Received a mention in todays Australian as well. Although it isn't accurate now regarding the Canadian partner.
SHARES NEWS
Mergers and acquisitions abound in the gold sector, James Dunn reports
THE Australian gold sector is experiencing a wave of merger and acquisition (M&A) activity among its smaller members, and analysts expect it to continue while the gold price remains strong.
In recent months, local resources investment company AuSelect has beaten Canadian group Premier Gold Mines to take over Sedimentary Holdings, which mines gold at Cracow in south-central Queensland; Victorian producers Perseverance Corporation and Leviathan Resources have negotiated a friendly merger; and PNG-based miner Lihir Gold has swooped on Ballarat Goldfields, which is trying to reopen the famous Victorian field.
"We will see more of this as companies get closer to bringing new production on stream," says David Sutton, gold analyst at Martin Place Securities. "The smaller players need capital and the bigger players need ounces. Ballarat Goldfields is a classic example. It needed $100 million-plus to develop Ballarat East; Lihir was cashed up and looking to add a mine in Australia to its PNG operation. Both got what they needed."
Gavin Wendt, senior resources analyst at independent research firm Fat Prophets, says predators are prepared to pay a premium for a second or third source of cash flow.
"They know that the single-project companies trade at a discount, and even if they pay a premium for them, the market will most likely pay them back by giving them a higher valuation because they've added new cash flow," he says.
Sutton says predators are assisted by two factors: the strong gold price and the undervaluation of many Australian gold stocks compared to ounces in the ground. "With the gold price at these levels, any company that can pick up resources at a cheap price -- where somebody has done the hard work of finding the deposit and proving the resource -- will do it, because the cost of exploration is very high.
"Why explore when you can pick up ounces that at the current gold price will make you a nice fat margin -- even at grades less than 2 grams per tonne."
In mid-May, the $A gold price peaked at $933.20 an ounce, an all-time high.
It has since slipped back to $785 an ounce but, more importantly, the Australian gold industry is producing gold at an average cash cost of $468 an ounce. That leaves a $317 average margin.
At the high-cost end are mines such as Ravenswood in northeast Queensland, operated by Resolute, which has an average cost of $664 an ounce, and Agincourt Resources' Wiluna operation in Western Australia, with an average cost of $635 an ounce.
In contrast, Troy Resources' Sandstone operation in Western Australia reported a production cost of $267 an ounce for the September quarter.
Sutton says Morning Star Gold and Hill End Gold are "perfect examples" of stocks that are undervalued compared to ounces in the ground.
"Morning Star is going back into the old Morning Star mine at Walhalla in Victoria, and is sitting on potentially a very large resource. Hill End is developing the Hill End project near Bathurst in NSW, also based on an old goldfield.
"Hill End believes it has potential for 4 to 5 million ounces of gold; Morning Star Gold thinks it has 2 to 3 million ounces of gold.
"Hill End has already brought in a Canadian partner to fund exploration. It's unlikely that this sort of potential isn't being noticed."
Wendt likes Tanami Gold, which is about to bring its Coyote project, in Western Australia near the Northern Territory border, into production; Avoca Resources, which has a high-grade (4 grams per tonne) 1.1 million ounce resource at Higginsville in Western Australia; and Dominion Mining, which operates the wholly owned Challenger mine in South Australia.
"These are all good single-project companies that would be attractive to a predator. Tanami and Avoca are very close to production, and Dominion is doing very well.
"Since Challenger went underground (it began life as an open-pit mine in 2002 before operations moved underground in 2004) it has made a lot of money mining ore at 5-6 grams per tonne.
"They are mining a lode called M1, they have two others ... which could be similar. Dominion just paid its first dividend and has a lot of exploration upside."
Steve Bartrop, co-founder of independent research firm Stock Resource, says North American companies in particular are looking for companies with "significant, tangible resource/reserve positions".
He says Integra Mining, which has identified a 1.1 million ounce resource at the Aldiss-Randalls project near Kalgoorlie, and Crescent Gold, which has a potential 900,000 ounce resource at Laverton, also in Western Australia, will be attractive if the gold price stays high. But Bolnisi Gold, an Australian company with a Mexican project, is the real stand-out, he says.
"Bolnisi's Palmarejo-Trogan gold-silver project in Mexico has a resource of about 3.6 million ounces of gold equivalent, with about 78 per cent of the resource tonnes at Palmarejo now either measured and indicated. Bolnisi is in the S&P/ASX 200 index and, as they prove the resource up, any extra goes straight to the market cap, which is what North American investors want to see," he says.
HEG Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)