I went back to the BFS. The base case for the NPV showed the company valued at $30m post tax based on:
1. price of gold at $1600/oz. 2. discount rate of 8%
They undertook a sensitivity analysis with gold +/- 20% and it appears the project isn't economic (i.e, NPV of zero) with gold at around 15% below base case (ie, $1360).
Quoting from the study:
The key driver of project value is the gold price. Under the base case zero pre-tax NPV8 is reached if prices fall by around 15%. This suggests that the project is relatively sensitive and only modest reductions in gold price are required to endanger the project.
Based on this analysis the Project generates reasonable returns at current gold prices and is sensitive to adverse movements in key variables, especially gold price.
Further, the study assumed a discount rate of 8%. I think that's underdone - cost of finance will increase as risk increases (i.e, the price of gold drops) I think 12% is more conservative (which doesn't help).
That all said........ They've found a lot more gold since then. And gold is showing good technical support at $1580/oz, and appears oversold. Here's a research piece from ANZ (Singapore) on gold EFT from Wednesday. (I posted also on KCN):
The weakness in gold at the end of last week has exposed value in the bullion market for investors able to see past near term technical risks. We believe a floor may have formed at the six-month lows just below USD1,600/oz struck while Chinese markets were closed last week, and that prices may bounce back above USD1,650/oz.
Gold appears oversold on a technical basis, but charts still suggest the risk of another USD50-80/oz slide to USD1,530/oz. This assumes a failure of support at USD1,600/oz.
Monday’s trading activity showed record trading volumes on the Shanghai Gold Exchange and plenty of interest from both financial institutions and jewellers. As a result we are feeling a little more confident that we will avoid retracing to the 2012 lows below USD1,550/oz.
We think prices will push higher after the FOMC minutes this Wednesday. The market appears to have already priced in some hint of tighter policy and higher US interest rates with positive consequences for the dollar and downside pressure on gold.
But our international economists point out that the FOMC will be on hold for a long time, even after the economic recovery appears entrenched. As such, the US dollar should remain weak for some time yet and gold prices will be supported.
So if you're long gold, hyper risk tolerant, right now presents excellent value. I'm buying on that belief - on their exploration value.
AZM Price at posting:
8.2¢ Sentiment: Buy Disclosure: Held
