True Gold taps new sources to raise capital

Mark O’Dea has to be the envy of every of nearly every junior mining CEO in the country.

As the executive chairman of True Gold Mining Inc., Mr. O’Dea has signed off on deals to raise $33.5-million of fresh capital since the start of May. That equates to more than half of True’s $60-million market value.

It is an enormous amount of money for a junior gold miner to raise at this point in time. Juniors are suffering through some of the worst market conditions seen in decades, as risk capital has fled the sector and equity financing opportunities have dried up due to lack of demand. The recent drop in gold prices only made matters worse.

Mr. O’Dea, a well-known mining entrepreneur, said he recognized the equity markets were a non-starter for raising capital. That caused him to take a different approach and look for strategic investors. His success demonstrates that money is available for quality junior companies, but they have to work a little harder for it than they used to.

“We’ve really tried to target a different style of niche investor, and different pools of capital from the traditional resource sector funds which have been really beat up,” the 45-year-old said in an interview.

Many juniors like to talk about how they are courting various “strategic” investors (particularly in Asia) but almost none are able to raise substantial amounts of money that way.

True Gold, however, was able to tap two different sources. Back in May, the Vancouver-based miner raised $10-million through a private placement with Canadian giant Teck Resources Ltd. And on Thursday, the company announced it is receiving a $23.5-million investment from Liberty Metals & Mining Holding LLC, a subsidiary of Liberty Mutual Insurance and a very long-term investor in the resource space.

True Gold was helped by the fact that Mr. O’Dea has a strong track record. He was the CEO of Fronteer Gold Inc., which made a discovery in Nevada and was sold to Newmont Mining Corp. for $2.3-billion in 2011. He also has a relationship with Teck that dates back to his days at Fronteer.

But on its own, that would probably not be enough to raise significant funds in this market.

Mr. O’Dea said the key was to match the project he wanted to build with the right kind of long-term investors. He said that Liberty was interested in True Gold’s Karma project in Burkina Faso because it has low capital intensity, with a construction cost of less than $150-million. That is a must in a market where capital is so scarce, and provides a useful lesson for juniors trying to tackle more ambitious projects.

“As the market began to turn, we recognized that projects with low capital costs, that can get into production relatively quickly, and can withstand downward pressure on the gold price are the projects you want to be in,” he said.

Source: http://business.financialpost.com/2013/07/18/true-gold-taps-new-sources-to-raise-capital/

Get ready for turbulent gold earnings season

The second quarter of 2013 is one that gold miners and their investors would love to forget. Unfortunately, they will have to relive the horrors when the companies start reporting earnings later this month.

The results will be ugly. Analysts at Stifel Nicolaus estimated that the gold miners under their coverage (which includes the senior producers and a smattering of others) will report an average 20% drop in EBITDA from the first quarter. Lower metal prices are obviously a key factor, but so is an anticipated decline in production (down 1%) and an increase in cash costs (up 8%).

With squeezing margins and potential mine closures on investors’ minds, the Stifel analysts ran their models at a gold price of US$1,000 an ounce to see how many operations would have to shut down if the price stayed at that level for an extended period. They found that Kinross Gold Corp., Barrick Gold Corp. and Newmont Mining Corp. would lose well over 30% of their production from closures. But Goldcorp Inc. would only lose 7% because of its low-cost asset base.

“With a management response on costs, probably half of the production loss could be saved for a year or two. However, the simple study shows that there would be strong supply side support at US$1,000 [an ounce],” they said in a note.

The only gold miner under Stifel Nicolaus coverage to be downgraded is Barrick Gold Corp., which was cut to hold from buy by analyst George Topping. He noted the company needs higher gold prices to pay off its debt, and the stock is likely to drift lower if prices remain flat. He also anticipates a dividend cut in the second quarter, along with US$7-billion to US$8-billion of writedowns. Neither of those moves would come as a surprise to investors.

Source: http://business.financialpost.com/2013/07/09/get-ready-for-turbulent-gold-earnings-season/

Finally, A Reason To Buy Gold Miners

A strange thing occurred at 2:00 PM Eastern Time on Thursday. While the price of the SPDR Gold Shares ETF (GLD) continued its free-fall, curiously the price of the Gold Miners ETF (GDX) jumped on high volume, adding 2.5% for the day.

My first reaction was that the abnormal divergence between the spot cost of the metal from the price of miners’ shares must be due to some kind of quarter-end portfolio rebalancing. Upon further review of the day’s news, I think the miners’ revival may be the result of another impetus, which may continue to contribute support to miner stocks.

As the market opened, it appeared that gold was due for a “dead cat bounce” from drastic losses earlier in the week, and the Miners rebounded with the metal. However, by 1:00 PM, GLD had given back the gains and the miners were pulling back as would be expected. Near 2:00 PM a story was circulating on the newswire that the World Gold Council had issued new guidelines for analyzing gold mining companies. The WGC distributed “a Guidance Note on ‘all-in sustaining costs’ and ‘all-in costs’ metrics, which gold mining companies can use to report their costs as part of their overall reporting disclosure. The World Gold Council has worked closely with its member companies to develop these non-GAAP measures which are intended to provide further transparency into the costs associated with producing gold.”

In order to understand the significance of this news, we should revisit the Mark Twain assessment of the industry: a gold mine is a hole in the ground with a liar standing next to it. Too many investors have been burned by gold miners’ claims, and distrust keeps many others away from legitimate mine operators.

In order to prevent deceptive representation of a miner’s potential for profitability, the US Geological Survey, SEC and Canadian authorities have created strict reporting requirements. Categorization of a mine’s resources must meet certain requirements, and a more complete explanation of this may be reviewed in our SA article, Beware The Trap Door Under Miner’s Silver Reserves. Despite all the attempts at clarification, most investors have little faculty for understanding exactly what miners mean when they tout, “our production costs are below $400.” It is frustrating and difficult to understand why a miner cannot earn more profits with the spot price three or four times the production cost.

The problem is that the “operating cost” or “production cost” only factors in a small portion of the miners’ expenses, excluding things like corporate G&A, amortization, reclamation, some exploration and capital expenses, etc. A better measure is the WGC’s “sustaining cost,” which is the actual cost to sustain the operation, including all the above and other costs. The sustaining cost for most miners exceeds $1000 per ounce, including all the costs incurred by the company.

We think this news proved positive for miners’ stocks for the following reasons:

  • The guidelines define an acceptable alternate to GAAP accounting that is consistent in the industry.
  • They more realistically allow the comparison between the spot price and the company costs, and its relationship to profits.
  • They bring to the investing public the realization that the spot price of gold cannot fall to triple digits without drastically affecting supply.
  • They enable legitimately efficient companies to differentiate themselves from miners that promote their prospects with partial information.

The definition of “all-in costs” and “sustaining costs” can be found in the WGC guidance memo.

Although the “sustaining costs” have not been published for most miners, we added a calculation from the Alamos Gold investor presentation in the following table we sent to clients recently:

TICKER SUST. COST DIV % RATING COMMENTS
AGI $ 812 1.7% 1.9 No Debt/Buybck
EGO $ 928 2.2% 2.1 China/Political
AUY $ 945 2.7% 2.1 Debt/Political
ABX $ 1,120 4.3% 2.2 High Debt
CAGDF $ 1,126 4.5% 4.0 Asia/Political
NEM $ 1,129 4.7% 2.6 Debt/Divvy Inc.
GG $ 1,168 2.4% 2.2 Moderate Debt
AEM $ 1,245 3.3% 2.6 High Debt
IAG $ 1,257 5.7% 2.7 Debt/Low Rating
FCX UNKNOWN 4.4% 2.2 Diversified

It is clear why Alamos Gold chose to highlight this metric in its presentation. In addition to low sustaining costs, we prefer mining companies to have some dividend yield, a moderate debt level and low political risk. As a comparison, the table also includes the current YAHOO analyst consensus number (lower is better).

Alamos Gold is the clear winner in the cost category, and the debt free balance sheet offers strong support for growing dividends even if the spot price drops. The dividend is lowest among these ten, but the company recently announced a share buyback program. In the recent earnings report, the company explained its intent to continue exploration and development of its properties, and these are initiatives that can readily be cut back if the gold drop becomes worse.

Yamana Gold is also attractive in this comparison with very low costs. Debt is also moderate, but some important properties are in politically-unpredictable Argentina. AUY has sold off more severely than most, so it may benefit from a bounce.

We also think that Newmont Mining and Goldcorp, Inc. should be on the watch list for bottom fishers.

Conclusion

We had considered $1246 per ounce as the support level for gold, although that appears too optimistic. That is the level in September 2010 when the price of gold exploded up, creating a gap-like phenomenon that had to be backfilled. It also is a point where some miners must evaluate how to sustain their operations, possibly to shut-in mines or slow production. This eventually will support the price of gold, although the immediate bearishness requires caution. However, if investors understand that the price of gold cannot continue indefinitely below its production price, miners like Alamos, Yamana and Goldcorp may justify a long-term investment. With the new reporting options from the World Gold Council, these stocks will be able to differentiate themselves from the crowd going forward.

Source: http://seekingalpha.com/article/1527542-finally-a-reason-to-buy-gold-miners