my thoughts on gdo

In view of the company's early cost saving projections as outlined in an email from the company referred to in a separare post (from Tombola), i'd just like to update a post I made earlier...

1) The company we have just bought (Rand) produced 163,000 ounces last year, with costs of $1222/oz. According to Tombola's email, GDO management are targeting cost savings of between 20-30%. Taking the lower end of that guidance for the sake of being conservative (20% or $244/oz), and assuming a conservative price of gold of around $1400/oz (current price over $1550/oz), our margins on the Rand acquisition ought to be somewhere in the vicinity of $400/oz give or take some variation, meaning we can expect on conservative estimates roughly 400 x 163,000 = $65m in profits from Rand per year, on an acquisition that cost $250m (nb this represents a yield of 26% and a payback period of roughly 3.8 years - a great acquisition if the cost savings are there).

2) Production at present from GDO is running at about 25,000 ounces per quarter (guidance for coming quarters are slightly higher at 28k, 34k and 33k respectively, but again we'll make the estimate conservative). So we can expect roughly 100,000 ounces per year from existing GDO mines. Our costs are much lower, at roughly $614/oz (total costs). Therefore, again assuming a conservative estimate of gold at $1400/oz, we are earning about $800/oz and can expect roughly 100,000 x $800 = $80m in profits from GDO mines per year.

Therefore gross profits = $145m/year. Less corporate costs (roughly $15m) and financing costs (roughly $20m) and you get approx. $110m per year in net profits.

807m shares in issue + 87 m options. If 40m in equity is issued for the balance of the purchase that adds another 80m shares (at 50c) so we could guess there will be approximately 1000m shares in issue.

1000m shares on issue x 42c SP = $420m + the new $210m debt to fund the deal and we get $630m total ascribed value to the company by the market fully diluted right now.

That would be a p/e of roughly (630/110) = 5.72.

If we compare that to the market P/E (14.50), the implied value of GDO = $1.06

If we compare that to the P/E of NCM (25.89), the implied value of GDO = $1.89

Then there is the 71% stake in Goliath, which has a MC as of last quarterly of $62m so thats worth another $44m. And we've got $20m in the bank. Add to that loads of exploration potential, a new and potentially very large uranium asset as part of the Rand acquisition, and chinese buyers circling for a takeover bid at no less than 53c (based on the purchase last friday by chinese buyers of 17% of the company at this price)

Now I realise these numbers are 'back of the envelope' and a bit rough, but they are deliberately conservative and better than a baseless ramp. I can't see how there can be much downside, unless gold prices fall substantially, and with global inflation on the rise I do not see this happening. All of this information combined gives me the confidence to hold, and if I had money to spend I would be buying more. If anyone can correct or improve on these estimates please do so, maybe we can come to some kind of consensus target, and compare it with various broker reports to try an pin down a fair value. Personally I believe it is around $1.50.

Cheers,
NickR