share price may come close to doubling:-E.L. & C. Baillieu...

share price may come close to doubling:-


E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 1
11 December 2007
Lion Selection (LST) In Brief
Transformational transaction brewing!
�� Newcrest has put its 70% interest in the Cracow gold mine out to
tender; LST, which directly owns 30% (present value $58m), has
a pre-emptive right. LST has said 100% ownership of Cracow would
be a major strategic step in
�� transforming the company from a NTA related basis to one based on
earnings multiples. It is here we see a significant lift in value (mkt
cap.) if LST is successful in obtaining 100%. The process is
expected to start for LST in early February with a final investment
decision around mid-2008.
Presently, LST’s 30% of Cracow is valued at $58m which places a
run-through value of $193m on Cracow. But, Dominion Mining, for a
similar level of gold production/comparable costs and mine life, has a
market capitalisation is $498m. We value DOM at $250m ($2.50 per
share) and 100% of Cracow at $190m but attribute another $55m to
exploration (see summary sheets attached – DOM, Cracow).
�� LST says it’s serious about owning 100% of the mine. The value lies
somewhere between –
a) $156m (70% of $215m, a function of grossing up LST’s $58m
value and inflating by 15% for a control premium).
b) Our own valuation, including exploration upside, is $245m with
70% worth $171m plus a premium for operatorship, say
$185m.
�� Well, LST is now an “operating” investment company which trades at
a discount to its NTA, like most such companies. The present share
price is $1.79 versus the most recent NTA of $2.03, ie a discount of
13%. It has $67m in cash, boosted by $30m coming from the sale of
its interest in Platmin and residual investments totalling $249m.
LST has been liquidating some non-performing investments within the
portfolio, eg Intrepid Gold. We understand it is selling other interests
but is reluctant to nominate given market sensitivities. Should it sell
all of its AGM shareholding (it has sold some) it would realise around
$30m.
So potentially, LST could, by the time it is required to make a
pre-emption on the 70%, have over $100m in cash.
�� Based on a pre-emptive price of $175m to $200m, this
could/would leave a funding shortfall of $75m to $100m (at a mid
point). LST has had numerous approaches about various
alternative forms of financing in the event of a purchase. And
there are those content to take a minority position (25% to 30%) in the
total asset; paying a premium to get in.
�� The Lion Selection Group has in its history been very frugal when it
comes to issuing shares; we would only see the issue of shares as a
last resort although not out of the question. It’s likely the shortfall in
funding will be a mix of debt (say 70%) and equity.
�� The attraction of owning Cracow in its entirety is that the market
has only limited choices in this category of gold mining, ie
+100,000 oz pa, cash cost of below A$375/oz, unhedged with
exploration upside. We have referred to DOM and point out that at its
present share price of $4.87 it’s selling on a prospective PER of 19
times for 2007/2008 earnings.
Recommendations
Short Term: Speculative Buy
Risk: Medium to High
Price: $1.79
Valuation Range: $2.54 to $3.08
Snapshot
Monthly Turnover (m) 6.6
Market Cap (m) $340.9
Shares Issued (m) 191.0
52 Week High $1.90
52 Week Low $1.34
Sector Div. Metals & Mining
Business Description
Lion Selection Limited, is a resource investment
company. LST invests in Australian mining and
exploration companies with gold and base metal
activities in Australia, Africa and South East Asia. It
owns a direct 30% interest in the Cracow
underground gold mine in Queensland.
Investment Fundamentals
Year end July FY07 FY08 FY09 FY10
Reported NPAT ($m) 64.3 46.1 40.3
EPS (¢) 32.4 19.5 17.1
PE Ratio (x) 5.5 9.1 10.5
DPS (¢) 10.5 5.9 5.1
Dividend Yield (%) 5.9 3.3 2.9
Spot Gold (US$/oz) 647 750 750
Exchange Rate (A$/US$) 0.80 0.90 0.89
Analyst Name – Ray Chantry
61 3 9602 9219 [email protected]
We estimate that LST could generate earnings of
7.6 cps ($16m) from 100% of Cracow in the
2008/09 year. Capitalised at a PER of 15 times
(mid point between forward PERs of DOM and
EQI) translates to $240m or $1.15 per share.
Then there’s the investment portfolio which LST
intends to still aggressively pursue and after further
rationalisation could still approximate $1.65 per share.
So, base case, the LST share price moves up
through $2.80 per share . . . that’s if it all goes to
plan!
We see negligible downside risk for LST given the
strategic nature of its shareholdings in IRN and
ALB and its other investment opportunities.
E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 2
Lion Selection
Share Price LST $ 1 .79 $ 1 .79 $ 1 .79
Year Ending . 31-Jul 2005/06 2006/07 2007/08 2008/09 2009/10
Market Capitalisation $m 189.4 340.9 340.9 376.3 0.0
Valuation $m 477.7 559.2 635.0 686.9
Valuation per share $ 2.65 $ 3.01 $ 3.26
Issued Ordinary Shares m 106.1 191.0 191.0 210.8 210.8
New Issue " 14
Options " 7.600 7.600 5.800
Fully diluted 113.7 198.6 210.8 210.8 210.8
ASSUMPTIONS
Spot Gold $US/oz 527 647 720 750 750
Spot Exchange Rate $A/$US 0.755 0.800 0.878 0.898 0.892
Gold production 000oz 3 2 3 6 3 3 1 10 1 12
Gold Resource m.oz 1.1 0.9
Mkt Cap per resource oz 310 401
Cash Cost 281 327 356 367 356
Number of Shares m 113.7 198.6 210.8 210.8 210.8
FINANCIALS
Sales Revenue 22.6 26.1 28.2 95.8 97.4
Other Revenue 56.4 51.6 52.1 40.6 30.2
- Operating Costs 9.0 12.4 12.7 44.5 44.5
EBITDA 13.6 13.7 15.5 51.3 52.9
- Depreciation/Amortisation 2.6 2.6 2.5 8.4 8.4
-Other 3.5 7.5 10.1 15.6 15.2
EBIT 7.5 3.6 2.9 27.3 29.3
Pre Tax 62.1 53.8 52.1 66.3 58.0
Net Profit (pre Abnormals) $m 41.0 64.4 36.5 46.4 40.6
-Half year result 1.2
EPS cents 36.1 32.4 17.3 22.0 19.3
EPS Growth % 4618% -10% -47% 27% -13%
P/E ratio x 5.0 5.5 10.3 8.1 9.3
Gross Cash Flow $m 16.2 37.4 28.6 44.0 41.4
GCFPS cents 14.2 18.8 13.6 20.9 19.7
P/GCF times 12.5 9.5 13.1 8.5 9.1
Dividend $m 10.0 20.0 15.0 13.9 12.2
DPS cents 9.4 10.5 7.9 6.6 5.8
Dividend Yield % 5.9 4.4 3.7 3.2
Net Cash Flow $m 9.0 32.4 23.6 39.0 40.4
Discount rate % 8.5% 8.5% 8.5% 8.5% 8.5%
Net Present Value Cracow $m 1 56.6 3 44.4 3 46.4 3 57.5 3 54.2
Exploration/other (8.3) (14.0) (12.6) (12.6) (9.5)
H/Office 4 .4 4 .5 4 .5 1 1.0 1 1.0
Debt (9.0) (13.0) (68.5) (56.6) (44.7)
Cash 7 3.0 1 02.7 2 8.5 7 4.8 1 15.0
Investments 2 61.0 2 61.0 2 61.0 2 61.0 2 61.0
Total Valuation $m 4 77.7 6 85.6 5 59.2 6 35.0 6 86.9
NPVPS $ 2 .50 3 .25 2 .65 3 .01 3 .26
E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 3
Dominion Mining dom $ 5 .37 $ 5.37 $ 5.37 $ 5.37
Market Capitalistion $m $ 5 43.3 $ 5 53.6 $ 5 53.6
Valuation $m $ 2 33.4 $ 2 81.2 $ 2 68.3
Valuation $ 2 .37 $ 2 .80 $ 2 .67
Year Ending . 30/june 2004 2005 2006 2007E 2008E 2009E 2010E
Issued Ordinary Shares m 80.7 98.5 98.5 100.4 100.4 100.4 100.4
Options " 2.150 0.300 0.000
Unlisted Options " 2.000 2.100 2.700 2.700 2.700 1.500 1.500
Fully diluted 84.810 100.870 101.170 103.100 103.100 101.900 101.900
ASSUMPTIONS
Spot Gold $US/oz 409 450 556 666 750 750 750
Spot Gold A$/oz 626 616 736 832 855 835 841
Hedged Price A$/oz 562 580 580 710 729 0 0
Realised Price A$/oz 594 593 635 790 811 835 841
Hedging as a prop. of production 50% 65% 65% 35% 35% 0% 0%
Silver $US/oz 6.10 8.00 12.25 13.43 14.60 14.60 14.60
Spot Exchange Rate $A/$US 0.653 0.730 0.755 0.800 0.878 0.898 0.892
Gold production oz 60,813 43,477 108,017 108,329 111,257 110,938 109,829
Silver Production 0 0 0 0 0 0 0
Gold Reserve 000oz 298 293 293
Gold Resorce 000oz 0.37 328 686 686
Mkt Cap per oz OF RESOURCE 0 0 0
FINANCIALS 2004 2005 2006 2007E 2008E 2009E 2010E
Sales Revenue 36.1 25.8 68.5 85.5 90.2 92.6 92.4
EBITDA 12.2 -1.6 15.5 61.6 51.9 42.6 45.8
EBIT 6.7 -8.6 1.3 47.9 37.7 27.0 30.3
Pre Tax 5.7 -9.1 0.9 47.9 37.7 27.0 30.3
Reported Net Profit $m 5.7 -9.1 9.7 54.2 26.4 18.9 21.2
NRI (included above) -8.8 -21.0
Sust. Profit 18.5 33.2 26.4 18.9 21.2
Half Yr $m 0.6 (3.6) 4.4
EPS cents 6.7 -9.1 9.6 32.2 25.6 18.5 20.8
EPS Growth % -235% -206% 235% -21% -28% 12%
P/E ratio x -59.2 55.9 16.7 21.0 29.0 25.8
Gross Cash Flow $m 14.2 0.8 28.9 75.9 48.6 42.5 38.7
GCFPS cents 17 1 29 74 47 42 38
P/GCF 32.18 699.42 18.80 7.30 11.39 12.87 14.13
Dividend $m 0.0 0.0 0.0 16.1 12.8 9.3 10.4
DPS c 0.0 0.0 4.0 8.0 27.0 13.1 9.4
Dividend Yield % 0.0 0.0 0.7 1.5 5.0 2.4 1.8
Franking % 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Net Cash Flow $m -4.8 -12.2 16.9 50.9 34.5 29.4 26.4
NCFPS c -5.7 -12.1 16.7 49.3 33.5 28.8 25.9
Net Present Value (8.5%) $m 91.0 118.5 215.4 216.8 184.3 165.5 150.2
Cash 4.2 6.4 16.8 62.8 80.0
Debt - (6.5) - - -
Exploration 6.0 10.0 16.0 16.0
investments - - -
HO (12.0) (6.0) ( 8.8) ( 14.4) ( 12.0)
Total Valuation $m 83.1 118.4 233.4 281.2 268.3
NPVPS $ 1.03 1.20 2.37 2.80 2.67
E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 4
Cracow
30% 30% 40% 100% 100%
Period Ending Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
Gold resources m.oz
Total Project
Total Ore Treated t 314 387 375 375 379
underground 314 387 375 375 379
waste 314 330 353 371 371
Gold price A$/oz 795 920 882 829 829
Head Grade g/t 11.4 10.2 9.8 9.8 9.8
underground 11.4 10.2 9.8 9.8 9.8
open cut - - - - -
Recovery % 93 93 94 94 94
underground 93 93 94 94 94
open cut 93 94 94 94 94
Recovered Grade g/t 11 10 9 9 9
underground 11 10 9 9 9
open cut - - - - -
Gold Produced ozs 108 118 110 110 112
Silver Produced 95 101 108 113 113
underground 108 115 111 112 112
open cut - - - - -
Operating Cost $/t 96 100 105 108 110
underground 96 100 105 108 110
open cut
Operating Cost $/oz 281 327 356 367 373
Operating Cost $m 30 41 42 41 42
underground 30 39 39 41 42
open cut 0 0 0 0 0
Amortisation & Depreciation $/t 39 27 27 54 54
Amortisation & Depreciation $/oz 115 75 75 175 175
Amortisation & Depreciation $m 13 9 10 20 20
Royalties $m 1 2 2 2 2
Total Cost (ex royalties) $/t 135 151 144 143 143
Total Cost (ex royalties) $/oz 403 438 492 567 574
Total Cost (ex royalties) $m 43 50 51 53 53
Total Sales ozs 32 36 33 110 112
Hedging ozs 30 30
Spot sales ozs 2 6 33 110 112
Spot Gold price $A/oz 795 920 882 829 829
Gold Price Achieved $A/oz 664 664
REALISED Gold PRICE 664 785 882 829 829
Financials
Sales Revenue $m 21.9 25.0 29.2 91.5 92.5
Site Operating Costs - - - - -
Mine Operating $m 9.0 12.4 12.7 40.5 41.7
Inventory Change/stripping/devel. - - - - -
Total Mining 9.0 12.4 12.7 40.5 41.7
Royalties/Other 1.1 1.2 1.5 4.6 4.6
EBITDA 11.7 11.4 15.1 46.5 46.2
Amortisation & Depreciation $m 2.6 2.6 3.0 20.3 20.5
Exploration spend 1.1 1.1 1.1 1.1 1.1
Administration $m 1.0 1.0 1.5 1.5 1.5
Income from Operations 7.0 6.6 9.4 23.6 23.1
Other Expl. $m
Profit before Tax & Abnormals $m 7.0 6.6 9.4 23.6 23.1
Income Tax $m - 0.7 2.8 7.1 6.9
Profit before Abnormals $m 7.0 6.0 6.6 16.5 16.2
Period Ending - - -
Profit before Abnormals $m 7.0 6.0 6.6 16.5 1 6.2
E.L. & C. Baillieu Stockbroking Ltd ABN 74 006 519 393 www.baillieu.com.au Please read the disclaimer at the end of this report. Page 5
Disclaimer
This document has been prepared and issued by E.L. & C. Baillieu
Stockbroking Ltd. Australian Financial Services Licence No
245421. Participant of ASX Group.
Disclosure of Potential Interest and Disclaimer
E.L. & C. Baillieu Stockbroking Ltd and/or its associates may
receive commissions, calculated at normal client rates, from
transactions involving securities of the companies mentioned
herein and may hold interests in securities of the companies
mentioned herein from time to time.
Your adviser will earn a commission of up to 50% of any brokerage
resulting from any transactions you may undertake as a result of
this advice.
(a) In preparing the advice, the licensee did not take into account
the investment objectives, financial situation and particular
needs of any particular person; and
(b) Before making an investment decision on the basis of that
advice, the investor or prospective investor needs to
consider, with or without the assistance of a securities
adviser, whether the advice is appropriate in light of the
particular investment need, objectives and financial
circumstances of the investor or prospective investor.
No representation, warranty or undertaking is given or made in
relation to the accuracy of information contained in this advice,
such advice being based solely on public information which has
not been verified by E.L. & C. Baillieu Stockbroking Ltd.
Save for any statutory liability that cannot be excluded, E.L. & C.
Baillieu Stockbroking Ltd and its employees and agents shall not
be liable (whether in negligence or otherwise) for any error or
inaccuracy in, or omission from, this advice or any resulting loss
suffered by the recipient or any other person.
E.L. & C. Baillieu Stockbroking Ltd assumes no obligation to
update this advice or correct any inaccuracy which may become
apparent after it’s given.
Contact Details
E.L. & C. Baillieu Stockbroking Ltd
A.B.N 74 006 519 393
Website: www.baillieu.com.au
Melbourne Office
Level 27, 360 Collins Street, Melbourne Victoria 3000
PO Box 48, Collins Street West, Melbourne Victoria 8007
Ph (03) 9602 9222 Fax (03) 9602 2350
Email: [email protected]
Sydney Office
Level 18, 1 Alfred Street, Sydney NSW 2000
PO Box R1797, Royal Exchange NSW 1225
Ph (02) 9250 8900 Fax (02) 9247 4092
Email: [email protected]
Bendigo Office
Cnr Bridge & Baxter Streets, Bendigo Victoria 3550
PO Box 40, Bendigo North Victoria 3550
Ph (03) 5443 7966 Fax (03) 5442 4728
Email: [email protected]