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GBG AND SIMMERS OFFER CLEAR VALUE
Gold juniors offer better investment proposition
Gold juniors are set to capitalise on the gold price, while majors are grappling with power and cost issues.

Author: Tessa Kruger
Posted: Thursday , 06 Mar 2008

JOHANNESBURG -

South African junior gold companies offer a better investment proposition compared to majors as they are set to capitalise on a markedly higher gold price, while majors are grappling with high costs and power supply problems.

The number of gold juniors which have recently emerged in South Africa allow significantly better geared exposure to the gold price as many of them offer more than one revenue stream and they mostly mine at significantly shallower depths than the gold majors, said RBCCM analyst Leon Esterhuizen in a report.

And while the potential of lower costs and higher margins is backed by significant capacity for production growth over the next couple of years, the current valuations of many juniors are fortunately very low, he said.

Two "clear value" candidates among the gold juniors are Simmer and Jack Mines and Great Basin Gold as they both have significant potential to expand resources and to deliver high margins within the next 12 months.

"Following that, DRDGold and Pamodzi Gold consistently appear in the lowest ratings versus resource and production potential. Although both companies are known to be marginal producers, both have sufficient execution plans to deliver more than the market appears to be expecting."

DRDGold is in particular expected to benefit significantly from its joint ventures with Mintails. Phase two of the ERGO joint venture will add both uranium and acid sales capacity and significantly enhance the revenue potential of both Mintails and DRDGold.

Pamodzi Gold will also benefit from cooperation with Mintails, but to a smaller degree.

Esterhuizen said that juniors' resource bases were not only significantly shallower than that of the majors, but many of the resource bases were well beyond small. First Uranium and Central Rand boast very large resource bases (about 35m ounces each), followed by DRD's projects (30m ounces at ERPM), Simmer and Jack's Buffels project (about 15m ounces) and Great Basin Gold's Burnstone project (about 8m ounces).

These companies were still classified as juniors as the gold resource landscape was dominated by Gold Fields, AngloGold Ashanti and Harmony.

In order to find the real gems among the juniors, the aspects of size, depth and likely production had to be combined with profitability. Profitability must also take account of the fact that the companies may have to raise capital, causing dilution.

For this reason, profitability was considered after treating capital expenditure as part of the cost. The highest profitability after capex (assuming a gold price of $800/ounce) is attained by Great Basin Gold at its Hollister and Burnstone projects (about $500/ounce), Harmony Gold's PNG projects (about $450/ounce) and Elandsrand mine and Simmer and Jack Mines (about $430/ounce) through its holdings in First Uranium's Ezulwini (about $430/ounce) and Buffels projects ($420/ounce) and its own TGME project ($540/ounce).

Pamodzi Gold and DRDGold probably had the best gearing to a potential increase in the gold price as their as assets were priced very low and offered value. However, their high gearing to the gold price means they also offered significant risk if the gold price declined.

Esterhuizen said mining was essentially a process of moving rock and an important measure of potential success was the value contained per tonne of rock that had to be moved.

The only junior that featured very well on this basis was Great Basin Gold (about R700/t or $88/t), followed by big producers Harmony with Randfontein Mines, Gold Fields with Kloof and Driefontein Mines and AngloGold Ashanti with its West Wits operations. The first junior following the majors is Simmer and Jack Mines with the Buffelsfontein underground project (R300/t/$38/t)

The classic value measure of comparing companies' NPVs at current spot prices and spot less 30%, showed that only Simmer and Jack Mines and Great Basin Gold currently had NPVs lower than values at a spot price of $800/ounce less 30% ($560/ounce.).

Witwatersrand Gold, Central Rand Gold, Mintails, DRDGold and Pamodzi Gold all showed negative NPVs in an "aggressively" lower price scenario.


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