what is going on?, page-17

re: what is going on? pippet Intraday Comment
February 18, 2005
Ballarat Goldfields NL
(ASX: BGF)
Outperform
Above Average Risk
Initiating Coverage. Reviving Ballarat’s Treasure Chest of Gold
For Required Disclosures, please see
page 7.
BALLARAT GOLDFIELDS NL
BGF.AU.I
100 WEEKS 28MAR03 - 18FEB05
HI-9JAN04
LO/HI DIFF
409.201
312.43%
LO-25APR03 99.218
CLOSE 335.754
BALLARAT GOLDFIELDS NL Rel. AUST ALL ORD.
100
200
300
MA M J J A S O N D J F M A M J J A S O N D J F
2003 2004
HI-26NOV04
LO/HI DIFF
0.19000
475.76%
LO-28MAR03 0.03300
CLOSE 0.18000
BALLARAT GOLDFIELDS NL
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
PEAK VOL.
VOLUME
54851.3
22779.7 20000
40000
Geoff Breen
(612) 9033-3022
email [email protected]
Stuart Connell
(612) 9033-3071
email [email protected]
Price: $0.18 Price Target: $0.24
52 Wk High: $0.19 52 Wk Low: $0.07
Float (MM): 787 Debt-to-Cap (MM): na
Shares Out: 787 Market Cap (MM): $142
Dividend: $0.00 Yield: 0.0%
Tr. 12 ROE: NA 3-Yr EPS Gr: >1000%
Trading Volume: P/NAV 68%
Strategic Shareholders: Merrill Lynch 6.6%
(FY June) 2005e 2006e 2007e
EPS ($0.01) ($0.00) $0.02
P/E x NA NA 8.4 CFPS ($0.01) ($0.00) $0.04
P/CFPS x NA NA 5.1 EPS H1 H2
2005 ($0.01) ($0.00)
2006 ($0.00) $0.00
2007 $0.01 $0.01
Cash Flow H1 H2
2005 ($0.00) ($0.00)
2006 ($0.00) ($0.00)
2007 $0.01 $0.01
Assumptions 2004a 2005e 2006e 2007e
Gold Price US$/oz $397 $422 $425 $425
Exchange rate US$/A$ 0.73 0.76 0.79 0.72 Gold Price A$/oz $546 $556 $542 $595
Realised Price A$/oz NA NA $551 $594
All values in A$ unless otherwise noted.
Event
We initiate coverage of emerging, medium sized Australian gold producer
Ballarat Goldfields with a rating of Outperform, Above Average Risk and
base case price target of $0.24.
Investment Opinion
• Ballarat Goldfields is an emerging, mid sized Australian producer
developing an initial 100koz pa, underground mine NW of Melbourne,
before ramping to 200koz pa by year 3, mid 2008. Between 1851 and
1917, over 12moz was produced at Ballarat – the field still offers strong
gold production potential.
• Current management recommenced driving an existing decline in late Nov
04. According to the 2004 Pre Feasibility Study, initial production of
100koz pa is on schedule for the March Q 2006 before ramping up to
200koz pa by mid 2008 assuming a mine life of 21 years and A$525/oz
gold. We adopt similar figures and derive earnings of A$22m (2.1¢) in
FY07 and then A$26m (2.5¢) in FY08 and an NPV of A$209m or 27¢.
• We have inspected the site and viewed the 3D geological model on several
occasions and are impressed with the professional approach by an
experienced team led by ex WMC’s Head of Gold, MD Richard
Laufmann. BGF has A$21m cash, no debt and we assume that a A$33m
inflow from Sept 05 options, exercisable at 15¢, will help fully equity fund
the initial A$55m capex – a low figure due to its highly favorable location
and an existing decline. A further A$15m is to be spent to double plant
capacity to 0.8Mtpa for 200koz pa by 2008 – still a relatively small plant.
• Valuation. We estimate that BGF is selling on a modest prospective 2007
PER of 7 to 8X and a cash flow multiple of 4 to 5X, and < 70% of our
NPV of A$0.27, assuming a 10 year mine life. We believe that our base
case target of A$0.24 is attainable, as risk reduces during the construction
and then during the commissioning phases.
If we extend our assumed mine life from 10 to 21 years, as per the pre
feasibility study, our NPV almost doubles to A$411m or 52¢ with no
additional expansion capital required. Risk weighting this incremental
value by 50%, derives an upside target of 40¢. We believe that grade,
followed by operating performance, are the biggest risks to achieving our
target but have been competently addressed by management.
RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 2
Overview
Ballarat Goldfields has begun the development of a 100koz pa, rising to 200koz pa, underground gold mine on the historically
important Ballarat Gold Field in Central Victoria, near Melbourne. The previous management spent a total of A$50m on the
project and driving a large decline towards the Ballarat East orebody accounted for the bulk of it. The new management team
has, since December last year, begun the extension of the decline at depth in good ground conditions.
Prior to joining BGF, the current Managing Director, Richard Laufmann, headed WMC’s gold business, including 3 years as
GM of St Ives Gold in Western Australia. St Ives is a mixture of underground and open pit mines and is also a mix of narrow,
high grade mines and low grade, large tonnage mines. Ballarat still does not boost reserves but this is neither unique nor
unusual. For example, Newcrest’s underground Cracow mine in Queensland started gold production in late 2004 and still has
no reserves established.
The first major task of the new team was to fully understand the geology of the selected Ballarat East orebody. Extensive work
including regional mapping and modeling of the geology in 3D and drilling has allowed them to understand where and how the
historically mined quartz deposits formed. Investors need to be confident that the gold will be found and mined in quantities
and grade as forecast by the company. We believe that detailed work by an experienced professional team has been undertaken
to give this a relatively high probability.
Development of Ballarat East
Ballarat Goldfields is focused on the Ballarat East orebody which has a strike length of 3.5kms by 400m wide and a depth of
830metres. The majority of the new mine will be beneath the historic underground quartz mine workings. The orebodies are
not narrow – they range between 2 and 40m in width and average 3-8m, a very satisfactory mining width. The continuity of the
orebodies is a positive feature of the field and stope lengths range up to 500m.
A key feature of the gold mineralisation at East Ballarat is the grain size which is described as coarse to very coarse. This is not
surprising given the predominance of nuggety gold. Assays of between 1 - 4g/t were derived from numerous drill samples
but due to the coarse nugget effect these assay grades were upgraded two-fold for resource estimations. Historic data
shows that the field produced a recovered grade of 9.35 g/t. BGF assumes that the minimum head grade to achieve this grade
would have been 10.4 g/t at a recovery of 90%
Pre Feasibility Study:
In mid 2004 BGF completed a pre feasibility study of the Ballarat East project. Key features are:
• Once decline development commences (late November 2004), BGF assumes 18 months until the first gold pour ie
March 2006
• Production rises to 100k oz pa, then ramps to 200k oz pa by year 3
• Cash costs of A$274/oz and total costs of A$342/oz
• Start up capex A$55m included all decline and mine development (now underway), a treatment plant & infrastructure.
• Gravity plant indicated 94% recovery from 5% mass
• Coarse grind and simple technology
• Mechanised Cut & Fill mining method with rock and paste fill. Stope widths vary from 3 to 8 metres.
• 20 stopes to be developed, with 10 in use at any one time (BGF believes that this is heavily over designed)
• Maximum depth 830m below surface and 560m average depth for life of mine
• 21 year life producing 13Mt at a head grade of 8.4g/t
• NPV (at 7%) A$254m and IRR 34%, assuming a A$525/oz gold price and a 21 year life.
The company generated NPV of A$254m or 32cents per share fully diluted, has 90% confidence limits of A$132m (17 cents) to
A$502m (64 cents)
Location, Location:
The Ballarat East project is to be developed as a modest sized underground mine using decline access extended from the
existing decline which was almost at the orebody. We inspected this decline on a site visit in February 2005.
The mine is designed to produce 800,000 tpa of ore – not a particularly large mine. Standard equipment will be used in the
operations including 40 tonne haul trucks up the ramp. Ballarat is an attractive well-established city of 85,000 people, offering
many advantages to a mining company. BGF does not need to build houses for employees, an airstrip, water pipeline, power
station, adopt the contentious fly in-fly out system nor suffer from a lack of nearby expertise.
RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 3
Exhibit 1: Ballarat Goldfields - Quarterly Gold Production FY06E to FY10E
0
10
20
30
40
50
60
Q1 06 Q1 07 Q1 08 Q1 09 Q1 10
-
2
4
6
8
10
12
Gold Production Head Grade
koz g/t
Source: RBC Capital Markets estimates
The well-worn phrase of location, location is very apt for this site and is a major reason for the low capital estimate of A$55m.
A relatively high-grade orebody also helps the project’s economics, as does the “inheritance” of a large decline drive to a depth
of 140m.
The mining lease is contained within a forestry reserve on a rise within the township. While special precautions are planned
regarding noise and blasting, we do not believe that houses are sufficiently close to the portal or planned plant to cause
problems. Community support has been positive to date and development is on schedule to produce the first gold by March
2006. However, we understand that the company is reviewing its timetable and capital requirements. The site is fully permitted
to begin mining
Profit & Loss: Gold production is on schedule to begin in the March Q 2006 and hence FY06 earnings are not meaningful. We
believe that the initial targeted capacity rate of 100koz pa will be readily and quickly achieved by June 2006. Thus FY07
represents a full year in which we forecast gold production of 105koz at a conservative, but realistic, A$299/oz cash cost.
Exhibit 2: Ballarat Goldfields – Profit & Loss Account, FY05E to FY10E
(A$ millions) FY05E FY06E FY07E FY08E
Sales Revenue 0.5 16.6 63.0 86.2
Cost of Sales (8.0) (15.6) (35.3) (42.7)
EBITDA (7.5) 1.0 27.7 43.5
Depreciation 0.0 (1.4) (6.1) (6.8)
EBIT (7.5) (0.4) 21.6 36.7
Net Interest Expense 0.0 0.0 0.0 0.0
Net Profit before Tax (7.5) (0.4) 21.6 36.7
Taxation 0.0 0.0 0.0 (11.0)
Net Profit after tax (7.5) (0.4) 21.6 25.7
Source: RBC Capital Markets estimates
Cash Flow: The company has begun spending the estimated A$55m of capital required to get the mine into production. Recent
equity funding including A$25m in FY05 is augmented by our forecast of a further A$33m of equity with the exercise of
options at 15 cents in September 2005. Cash builds quickly once full capacity of 100koz pa is achieved by FY06 and then
further capital totaling A$15m is spent prior to the ramp up to 0.8Mtpa by 2008 when 200koz pa are produced.
RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 4
Exhibit 3: Ballarat Goldfields – Cash Flow Statement, FY05E to FY10E
(A$ millions) FY05E FY06E FY07E FY08E
Net Operating Cash Flow (2.3) (1.9) 15.5 18.9
Capex (15.0) (37.0) (2.0) (17.0)
Exploration (5.5) (2.0) (2.0) (2.0)
Net Investing Cash Flow (21.2) (39.0) (4.0) (19.0)
Proceeds from Security Issues 25.5 33.7 0.0 0.0
Proceeds/(Repayments) of Borrowings 0.0 5.0 0.0 0.0
Net Financing Cash Flow 25.5 38.7 0.0 0.0
Cash Change 2.0 (2.1) 11.5 (0.1)
Cash Balance B/F 1.3 3.3 1.2 12.8
Cash Balance C/F 3.3 1.2 12.8 12.7
Source: RBC Capital Markets estimates
We demonstrate the cash flow for Ballarat Goldfields in the chart below.
Exhibit 4: Ballarat Goldfields – Cash Flow Includes Capex, FY05E to FY10E
-30
-20
-10
0
10
20
1H05 2H05 1H06 2H06 1H07 2H07 1H08 2H08 1H09 2H09 1H10
A$m
Source: RBC Capital Markets estimates
Balance Sheet: BGF has an ungeared, debt free, balance sheet and some A$21m cash on hand. There are no special features of
the current balance sheet but losses total A18m and protect tax payments for a short period.
Exhibit 5: Ballarat Goldfields – Balance Sheet, FY05E to FY10E
(A$ millions) FY05E FY06E FY07E FY08E
Cash 3.3 1.2 12.8 12.7
Other 0.4 0.4 0.4 0.4
Total Current Assets 3.7 1.6 13.1 13.0
Property Plant & Eqp 16.1 54.5 62.6 86.4
Capitalised Exploration 11.8 13.8 15.8 17.8
Total Assets 31.5 69.9 91.5 117.2
Current Debt 0.1 0.1 0.1 0.1
Non Current Debt 0.2 5.2 5.2 5.2
Other 2.3 2.3 2.3 2.3
Total Liabilities 2.5 7.5 7.5 7.5
Net assets 29.0 62.3 83.9 109.6
Contributed Equity 107.8 141.5 141.5 141.5
Reserves 0.0 0.0 0.0 0.0
Retained Profits (78.8) (79.2) (57.6) (31.9)
Total Equity 29.0 62.3 83.9 109.6
Source: RBC Capital Markets estimates
RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 5
Valuation
We believe that the price to earnings ratio and price to net present value are best for valuing mining stocks. We forecast
earnings to reach A$22m or 2.1 cents in FY06, rising to A$26m or 2.5 cents in FY07and our NPV is A$0.27. BGF is selling on
a modest prospective PER of 7 to 8X, a cash flow multiple of 4 to 5X and < 70% of our NPV of A$0.27, assuming a 10 year
mine life. We believe that our base case target of A$0.24 is attainable, as risk reduces during the construction, and then in the
commissioning phases.
If we extend our assumed mine life from 10 to 21 years, as per the pre feasibility study, our NPV almost doubles to A$411m
or 54¢ with no additional expansion capital required. Risk weighting this incremental value by a hefty 50%, derives an upside
target of 40¢.
In the Exhibit below, we compare Ballarat to similar sized Australian gold producers. Ballarat is mid ranked with respect to
capitalisation, does not produce gold until FY06 and hits full production in FY07 and is to produce at a similar production leve,
appears expensive on Enterprise Value per resource oz because we include a mere 0.675moz of resources (rather than global
resources) but has very competitive cash costs due to simple metallurgy and other factors.
Exhibit 6: Mid Sized Australian Gold Producer Comparative Valuation
Bendigo Perseverance Croesus Ballarat Agincourt Leviathan Sedimentary
Market Cap A$m 243 203 165 142 112 89 65
2005 Production koz na 35 217 0 128 164 37
2006 Production koz 58 167 178 30 158 140 117
2007 Production koz 82 163 144 124 178 145 146
EV/05 production A$m na 4,135 662 na 757 314 ,588
EV/07production A$m 2,880 888 997 1,441 544 355 402
EV/Resource A$ 17 30 44 216 72 33 48
Cash Costs A$/oz 380 280 375 274 380 370 278
Source: Consensus Earnings forecasts (except for Ballarat), RBC Capital Markets estimates
Price Target Impediments
Australian country risk for Ballarat is very low and all permits for a mining operation are in place. There is risk for construction
and the operation of the project but we regard these as moderate to low. We believe that ore grade is arguably the greatest risk
followed by operating performance but recognise that the company now has “high confidence in its geological model”. Mining
risk is seen as moderate.
Exposure to the A$ gold price is a risk but a relatively high grade orebody offers protection on the downside. We have applied
an above average risk qualifier category primarily because of the low market cap and the stock may not be a suitable investment
for all investors
Company Description
Ballarat Goldfields NL (Code BGF on the ASX) is an ASX and since December 2004, an AIM listed company, capitalised
around A$140m. It is headquartered in the city of the same name, located about 1.5 hours drive north west of Melbourne. The
field was discovered in 1851 and yielded over 12 moz between 1851 and 1917. In 1984, Ballarat Goldfields, under a different
management team, was formed to explore and develop the deeper leads of the Ballarat East goldfield. This small company
drove a large decline towards the orebody but struck extremely difficult ground conditions near the portal of the drive. A weak
gold equity market and cost overruns saw the company flounder by 1997 after spending about A$50m. The licenses of Ballarat
East and Ballarat West were consolidated under the ownership of BGF in 1998.
Ballarat Goldfields was recapitalized in 2002 with the purpose of bringing the field into production. A new management team
undertook a pre feasibility study which was completed in June 2004 - it concluded that a 21 year mine life would recover 3.5
moz of gold and generate an NPV of A$254m (32 cents per share)
RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 6
Exhibit 7: Ballarat Goldfields Production & Financial Summary
ASX: BGF Share Price: (A$) 0.18 Stock Rating: Outperform Risk Qualifier: Above Average Risk
Issued Shares (m) 787.4 Market Cap: (A$MM) 141.7 Price Target: A$0.24 NAV @ WACC: A$0.27
Fiscal Year Ended June
ASSUMPTIONS FY05E FY06E FY07E FY08E ATTRIBUTABLE MINE STATS FY05E FY06E FY07E FY08E
Gold Price US$/oz 422 425 425 425 Production:
Exchange Rate A$/US$ 0.76 0.79 0.72 0.70 Ballarat East Gold Project - 100% oz - 29,836 105,776 142,042
Gold Price A$/oz 556 542 595 607
Realised Gold Price A$/oz 551 594 607 Gold Sold:
RATIO ANALYSIS FY05E FY06E FY07E FY08E Ballarat East Gold Project - 100% oz - 29,836 105,776 142,042
Issued Shares - period end MM 787 1,012 1,012 1,012
Net profit A$MM (7) (0) 22 26 Cash Costs A$/oz - 397 299 275
EPS A¢ (1.0) (0.0) 2.1 2.5 Cash Costs US$/oz - 306 214 192
P/E x NA NA 8.4x 7.1x Total Costs A$/oz - 445 356 323
CFPS A¢ -0.9 0.1 3.5 4.1 Total Costs US$/oz - 354 271 240
P/CF x NA NA 5.1x 4.4x
Dividend per share A¢ 0.0 0.0 0.0 0.0 Reserves & Resources (@ June 04) Reserves Resources
Dividend yield % 0% 0% 0% 0% Tonnes kt nil 2,000
Payout Ratio % 0% 0% 0% 0% Grade g/t nil 10.7
Book value per share A¢ 3.7 7.9 10.7 13.9 Ounces koz nil 675
P/Book value x 4.9x 2.3x 1.7x 1.3x
R.O.E. % -26% -1% 26% 23% Enterprise Value/t Reserve A$/oz NA US$/oz NA
R.O.A. % -24% -1% 24% 22% Enterprise Value/t Resource A$/oz 216 US$/oz 164
EBITDA A$MM -7 1 28 44 EARNINGS SENSITIVITY FY07E FY08E FY07E FY08E
EBITDA per share A¢ -0.95 0.13 3.51 5.53
PROFIT & LOSS FY05E FY06E FY07E FY08E Gold Price US$/oz +10% 6 6 29% 23%
Revenue A$MM 1 17 63 86 -10% (6) (6) -29% -23%
Operating costs " 0 (12) (32) (39) Exchange Rate +10% (6) (5) -26% -21%
Mine Operating Profit " 1 5 31 47 -10% 7 7 32% 26%
Exploration Expense (6) (2) (2) (2) PRODUCTION PROFILE - BALLARAT EAST GOLD PROJECT
DD&A " 0 (1) (6) (7)
Corporate and Other (2) (2) (2) (2)
Operating Income (EBIT) A$MM (7) (0) 22 37
Net Interest Expense " 0 0 0 0
Pre Tax Profit " (7) (0) 22 37
Tax Expense " 0 0 0 (11)
Net Profit After Tax A$MM (7) (0) 22 26
Dividends Paid A¢ 0.0 0.0 0.0 0.0
EPS A¢ 0.0 0.0 0.0 0.0
DPS A¢ 0.0 0.0 0.0 0.0
CASH FLOWS FY05E FY06E FY07E FY08E
Operating Cash Flow A$MM (2) (2) 16 30
Net Interest Expense " 0 0 0 0
Tax Paid " 0 0 0 (11)
Retained Op. Cash Flow A$MM (2) (2) 16 19
Acquisitions 0 0 0 0
Exploration " (6) (2) (2) (2)
Capital Expenditure (15) (37) (2) (17) BALLARAT GOLDFILEDS EBITDA
Funding Surplus/(Deficit) A$MM (21) (39) (4) (19)
Dividends Paid " 0 0 0 0
Loan Repayments " 0 0 0 0
Borrowings (incl Fin. Leases) " 0 5 0 0
Equity Issues " 25 34 0 0
Other " 0 0 0 0
Total Funds Provided A$MM 25 39 0 0
Net change in cash " 2 (2) 12 (0)
Cash at start of year " 1 3 1 13
Exchange Rate Adjustments " 0.0 0.0 0.0 0.0
Cash at end of year A$MM 3 1 13 13
Net Op. CFPS A¢ -0.3 -0.2 2.0 2.4
BALANCE SHEET FY05E FY06E FY07E FY08E
Cash & equivalents A$MM 3 1 13 13
Other current assets " 0 0 0 0
PP&E & Other Mining Assets " 16 55 63 86
Capitalised Exploration " 12 14 16 18 SHARE VALUATION - as at Dec '04
Other Non Current Assets " 0 0 0 0 Projects % Ownership A$MM A$/Shr %
Total assets A$MM 32 70 91 117 Ballarat East Gold Project 100% 168 0.21 100%
Total liabilities " 3 8 8 8 Total Operating Assets 168 0.21
Total Net Assets A$MM 29 62 84 110 Exploration 35 0.04
Total Debt " 0 5 5 5 Debt at Dec 04 0 0.00
Net Debt (Cash) A$MM (3) 4 (8) (7) Cash at Dec 04 21 0.03
Gearing (net debt:nd+ equity) % -12% 6% -10% -7% Corporate -15 -0.02
Gearing (net debt:equity) % -11% 6% -9% -7% Net Asset Value 210 0.27 0.68
Ballarat Goldfields NL
% age A$m
-
50
100
150
200
250
04A 05E 06E 07E 08E 09E 10E
0
100
200
300
400
A$/oz
Production (koz) Cash Costs (A$/oz)
koz
(20)
0
20
40
60
80
04A 05E 06E 07E 08E 09E 10E
A$m
Source: Company data, RBC Capital Markets estimates
RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 7
Required Disclosures
Explanation of RBC Capital Markets Rating System
An analyst's "sector" is the universe of companies for which the analyst provides research coverage. Accordingly, the rating
assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months
relative to the analyst's sector.
Ratings
Top Pick (TP): Represents best in Outperform category; analyst's best ideas; expected to significantly outperform the sector
over 12 months; provides best risk-reward ratio; approximately 10% of analyst's recommendations.
Outperform (O): Expected to materially outperform sector average over 12 months.
Sector Perform (SP): Returns expected to be in line with sector average over 12 months.
Underperform (U): Returns expected to be materially below sector average over 12 months.
Risk Qualifiers (any of the following criteria may be present):
Average Risk (Avg): Volatility and risk expected to be comparable to sector; average revenue and earnings predictability; no
significant cash flow/financing concerns over coming 12-24 months; fairly liquid.
Above Average Risk (AA): Volatility and risk expected to be above sector; below average revenue and earnings predictability;
may not be suitable for a significant class of individual equity investors; may have negative cash flow; low market cap or float.
Speculative (Spec): Risk consistent with venture capital; low public float; potential balance sheet concerns; risk of being
delisted.
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RBC Capital Markets Ballarat Goldfields NL
February 18, 2005 8
Important Disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including
total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been
generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates.
The author(s) of this report are employed by Royal Bank of Canada, Sydney, Australia branch.
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