KRY? did you forget

Aurelian to Kinross: who's next in the gold accumulator?

Around the world in a few ticks, with Greystar, Centamin Egypt, Andean, Red Back, Great Basin Gold, Detour, Novagold, and some others.

Author: Barry Sergeant
Posted: Friday , 25 Jul 2008

JOHANNEBSURG -

Your Kingdom for an ounce of gold? A refined ounce of gold may be a measurable and indisputable standard, but the sizes and qualities of Kingdoms around the world vary by vast degrees. In the gold producer market, valuations of listed stocks vary by degrees verging on insanity. This refers to an investing tool used by a number of interested parties, in the measure of market capitalisation per ounce of gold.

Thus, if a listed stock has a market capitalisation (value) of, say USD 1bn, and has provided sufficiently believable evidence that it's outlined 10m ounces of recoverable gold in the ground - preferably at one safe location - its market value per ounce of gold would compute at USD 100 an ounce. All it has to do it mine the gold and sell it; with a current price of more than USD 900 an ounce, the investor should be in the pound seats.

But while a market value of USD 100 an ounce of gold resources may be a convenient round figure, the real world throws up a range from just a few dollars an ounce, to more than USD 400. This may provide equity investors with any number of headaches, but the challenges are probably not much easier for gold producers on the prowl.

Thus, this week's effective USD 1.2bn bid by Tier I gold producer Kinross for Aurelian, a developer, is bound to create interest in which gold name could be next, given that resources stocks generally have been mercilessly pounded for the past two months. For its part, Kinross seemed alive to the idea that listed stock prices have most likely substantially parted from realities; it offered an effective 65% premium price to Aurelian's 20-day VWAP.

The bigger gold stocks in particular remain under relentless pressure on a number of fronts, not least cost-push inflation at both the maintenance and build levels, but also for the replacement of ounces mined, by exploration or acquisition. On this score, Aurelian is no small beer. The gold resources at Aurelian's Fruta del Norte, in Ecuador, total 13.7m ounces, at a very princely grade of 7.2 grams of gold per ton. Ecuador is currently reviewing its mining code, but for the meantime, the analytical community expects the mine to pour first metal in late 2012, and produce around 450,000 ounces of gold a year, over 14 years, at cash costs of about $250 per ounce, net of silver byproduct credits.

Measured on any standard, Fruta del Norte ranks as one of the biggest single-site gold discoveries of the past few years. It ranks with AngloGold Ashanti's La Colosa discovery in Colombia, announced a few months ago, where the initial inferred resource, at 0.86 grams a ton of gold, stands at 12.9m ounces. La Colosa ranks as the second significant greenfields discovery in Colombia, with Gramalote, also mainly in the AngloGold Ashanti stable, being the first.

Then there is the Angostura discovery, also in Colombia, in the hands of Toronto-listed Greystar. Measured and indicated resources at Angostura are 10.15m and 49.8m ounces of gold and silver, respectively, at 1.35 grams and 7.3 grams a ton of gold and silver, respectively. There is also an inferred resource of 3.43m ounces of gold grading 1.37 grams of gold a ton. For reasons best known to the global investment community, the gold ounces at Angostura are rated at about one-sixth the value of those at Fruta del Norte. The grade difference is steep, but is it also because Angostura is found 55 kilometers north-east of Bucaramanga, near the border with Venezuela?

Australia- and London-listed Centamin Egypt's Sukari Hill gold project also ranks as a major modern gold story; the current resource there is some 8.12m ounces measured and indicated, plus 3.5m ounces inferred, with, says the company, "ongoing drilling expected to add significantly to this resource". Construction of the mine at Sukari is underway with completion estimated for the first quarter of 2009. Equity investors rank these ounces at ten times more valuable than those at Angostura.

Andean Resources has attracted potential takeover attention, with its Cerro Negro property in what is known as "the mining friendly" state of Santa Cruz in Argentina. The deposit has been compared to Aurelian's Fruta del Norte; both boast high-gold mineralization. At Cerro Negro, the Eureka Vein runs underground, with an estimated 1.4m ounce resource grading around 10 grams a ton, likely to dilute to about 6 grams a ton or less if the mine is combined as underground and open pit. There is lots of further work to be done on the property, and adjacent areas, but the available information points to a resource, so far, of around 5m ounces of gold.

Investors are challenged with a number of issues in valuing listed gold stocks, not least external influences that contribute to the waxing and waning of gold bullion prices. In considering the individual stocks, current market valuations show that deep level gold deposits, particularly those below South Africa's surface, tend to attract heavy penalties. There is a natural preference for deposits that can be mined as open pits, or shallow underground operations.

In general, a premium is awarded for mines located in mining friendly jurisdictions, or at least where geopolitical challenges are relatively light. Vancouver-based Goldcorp, a Tier I gold stock that for years has ranked as one of the best performing gold stocks in any class, holds gold ounces only within the NAFTA region - the US, Canada and Mexico. Investors rate Goldcorp's unmined gold ounces at nearly twice the value than those held by Barrick, the world's biggest gold miner.

Goldcorp's ounces are ranked as more than ten times more valuable those held by Johannesburg-based Gold Fields, which are ranked, in turn, at ten times more valuable than those held by Pamodzi Gold, a South African miner that wants to build production to 1m ounces of gold a year. On the other hand, Goldcorp's unmined ounces are ranked as slightly less valuable than those held by premier Tier II gold names, Yamana, and Agnico-Eagle.

Specialised investors in gold stocks also take account of byproducts, such as base metals. In some cases, gold itself may be in that category, such as at Freeport McMoRan's gigantic Grasberg complex in Indonesia, described by Freeport McMoRan itself as "the world's largest copper and gold mine in terms of recoverable reserves". Given that listed gold stocks generally attract higher ratings than base metals stocks, companies prefer to be characterised as gold stocks, when that is possible.

Geopolitics, as mentioned, can also play a distinct role in the valuations of mining stocks, not least those with connections to the likes of certain former Soviet Union countries, Venezuela, and certain parts of Africa, where intensifying unfriendly activities in Zimbabwe have done no one any good. There are inevitably always exceptions to the rule, however. Randgold Resources and Red Back, which only hold interests in gold in Africa, and outside southern Africa, continue to rank among top performing global gold stocks.

Great Basin Gold also goes against the rule, as remaining among the top performers, yet holding material assets in South Africa, lightened by another asset on the Carlin Trend in Nevada. Among those stocks with coveted North American exposures, Detour stands out, in terms of attractive valuations, but not near by so much as Novagold. The valuation of these stocks is also impacted by the pains of moving from developers to full blown producers.

While on the topic of potential corporate activity, mining stocks of all kinds are often on the hunt for potential so-called value added acquisitions. The huge sell off in resources stocks over the past two months may have intensified interest in corporate activity, but it may also have increasingly created the perception that valuations have not yet bottomed. Thus, would it be a surprise if Polyus, Russia's Tier I gold digger, is found to be closely eyeballing both AngloGold Ashanti and Gold Fields?