Proactive investors

Additional information

Additional	Information
Market:	ASX
Sector:	Gold Mining
Epic:	GDO
News:	Latest news
Web Site:	Gold One International
Other Articles:	24-06-201023-06-201017-06-2010

US equity research firm bullish on Gold One International

by Proactive Investors

In a recent report on Gold One International (ASX: GDO), Strategic Energy Research and Capital LLC's Precious Metals Equity Research wrote the company is significantly undervalued but likely to be re-rated.

Gold One International is a recently emerged shallow gold miner that has started up two producing mines on the East Rand this year, and has a portfolio of additional shallow exploration and development assets on the East Rand and other parts of the Wits Rand Basin in South Africa – including its next potential flagship (Ventersburg).

As well, the company holds a 100% interest in one deep mining prospect with a 5Moz NI 43-101, part of which is shallow, an attractive IOCG target in Namibia, and greenstone and alluvial prospects in Mozambique (blue sky).

Gold One’s shares are listed on the Johannesburg and Australian Stock Exchanges under the symbol (ASX: GDO), and its American Depository Receipts trade on the NASDAQ under the symbol GLDZY at a ratio of 10 ordinaries per ADR. 

Salient Investment Features

- First rate experienced management group
- It is one of just two shallow miners in South Africa
- High margin operation
- Near and long term growth in production
- Low maintenance capital
- Continues to meet targets
- Strong pipeline of assets to scale up in production
- Valuation – lumped in with low margin deep miners
- Turning cash flow positive after five months

The strike orchestrated by the members of South Africa’s National Union of Mineworkers at Gold One’s 3 month old operation, Modder East, which threw at least 600 people out of work on March 23rd, is over.  The union has agreed to a three year wage contract with a “living out allowance, a travelling allowance and allowances for meal breaks.”

Salaries will increase 10% this year, 11.5% in 2011, and 26% in the third year of the contract; and the living out allowance amounts to ZAR 225 (US$30) per month in 2010 and 2011 increasing to ZAR 400 per month in 2012.

The handling of the strike demonstrates the depth of experience at this company.  At the time of the strike, Modder East was processing at a rate of between 800 and 1000tpd (about 35% of current nameplate capacity and roughly 27% of steady state capacity). 

Despite ¾ of its work force out on strike, it was still able to keep the mill running at 500 tonnes per day, having planned for the eventuality.  And despite the unlawful conduct of union members, the company stuck to its guns on the proposed 3yr term of the wage contract and wage rate offer, giving up only the additional living out allowance; moreover it refused to pay anyone who wasn’t working during the industrial action.

Using these facts as a road map, we estimate the plant to be processing just 1,500 tonnes per day (45,000 tpm) by the end of the current quarter, up significantly from the 500tpd strike rate and somewhat from the 1,000 tpd it was approaching prior.  That is, the plant could be operating at 64% of its current capacity - before the commissioning of the secondary crusher and gravity circuit – by the end of June.  Over the subsequent 12 months we expect that the company will meet its objectives of ramping throughput up to ~100% of the expanded capacity (at 100ktpm).

As a result we are reducing our milling forecast from 720,000 tonnes to around 570,000 tonnes in 2010; and from 1.3 million tonnes in 2011 to 1.05 million tonnes, as the company notes it won’t achieve steady state until mid 2011.

However, the company has been mining higher than expected grades and suggests that it could continue to mine them. 

Furthermore, plant recoveries have improved markedly to nearly 96%.  Consequently, gold production is still expected to come in within the previously projected ranges: 100,000 to 120,000 ounces in 2010, and about 180,000 ounces in 2011; and our risk adjusted BEE discounted valuation of US$500 million for the Modder East asset failed to budge on any of those adjustments, underscoring just how well management handled the contract negotiations.

Gold One continued to uncover wider than expected high grade sections in the mine last quarter and we are confident that this will help it achieve our $75 million cash flow target in 2010 and around US$175 million in 2011.

It was encouraging to see that the company completed a preliminary scoping study at the Ventersburg deposit – its next flagship, targeted for production in 2013-14 – as it does justice to our early valuation.  The company is focused on delineating resources above 550 meters.  The study showed the project economics to be potentially viable at an 11 year mine life, producing at a peak rate of around 157,000 ounces per year for 8 of those years at cash costs of roughly US$379/oz (ZAR8.81), with preproduction project capital estimated at around US$215 million. 

Drilling has resumed, and is aiming at delineating the upthrown section of the deposit west of Virginia fault, and improving the confidence in the resources estimate backing up the scoping study... moving towards a feasibility study next year.

The study implies undiscounted cashflows of roughly US$800 million over 11 years assuming an average US$1100 gold price; discounted at 10%, the potential net asset value of the Ventersburg deposit approaches US$370 million.

Our current valuation ($128 million) for this asset is heavily discounted to reflect the appropriate development risk.

Gold One technically emerged as a producer with the re-commissioning of the Sub Nigel Shaft No 1 in January 2009, which has produced and stockpiled nearly 15,000 tonnes of ore at the new Modder East plant, which in turn was completed in April, commissioned on 24 June 2009, and began producing Modder East ore on 21 July 2009.

The Modder East mine is on track to produce 20,000 ounces of gold in 2009, 120,000 in 2010 and 180,000 oz per year from 2011 to 2013 with production from the BPLZ tapering off after that out to 2016.  Total cash costs are forecast at an average US$303 per ounce over the life of mine and well below that between 2011 and 2013. 

We expect Modder East to generate US$60-80 million in free cash flow during 2010 and twice that in 2011, funding the company’s development pipeline – predominantly Ventersburg, Tulo and Bothaville – potentially boosting output to approximately 500,000 ounces per year by 2014.  These are all shallow prospects with low technical risk and costs.

The company has begun a second phase drilling program at Ventersburg on 17 July 2009 in order to expand the resource (currently over 3Moz) and fast track it toward prefeasibility.  Ventersburg is potentially a 5-10Moz deposit grading 4-5 grams per tonne at depths of less than 850 meters located in the Free State region of the Wits Basin.

The company is also ready to build an access road for the exploration and development of the Tulo Gold project in Mozambique where it will mine a 32,000 oz alluvial prospect to fund development of the primary source targets that it has identified.  Gold One listed on the ASX in May via reverse takeover of BMA group, and has since sold BMA’s twin hills project for A$1.75 million in cash. 

Its resources are NI 43-101, JROC and SAMREC compliant, and it has the fifth largest resources inventory on the ASX.  The company has negotiated two BEE agreements – on its East Rand Basin assets and Ventersburg – which are subject to the government granting new order mining/prospecting rights on all the assets and approving the structure of the BEE partnerships and JV.

Finally, it said that it has short listed down to two banks proposals for a credit facility to fund the replacement of its convertible bonds, which hold an option to redeem at the bondholders’ request by the end of 2010.  The company said that it expects final term sheets submitted in May, and we expect them to close in on a deal sometime in the third quarter. 

The market continues to maintain a wait and see attitude with respect to what we believe is an overdue rerating of the shares.  In our opinion, if management achieves our near term ramp up and cashflow projections and completes its debt financing, with gold prices steadily advancing, we believe that the stock will ultimately close in our share price target. 

The shares of Gold One are trading at less than 1/3 our risk adjusted NAV (discounted at 10%) and around 3.4 times our projected 2010 cash flows based on an US$1100 gold price.  Our share price target is 1x our risk adjusted net asset valuation –US$9.40 per ADR.

Register here to be notified of Proactiveinvestors One2One Forums.