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August 10, 2011

Troy Resources Recovers Its Poise In South America, And Earns An Endorsement From Investec Along The Way

By Our Man in Oz

No-one has ever accused Troy Resources of over-promotion. Quite the opposite actually. It?s arguable that the Australian-listed, but increasingly South American-focussed gold miner is in fact guilty of excess caution - when a little bit of shouting from the roof-tops might seem more appropriate. A glimpse of the good news unfolding inside Troy can be found in recent production and exploration news from the company?s Casposo project in Argentina, though the presentation by Troy?s chief executive, Paul Benson, at last week?s Diggers & Dealers forum in Kalgoorlie also dwelt heavily on the company?s problems, and included a technicolour slide show of frozen operations during an Andes blizzard which stifled gold production in June. Another slide explained the technical issues which had slowed the production ramp up.

But if you look beyond those issues, as analysts in the Australian division of the South African investment bank Investec have done, then it?s possible to come to some very positive conclusions. Investec makes a very straightforward case: Troy is a company with highly attractive exploration upside, rising production, and the potential to become one of those rarest of all gold mining beasts, a company with a negative cash cost, after allowing for silver credits.

In fact, the Investec analysis tells a story of a company which has the potential actually to be dominated by silver, especially as exploration moves deeper into the richly-mineralised vein system at Casposo, in Argentina?s mining-friendly San Juan province. Included in the latest drill hits on the Inca vein was a 7.2 metre section assaying 108.7 grams of gold a tonne, plus 4,423 grams per tonne of silver. On conversion, the silver grade alone equates to gold at 110 grams per tonne, while the combined gold and silver grade totals seven ounces to the tonne. ?Troy becomes increasingly exposed to silver, with 60 per cent of revenue from the metal under our high-grade underground assumptions,? Investec said.

Investec sets a 12 month target price for Troy of A$5.20, which looks eminently achievable given a recent recovery from trades lower that A$4.00 to the current A$4.30. Worth noting too that using spot metals prices the valuation would be even higher, at A$6.80 a share.

Paul Benson offered the Diggers an insight as to why Troy might have found favour with the likes of Investec during a low-key presentation that started with a run-down of the company?s solid but small Andorinhas gold mine in Brazil, before shifting to the flagship, Casposo. After confession time and apologies for the slow ramp up, which was ascribed variously to the complexity of the silver circuit, to dry tailings because of seismic activity, and to a once-in-50 year freeze in June, it was across to the good news. In April, before winter set in, Casposo produced 4,414 ounces of gold plus 60,862 ounces of silver, with costs diving to US$232 per ounce of gold equivalent. As big freeze took hold, production slowed, and output in May dipped to 4,155 ounces of gold plus 57,909 ounces of silver. June output then plunged further to 2,993 ounces of gold plus 21,529 ounces of silver, at an alarming cash cost of US$1,145 ounces.

But winter is passing, and with the extra sunshine in the Andes investors might find that Troy starts to shine again too. Paul told the Diggers forum that three rigs are now operating at Casposo with a focus on fast-tracking the delineation of the Inca vein. He?s confident, he said, of producing a maiden resource estimate on the new zone in the current quarter, and a mining reserve by the end of the calendar year. ?Our focus in the coming months will be to determine if we can prove up sufficient high-grade material to justify commencing underground development earlier than currently planned?, he said.

Meanwhile, exploration success at the newly opened Kamila zone at Casposo has been exceptional, and is likely to continue as extra drilling rigs are mobilised, and management cranks up the exploration budget. Production will also rise, because the big freeze left the company with five months of stockpiled ore assaying an eye-catching 6.32 grams per tonne gold plus 81.69 grams per tonne, the equivalent of close to 8.5 grams per tonne gold. Financials could hardly be healthier. Dividend payments have been retained for the 11th consecutive year, despite the cost of developing Casposo. Net debt has effectively been wiped out, and there is no hedging.

Investec singled out recent exploration success at Casposo and the possibility of further future success for particular mention. The broker noted that drilling at the newly-discovered Inca vein is still in its early phase, but pointed out that the vein is assaying more than one ounce to the tonne in places, on a gold equivalent basis. ?With underground development likely in 2012, and a maiden resource later in 2011, we believe the market may become increasingly positive about the earnings and exploration potential at Casposo. The broker also noted the similarities to Canadian hopeful Extorre which now has a C$1.2 billion market capitalisation based on a similar high-grade epithermal discovery in southern Argentina. Troy is capitalised on the ASX at A$344 million.

The broker?s financial forecasts are for Troy to report revenue for the year ended June 30th of A$106 million, and a pre-tax profit of A$10.4 million. But in the current year, as Casposo fires in a red-hot gold market, revenue will more than double to A$233 million, and pre-tax profit soar to A$121 million, encouraging the board to boost the annual dividend by 50 per cent to A6 cents a share, and then virtually to double it again in 2013 to A11 cents a share. Dividends are not what many gold investors seek, but they are a good sign of a business in robust financial health, and with confidence in the future.