Value Microcaps Junior Miners

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TGZ.TO - New Pick Teranga Gold

Teranga is merging with neighbor Oromin. Newco has potential to produce 275-300 gold ounces/year in 2015-2020.

RBC Analyst report has post-merger Teranga-Oromin shares at 315M but I have calculated fully diluted shares at 335M and a combined fully-diluted enterprise value incorporating Teranga's $.75 SP today, plus the net debt of both companies at just under $300M EV. Cheap.

Cormart bought 1.4M shares (likely on behalf of Sprott funds) between Aug 10 and 28 so this is one of their big new additions since the major gold bottom.

I'm in at $.75 as of a week ago and TGZ has been holding that line.

RBC just put out the first report on post-transaction valuation and has a $1.90 price target which is a mix of .7x 2014E P/NAV and 5.0X 2014 P/CF. They are using $1400 long term gold for that. This reflects risk of bringing online Oromin's mine and finalizing the agreement to exploit that mine with the Senegalese government. Bit of political risk.

Teranga (standalone) guidance for 2013 is 190-210 gold ounces at cash costs of $650-$700 and all in sustaining costs of $1000-$1000 which is below average. Good. They have met expectations so far through Q2. Good.

Basically you get Teranga which is levered to gold price rebound and is a 200k/year producer with potential to double production over next 3 years. One of the cheapest sub $300M EV producers out there with a 200k production profile that has below average all-in-sustaining costs per ounce.

Teranga also finally became hedge free in 2013 so 2012 is not comparable.

Biggest risk is Oromin's agreement with Senegal to exploit their mine. I don't fully understand yet but based on the fact I think it will be difficult for this company to trade lower when gold goes to $1500 next.

Perseus (PRU.TO) is probably the most comparable west african producer. They are a sub $300M MC ~200k oz/year producer but I think they are in the doghouse at least somewhat for blowing out cash costs and all-in-sustaining cash costs while Teranga has not.

I think the historical hedge since mine start-up through early 2013 has a lot to do with Teranga's low valuation which was compounded by gold selloff. Based on this comparison my wildest dream (Basserdan likes that phrase) sees a run on Teranga similar to Oceanagold out of the 2008 financial crisis as gold recovered and Oceana eliminated their hedges in the recovery.

We'll see how it plays out.

The chart is amazing too. Dropped of a cliff in the sector slaughter. Also one of the best charts for $300M EV gold producer. Don't see much downside.