Troy Resources : A Value Proposition

by OUR MAN IN OZ on JANUARY 20, 2009

in INVESTING

I do not hold a Australian Financial Services License. Please consult a professional financial advisor before taking any action. This post is not intended as financial advise, is offered for free, without any guarantee of accuracy.

While doing my weekly review of the Australian stock market (ASX) I came across the junior gold mining companyTroy Resources (ASX ticker symbol : TRY). It would appear to me that TRY represents an outstanding value proposition based on its current share price, cash on hand and mining assets. I thought it timely to share this with you given my recent post about options for getting exposure to gold.

First let me provide a brief overview of the company;

Troy Resources was founded in 1984 and listed on the ASX in 1987. It is also listed on the Toronto Stock Exchange (TSX). The company has a solid history of project delivery developing 5 mines over the last 10 years. TRY’s existing operations are the the flagship Andorinhas gold project in Brazil and the Sandstone gold mine in Western Australia.

The company had initially planned to close the Sandstone gold mine during 2009, but due to the high Australian dollar gold price, it was concluded that continued processing of low grade ore at Sandstone will now be economically viable. The reopening of the Sandstone operation is expected to produce 30 000 ounces of gold in 2009. The flagship Andhorinas gold project in Brazil is currently in ramp up phase with a planned output of 50 000 ounces of gold per annum over an initial 5 year period at expected cash cost of approximately USD$300. With gold currently trading at around USD$829 (as of 19 Jan 09), there is significant margin on offer.

Andorinhas Gold Project source:www.try.com.au

In addition to these two advanced gold projects TRY has the following assets;

• Iron Ore deposit at Andhorinas expected to support a shallow, open cut (ie low cost) operation producing in the vicinity of 500 000 tonnes of iron ore per annum. Permitting and customer off take arrangements are still in progress for this project.
• A fully functional gold processing plant. Currently in storage and ready to be deployed immediately.
• Approximately A$60m cash on hand
• Prospective exploration tenements around existing projects in Australia and Brazil

So, with that overview in mind lets look at some numbers. According to the latest Appendix 3B form released to the ASX on 18 Dec 2008 TRY has around 78m shares fully diluted (ie. including fully paid ordinary shares, partly paid shares, share options, listed and unlisted). The stock price as of 19 Jan 09 closed at 97.5 cents giving a market capitalization for TRY of about A$76m. This is where it gets interesting because as mentioned above TRY has A$60m cash in the bank! So all their other assets (Two advanced gold mines, an economical iron ore deposit, fully functional gold processing plant, and prospective exploration tenements ) are being valued by the market at just A$16m!

Note : the company has distributed dividend payments for the last 9 consecutive years, including 07/08 when TRY incurred an operating loss for the year due to mine development and transition. In my view this represents loyalty to shareholders and financial resilience during times of change.

Keeping in mind that TRY has no debt, the A$60m cash on hand is an absolutely priceless strategic asset in the current economic climate. Looking at the gold sector its not hard to find several junior gold companies who have decent grade gold in the ground but no money or infrastructure to develop a mine…..enter TRY with A$60m cash and a fully functional gold processing plant in storage. Needless to say TRY’s management must be licking their lips at the thought of picking up a real bargain!

Speaking of management its always worthwhile having a look at the person in charge. At TRY we have CEO Paul Benson, a mining executive with 20 years experience, most recently with BHP Billiton. He was based in South America working in the role of Chief Development Officer for BHP Billiton base metals. Mr Benson joined TRY in October 2007 which means he’s had a good 15 months to get used to working in a much smaller company and build those all important relationships with management, suppliers, contractors and the board. So hopefully the forthcoming few years should bear witness to the most productive phase of his tenure.

No company analysis would be complete without a look at some of the risks. Well to start with the price of gold could collapse, although I cant see this happening. While the world is currently in the grip of deflationary forces I think inflation will win in the end, and if inflation wins so too does gold. Even in the current deflationary environment the price of gold is holding up a lot better than its peers. So, what else could go wrong?….Brazil and/or Western Australia could experience a revolution, war or government intervention (eg. nationalization of natural resources), again the chances of this are minimal. Both countries are relatively stable, have very strong mining cultures with sophisticated corporate laws and policies. So that leaves me with my last guess for company wide capitulation and its an old favourite……total mismanagement and squander of all mining and financial assets…..hmmm well it is possible, but any company that has managed to pay a dividend for the past 9 years, develop 5 successful mines over the last 10 years and retain $60m cash in the bank with absolutely no debt has my vote!

So there you have it, one of the best value propositions that I have come across on the ASX in a long time. What do you think?

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