Aurelian Resources Was Stolen By Kinross and Management But Will Not Be Forgotten
The company whose shareholders were better than its management
Message: Where does the $140/oz take over price come from --- A rough calculation
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Where does the $140/oz take over price come from? I’m surprised at how conservative analysts are right now in valuing takeover targets. $140/oz based on $550 gold is a year out of date and way behind the price curve. With gold at over $900 you can currently sell gold four years out at $750+/oz. A year ago you might have been able to get a long hedge at $400 or $450. It doesn’t take much to figure out that a Major could totally eliminate their downside if they wanted to hedge long. BUT, seeing as how several Majors are paying well over $300/oz to close out their hedges (when you locked in at $450 and have to close out your hedge book at $750+ it HURTS) they have to believe gold is going north of $750 in the long term. So where does the $140 come from? Skipping a technical example (ignore anything in brackets if you want to) they basically look at the Cash Flow stream (the stream of revenue less operating costs, less taxes, less interest less dividends, less depreciation, etc over the operating life span of the mine) and calculate the maximum that they can pay for the project that will yield a ZERO or better Net Present Value (NPV) at a given Internal Rate of Return (IRR). Every company and every project will have it own IRR requirements based upon the capital/financing cost for the project. Ideally the Major will want to pay less then their maximum cost per ounce so that they make more than ‘just enough’. So I ran a couple of rough NPV’s models at a 10% IRR with capital costs of $300 million, royalties of 5%, taxes of 30%, mine size of 20 million ounces with a 20 year life and a cash cost of $250/oz. At $550/oz gold prices the NPV is zero at an acquisition cost of $130/oz. At $750/oz the NPV is zero at an acquisition cost of $225/oz. Anything that increases revenue or decreases costs makes the deposit look better. While more ounces obviously means more potential dollars for us per ounce the hidden driver in the model is the IRR. In the $550 example if the IRR is 5% the NPV is zero with them paying us $305/ounce. If the IRR is increased to 15% the max they can pay us is $71/oz before they lose money. I roughed this up in about 30 minutes so clearly a major would model it much more precisely but you can see the rough picture on what they can pay.
So in the end the analysts are using average numbers to give average likelihoods. At $550 they are using an acquisition cost of about $140. All things being constant as gold goes up the amount they pay will also go up so we should be currently be expecting something in the low $200's. If the long term price of gold goes higher so will the acquistion cost of OUR ARU gold! The other thing to hope for is that long term interest rates go down so their IRR will go down and the acquiaition price up!
The company can roughly pays for what they know is the ground based on what they know about costs and revenues and then they get ALL the surprises (extensions of the deposit, new deposits, increases in prices, problems, commissioning problems, cost over runs, input increases etc for free). Every once and a while I feel that we should ride this through to being a producer and capture everything. There is a lots of money to be made. For now its time for a beer. …. Been There
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