This post continues the series on Open Pit Gold miners begun here, continuing here and here and here now profiling another open pit gold miner that I consider reasonably undervalued and still hold a minor position in.
Central Sun Mining is a situation where taking a big risk has already yielded a big reward. I'll leave it to you to judge whether entry at this point is justified.
Central Sun Mining, a Nicaraguan gold miner, got caught without funding for an medium-big open pit mine reopening. They started the conversion of their Orosi open pit mine from a low-recovery heap leach operation to a high-recovery heap leach operation and, more than half-way thru that upgrade, lost their funding-commitment from their bank. Their smaller underground Nicaraguan mine, Limon, continued production.
As you can see in this chart, their stock price crashed from over 2$ during the summer of 2008 to around $.10 in December 2009 as they, while having a valuable asset (the Orosi mine), desparately needed financing with no such financing apparently available. It seems that having a valuable gold property, while desparately needing financing, is a high-risk situation that one can make a profit by investing in. If you know of any such situations, please leave me a comment.
Linear Gold (LRR.TO), an explorer with good exploration properties and a pile of cash just about big enough to get Orosi into production announced a rescue buyout of Central Sun Mining on January 5, 2009. The resulting merger seemed to have the resources to get Orosi into production and the resulting company appeared quite undervalued even without Linear Gold's own advanced development projects and its prospects for big cash payments from Kinross Gold, its best project's development partner.
On January 27, B2Gold announced that it had made a higher offer for Central Sun Mining which Linear Gold refused to match. As a result, it now appears that B2Gold will acquire Central Sun Mining. B2Gold is an explorer with big name management (former Bema Gold executives), a pile of cash and some pretty undeveloped properties. The only property that they have, that I'm aware of, with an NI43-101 resource assumes an $800 price for gold. I do not consider such a property economic and so do not include those oz of gold in my appraisal of the resulting company.
To confess my foiables, I was picking up a couple of arbitrage percentage points (I thought) by accumulating Linear Gold between Jan 5 and Jan 27 rather than SMC as I expected their merger to close. The lesson I learned (the hard way) was that in this kind of grossly undervalued merger its better to give up a couple of arbitrage percentage points and go with the stock that has the asset. I lost about 20% on my Linear Gold when the B2Gold announcement came out. Live and learn. My winnings on earlier SMC purchases covered those losses, but I was not the big winner in this situation that some were.
At this point, the combined company expects to produce 45K oz of gold in 2009 with the Orosi project coming online in Q4 2009. They expect 130 oz of gold for 2010 at a cash cost of $474. As such, I would call it a relatively high cost producer. The main upside from this guidance takes the form of higher-grade drill results adjacent to the Orosi project. An NI43-101 for these drill results are expected any day. They can be expected to increase the Orosi output, reduce its cash cost and increase its mineral resources. This increase is not included (as it is not available) in my analysis.
At this point, the combined company compares to the other producers discussed as shown in the table that follows (based on the Fri 1/30/2009 closing prices):
At this point, I find the combined company attractive relative to our reference producers (Alamos Gold Corporation, Western Goldfields and Minefinders) on a price to annual oz basis and comparable on a price to operating cash flow and price to oz in the ground basis, but not as undervalued as the other blue table entries. I expect that I'll hold my smallish position until the high-grade NI43-101 comes out and an assessment of how much this helps the valuation can be made. One thing I like about the combined company is it location. Being in Nicaragua it helps diversify my holdings outside of Mexico where they are currently overconcentrated.
It seems like a good value overall because, where can you find a commodity stock with a sub-4.0 price to operating cash flow ratio guidance at lower than current commodity prices?
Of course, everyone should do their own due-diligence and make their own investment decisions. All of the above material comes from my own amateurish reading of the company websites and related financial documents. As you know, I am a software engineer, not a financial advisor.