Emperor Mines Buy up to 42 centsFat 268, 28 Feb, 2006Printer...

Emperor Mines Buy up to 42 cents
Fat 268, 28 Feb, 2006
Printer Friendly Turning the corner
$76m
2005 could possibly end up being one of the worst in the history of Emperor Mines (EMP). It was a case of what
could go wrong, did go wrong. A series of problems resulted in a sharp fall in production at Vatakuola gold mine in
Fiji. High rates of absenteeism, three deaths, poor heavy vehicle availability and technical problems at the Philip
Shaft triggered a sharp fall in gold production and a blowout in cash costs. This culminated in a total loss of $36.4
million being recorded for the half year to December.
"Once the transaction is finalised, Emperor will emerge as the third largest
gold producer in Australasia, with projected annual production increasing by
300 percent to around 375,000 ounces."
Thankfully, some positive signs of a turnaround are beginning to emerge and we believe the worst days are now
behind Emperor. Price action has improved considerably following an all-time low of 16 cents in May last year. The
stock has since rebounded strongly - hitting 51 cents in November. While Emperor remains a long way below the
levels seen during mid 2004, we believe the improved price action is a strong indication that the worst has past.
Emperor's largest shareholder, DRD Gold, put forward a proposal last November to sell an interest in two gold
mines in Papua New Guinea. Under the proposal, Emperor will acquire a 100 percent interest in the Tolukuma
http://www.fatprophets.com.au/content.aspx?page=Emperor+Mines%2c+Fat+268 (1 of 3)1/03/2006 3:06:27 PM
Emperor Mines, Fat 268 - Fat Prophets Australasia
mine and a 20 percent interest in the Porgera mine.
The Tolukuma mine is about 100 kilometres north of Port Moresby and has been owned by DRD since 2000. Open
pit production began in 1995 and underground mining in mid-1997. Annual production is approximately 80,000
ounces. Exploration prospects are solid with around 9,000 square kilometers in tenements included in the
transaction. Ten new target deposits have been identified for exploratory drilling.
The Porgera open pit gold mine is located in the Highlands of PNG. DRD currently holds a 20 percent interest, with
Placer Dome, the operator, holding 75 percent and the PNG Government 5 percent. Annual production is
approximately 1 million ounces at a low cash cost of around US$250 an ounce. DRD's annual share of production
is about 200,000 ounces.
The transaction involves Emperor paying total consideration of US$230 million to DRD Gold, of which US$30
million will be paid in cash on completion.
For the remaining US$200 million, Emperor will issue a total of 752 million new shares to DRD at a price of 35
cents. The transaction will initially lift DRD's interest in Emperor from the current 45 percent to just over 90 percent.
Despite the small size of the minority interest, DRD will not seek to compulsorily acquire the remaining balance.
Emperor will fund the transaction through a new equity issue that will raise $40 million and a US$42 million debt
facility with the ANZ. The new issue of equity will reduce DRD's shareholding to around 85 percent. The funding
comes on top of the $8.9 million raised last December through a placement at 38 cents. Surplus cash will be
applied to enhancing Emperor's other operations.
Shareholders approved the transaction last week after the Board unanimously recommended the deal. We
anticipate completion of the equity placement by the end of April.
Once the transaction is finalised, Emperor will emerge as the third largest gold producer in Australasia, with
forecast annual production increasing by 300 percent to around 375,000 ounces. DRD intends for Emperor to
remain listed on the ASX and to become the key vehicle for further expansion in Australasia.
We envision the enlarged company will launch further script based acquisitions over the coming year. This will
have the effect of increasing liquidity in the stock and reducing DRD's interest.
In our opinion the transaction should add considerable value for shareholders over time. In addition to increasing
production, the deal will substantially boost total reserves from 700,000 to 2.2 million ounces while total resources
will rise by nearly 60 percent to 7.6 million ounces.
Another benefit of the transaction is diversification. Emperor's mine portfolio will no longer be concentrated in Fiji
but geographically spread across the South Pacific.
New appointments have been made to the Board with Robert McDonald joining as a non-executive director and
Clyde Moore as a Director as well as taking over the role of CEO.
With new capital in the bank, Emperor is embarking on a number of new initiatives this year aimed at reducing
costs and increasing production, reserves and resources. Reducing the high energy costs is a major focus for the
http://www.fatprophets.com.au/content.aspx?page=Emperor+Mines%2c+Fat+268 (2 of 3)1/03/2006 3:06:27 PM
Emperor Mines, Fat 268 - Fat Prophets Australasia
company. Construction of a 2 megawatt hydro plant is underway at Tolukuma for a cost of $7 million. Plans are
also advancing for a proposed 14MW bio fuel plant in Fiji.
Funds will also be allocated to exploration and Emperor is aiming to prove up additional reserves at both Tolukuma
and Vatukoula. The upgrade of the Phillip Shaft should be completed this year at a cost of $8 million. This will
open access to more than 1.3 million tons of high grade ore with contained gold of around 900,000 ounces.
Emperor has languished in the Fat Prophets Portfolio for much of the past 18 months. We acknowledge this has
been frustrating for shareholders, especially considering the strength of the gold price. However in the past week,
the stock has rallied strongly and we believe upward momentum is now returning.
A sustained break above resistance at 50 cents would in our view provide added confirmation that a lasting
recovery is underway. With the gold price trading near 25 year highs, we believe such a break is only a matter of
time. Support at 30 cents should mitigate downside risk in our opinion.
In summary, we believe the enlarged Emperor will add value for shareholders. The risk profile of the company
changes considerably following the transaction. Ongoing concerns over financial security will no longer be as
much of an issue. Increased scale will make it easier to lower cash costs. Diversification of the mining portfolio not
only reduces geopolitical risk, but adds value through the combination of regional assets and reduction of items
such as head office costs.
Emperor possesses robust upside potential over the medium to longer term in our opinion. Accordingly, the stock
continues to be held in the Fat Prophets Portfolio. For Members with no current exposure, we recommend
the shares up to 42 cents.