It seems to me that the reasons for the share price of a gold company include:
·the country/countries in whichthey operate
·whether they are an explorer ora producer
·the grades revealed by drillingor processing
·the amount of gold produced
·the cost of producing that gold(AISC)
·the price of gold
·the extent to which it has beensold forward or hedged
·the amount of debt the companyis carrying
·the likely mine life
·the amount of exploration andthe exploration results
·the expected position of the company,not just the current position
·the quality of the management
As a result, comparisons between companies are difficult.However, suppose a person wants to compare the returns on gold stocks to term deposits.If the interest rate offered on terms deposits is 2% then it takes $50 to get a $1 return.A quick look at the dividend paying, ASX-listed, gold producers reveals that it takes as little as $25 and as much as $150 to get a $1 dividend.Put in a more conventional way, the dividend yield on those companies varies from a high of 4% to less than 1%.
So, what is the price prediction for FML?Obviously, you have to make all sorts of assumptions.It seems to me that the FML Board is sensibly moving towards sustainable production of a good amount of gold with good grades and a good AISC.
Assume 100,000 oza pa (at least initially).
Assume an AISC of AUD1,200
Assume a PoG of AUD2,000
That would yield AUD80m pa, ie (2,000 – 1,200) x 100,000
Initially, no tax due to tax losses assume but 30% in due course.
Assume AUD24m pa: for increasing plant capacity initially and later for tax.
That leaves AUD56m pa.
As I have said before, if a gold company is only mining then, sooner or later, it runs out of gold and if it is only exploring then, sooner or later, it runs out of money.That is why a combination of mining and exploring is ideal.So allow something for a continuing exploration programme.
Assume AUD16m pa for exploration.
That leaves AUD40m.
(I accept that the increasing plant capacity and exploration would likely reduce tax and make more money available after tax but let’s keep it simple.)
Assume half that is paid in dividends.
Since a 1c dividend costs FMLless than AUD2 million, for AUD20m you get 10c.
Shares in ASX gold miners are selling at between 25 and 150 times the dividend.
That suggests a share price of at least AUD2.50.
I note that Shandong bought around 4,500m shares at 5c, costing AUD225m
After the 50 to 1 conversion, that becomes 90m shares at a cost of AUD2.50
So, in Shandong we have the benefit of their expertise and a shareholder that must surely want to get the share price up to at least $2.50 since that is what they paid for them.
It seems the recent run-up from the mid-20c into the 40s means people are waking up to the potential of FML although the novelty of the news seems to have worn off because this morning (Friday 26 July) the share price has, at the moment, pulled back to 38c.What is surprising about that run up in the share price is that the latest drilling results were accompanied by a sentence about resuming production that did no more than repeat what was in the presentation made to the AGM. Yet the market appears to have read it as if it was fresh news.
A look at page 13 of that presentation reveals what are likely to be the other announcements before the end of this calendar year.As the table headed “Stage 1 Pipeline Key Dates in 2019” contains six entries, it seems we can expect five more announcements before Christmas.
Of course, they do deal with the people who are challenging their tenements and I suspect that is holding up the deal with Intermin.The “glass half empty” people look at the proposed sale of Coolgardie and suggest Shandong is selling out and cutting their losses.The “glass half full” people see the proposed sale of Coolgardie coupled with the exploration results from Laverton and think it will not be long before FML, instead of having about 2m ozs in Coolgardie and about 2m ozs in Laverton, will have close to 4m ozs in Laverton plus the money from the sale of Coolgardie to fund a restart of processing. Plus, they will only have to operate in the Laverton region, not Coolgardie and Laverton.
Of course, there is potential upside in the above figures, such as if an expansion of the plant enables higher output or if the price of gold goes higher.
As always, DYOR.
(20min delay)