 2016.
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