hartleys research, page-4

FOCUS MINERALS LTD
Friendly Bid for Crescent adds Production Ounces
Hartleys is a transaction adviser to FML in respect of this bid
Focus Minerals Limited (?Focus?, ?FML?, ?Company?) has made an offmarket
takeover for Crescent Gold Limited (?Crescent?, ?CRE?). The bid is
friendly and Crescent?s board is unanimously recommending the offer and
have provided acceptances for all their shares. The consideration being
offered to Crescent Shareholders is one FML share for every 1.18 CRE
shares held. Focus has also entered into a pre-bid acceptance agreement
with Crescent?s major shareholder, Deutsche Bank Group (?Deutsche?),
which owns 29.23% of Crescent. The pre-bid agreement is in respect of
19.9% of shares in Crescent. In the absence of a superior offer, Deutsche
intends to accept the bid for the remaining 9.33%. Focus currently has a
diluted 18.5% relevant interest in Crescent following conversion of a
convertible note to CRE shares by note holders.
Combined production of 230Kozpa targeted for CY2012
The transaction enables Focus to grow production, double resources and
diversify operations. Targeted production from Crescent?s Laverton
operation is expected to add ~100kozpa for combined production of
~230koz in CY2012.
Adverse weather conditions impacted the Laverton operations during the
Dec CY?10 and March CY?11 quarters, causing a loss of haulage days and a
decrease to ore processed. Reduced production and revenue resulted in
tight working capital which hampered CRE?s development progress at
Laverton. We see the strong balance sheet of Focus, along with FML?s
management/operational expertise as important factors for the turnaround of
the Laverton operation. Operational efficiencies provide an opportunity to
reduce costs and improve cash flows, but the biggest improvements can
come through improved ore scheduling (increase mined ore grades and
improve processed tonnes). Focus is targeting cash costs below $900/oz,
which we believe is attainable.
Resources double to 4.5Moz, Reserves now 746Koz
The combined entity will have gold resources of 4.5Moz. Crescent?s current
resource is 2.25Moz at a grade of 2.1g/t Au, with the vast majority of the
resources contained within shallow-oxide open pits. Focus? current resource
is also 2.25Moz but at a slightly higher grade of 2.6g/t Au, due to some
higher grade underground resources. Combined reserves through the
merger would be ~746koz at grade of ~2.1g/t Au. Focus? post merger
EV/Resource metric is calculated to be $62/oz, a considerable discount to
its producer peer?s of $115/oz, which provides a revaluation opportunity.
A pipeline of exploration opportunities
The combined group has a strong portfolio of expanding mine operations
and a pipeline of exploration opportunities. Post-merger integration will
provide the financial capability and in-house experience to unlock CRE?s
exploration value across the Laverton district; a well endowed goldfield that
has produced over 25Moz of gold from deposits less than 200m deep. Our
preliminary valuation of Crescent sees value in the transaction and we
continue to recommend Focus Minerals Limited as a Buy. The offer opened
on 30th June 2011 and closes on 1st August 2011, unless extended.