Centamin Egypt, other small Australia gold miners eye mergers Source: BI-ME and Reuters , Author: BI-ME staff Posted: , 2009 4:46 pm Back INTERNATIONAL. Australia's smaller gold miners are showing an urge to merge in an effort to bulk up and court investment funds that are being drawn to the sector due to soaring bullion prices.
A survey this month by accountants Deloitte showed a handful of minnow-sized Australian miners are gaining momentum on the back of their prospects. It singled out Centamin Egypt whose capitalisation ballooned A$608.7 million, or 56.7%, in May.
Centamin Egypt is seen as a possible takeover target by one of the majors as the gold exploration company is set to move into production over the next month at its Sukari gold project in Egypt.
Centamin is trading at a discount compared with both of the gold majors on a net present value and 2010 price/earnings ratio basis, so it makes it value accretive for the majors to pick it up at the current levels.
The problem, however, is the vast majority of the 25 gold miners in Australia are small and have a market value of less than A$1 billion, making it near impossible for most fund managers to invest in them because of liquidity concerns.
Companies want investment funds as shareholders as they tend to be long-term investors and their involvement boosts the profile of the business.
"For large investors, there is a bit of a constraint in the Australian market," said Steve Robinson, a fund manager with Alleron Investment Management. "Size does become an issue."
Alleron manages about A$1 billion in Australian shares, including Lihir Gold, the second-biggest listed gold miner in the nation.
For institutions in Australia without mandates to invest in global shares, Newcrest Mining Ltd and Lihir are the only routes to gain exposure to big gold stocks. Newcrest, the biggest listed gold firm, has a market value of about A$14 billion and Lihir A$7 billion.
Centamin and Sino Gold Mining, each about one-tenth the size of Newcrest, are distant thirds. The rest of the stocks are valued under A$1 billion, with an average capitalization of around A$200 million.
Sukari, Egypt's first modern gold mine, contains about 12.89 million ounces of gold, according to a February announcement, with the figure anticipated to grow when a new resource estimate is released in the third quarter.
Egypt has no mining code, although it plans to put out a code this year, and so Centamin operates under a profit sharing agreement.
Under this arrangement, Centamin is able to take all of the cash flows from the mine, less a 3 percent royalty, until its capital and exploration and operating costs have been recouped
Companies eager to fill that void want to gobble up smaller mines to create size. But size alone may not cut it.
"Putting mines together to create a bigger company does not necessarily solve all problems," said Neil Boyd-Clark, a fund manager at Fortis Investment Partners.
"What you want to do is put assets together that can do a better job than they could separately," said Boyd-Clark, who helps manage A$4 billion in Australian shares, but doesn't own gold mining stocks.
Note; Us$1 = A$1.25
CNT Price at posting:
$1.83 Sentiment: None Disclosure: Held
