nice read on a nice day

Miners’ win-win
By Tim Treadgold
May 22, 2009

PORTFOLIO POINT: Intrepid Mines and Troy Resources are winners on both sides of a single deal, and hold promise for investors.


Not every business deal produces two clear-cut winners, but a close look at a transaction between two mid-sized Australian gold companies, involving an undeveloped resource in Argentine, shows that both sides will gain substantially.

Intrepid Mines gets cash from the sale of the Casposo project and can now focus on a potential world-class gold and copper discovery in Indonesia.

Troy Resources becomes the new owner of Casposo and will develop it at a much lower cost than anyone else because it has a spare processing plant ready to install, and is already active in the region.

On the market, investors are warming to both stocks, which have been rising steadily since late last year. Moreover, the wider listed gold sector is wakening to an improved commodity price: In the short term, gold is being driven up by a falling US dollar. As the $US continues to weaken, gold prices hit a two-month high this week as gold jumped to about $US942 an ounce, the highest since March 26. Longer-term gold bulls – such as legendary prospector Mark Creasy (click here) – believe the price of gold will continue to rise as inflation eventually picks up in the wake of big spending rescue packages now being initiated by Western governments.

Intrepid is up from a rock-bottom 8¢ reached last October to about 30¢, for a market capitalisation of $122 million, and in solid volume, which leaves plenty of room for speculators get in and out.

Troy is up from 67¢ reached in November to trade around $1.40 and a market value of $98 million in thinner trade than Intrepid, but with sufficient volume to make for an active market.

Both stocks have further to go to reclaim their high points of the past 12 months. Intrepid was up to 40¢ in the middle of last year, and Troy was up to $2.44.

The attractions of Intrepid and Troy is that they both have substantial cash reserves, strong management, gold mines in production, and more to come thanks to that single sale, for $US22 million, of the Casposo resource in the San Juan province of Argentina.

The deal, completed three weeks ago, occurred for the best of reasons. Intrepid faced the choice of developing Casposo, at an estimated capital cost of about $US113 million, to achieve gold production of about 60,000 ounces a year.

The alternative for Intrepid was to concentrate on its existing Paulsens mine in WA, which is about the same size, and work on developing the Tujuh Bukit project in Indonesia, which is at least 10 times the size and will eventually attract the attention of a big miner.



Troy, which operates the fast-depleting Sandstone gold mine in WA and the Andorinhas gold mine in Brazil, has been looking for a new project to suit a processing plant it has had in storage in NSW for the past six years.

In terms of separating the two as investments, Troy offers the immediate appeal of being able to quickly achieve value from Casposo, and at a lower cost than Intrepid thanks to the plant it will ship to Argentina.

Troy also has the unique feature among medium-sized Australian gold companies in that it has been paying dividends every year since 2000, with a rising trend until 2008 when the 7.5¢ a share annual payout was clashed to 3¢.

It’s Troy's dividend record, and its 22-year history of low-cost gold production achieved by focussing on small, high-grade mines, that makes Troy an attractive proposition for more risk-averse investors seeking equity exposure to the gold sector via a well-run business.

There is the added comfort in knowing that Troy has about $35 million in cash and is just starting production from the high-grade zones at its Andorinhas mine in Brazil.

Troy’s chief executive is Paul Benson, a career miner who has previously worked for BHP Billiton, Rio Tinto and Renison. The company is chaired by John Dow, a former managing director of Newmont Australia.

The heavyweight board at Troy, which also includes the company’s founder John Jones, indicates the long-held desire of the company to grow substantially, something it has never quite achieved because of a focus on the financial aspects of its business, and not growth at any cost.

Troy's plan now is to finalise planning for the development of Casposo, which contains at least 500,000 ounces of gold with indications of more to come as exploration continues. The average grade is a gold equivalent of 6.8 grams a tonne, made up of gold (5.1g/t) and silver (136g/t). Intrepid is the slightly riskier proposition of the two stocks, although it is also the company chasing a much bigger prize.



Intrepid, like Troy, has a surprisingly strong management team with an impressive pedigree. Chief executive Brad Gordon is a career miner who has worked at Placer Dome, Delta Gold and Emperor Gold. Chairman Colin Jackson is a former executive of Selection Trust and Newcrest.

Intrepid, which is rated “best of breed” by analysts at ABN-Amro Morgans, plans to develop its Indonesian Tujuh Bukit in two phases. The gold cap (a mineral rich zone sitting on top of a bigger ore body), which should support a mine producing at least 150,000 ounces of gold a year, is manageable for a company the size of Intrepid.

The bigger prize, which has returned drill-cores more than 600 metres thick assaying 0.5% copper and 0.5g/t gold, will be better suited to a joint venture with a big partner, such as Newmont, which is already mining a lookalike ore body at Batu Hijau in the same area of Indonesia.

For investors, Troy and Intrepid are a unique offering. They are very different companies with totally different histories. But, both have arrived at a similar point in their development courtesy of a single value-adding deal.