What the Brokers Say

WHAT THE BROKERS SAY: Interesting news and views from across the Resource Analyst universe.

Troy Resources Ltd (ASX: TRY)

Troy’s friendly scrip-bid for Azimuth Resources (ASX: AZH) shows a degree of pragmatism that should hopefully be increasingly replicated in the small resources sector in our view.

Whilst prima facie the implied offer (approx. $188 million upon announcement) appears substantial, the market should recognise Troy’s track-record of value creation through frugal development of acquisitions.

Further, and in the context of the exploration upside potential offered by Azimuth’s tenure, it is reasonable to expect that this deal can realise substantial upside in time.

Troy brings a development skill set, cash and cashflow to realise development of Azimuth’s existing 1.6 million ounce at 3 grams per tonne West Omai resource.

We acknowledge that prima facie, the offer implied seems substantial; we believe that – particularly in the context of weak gold sentiment – Troy faces a “hard sell” to its existing shareholders.

However, we believe that this deal should ultimately be recognised for what it can realise for the company: It materially extends Troy’s group production profile and provides significant long term exploration potential.

In addition, we feel that the market should acknowledge Troy’s management has an excellent track record of realising substantial value from frugal capital developments.

We cite US$20 million paid for Casposo that should generate A$30 million in AT operating cash flow this FY, increasing to circa A$80 million next FY with the advancement of the underground development.

Similarly, Troy’s Brazilian operations – Sertao and Andorinhas – have both been profitable operations that have contributed to free cash flow that has maintained an annual dividend stream for the past 11yrs.

In addition, in-fill drilling in the short term should realise a maiden reserve (we anticipate circa 500koz) at West Omai.

As the Pre-feasibility Study unfolds, the market will have clearer optics on the economic parameters of a potential development of West Omai.

Noting Troy’s track record of low cost development execution, coupled with good exploration potential, we would expect upside value to the current share price to impute over the course of the year.

In assessing the valuation impact of the Azimuth acquisition, we have assumed staged development of West Omai, commencing from FY’15 at 1mtpa increasing to 1.5 million tonnes per annum from FY’17.

We assume staged capital expenditure of US$160 million on that basis, producing one million ounces over seven years at an average of 130,000 ounces per annum at US$720 per ounce.

It is reasonable to anticipate that Troy can achieve lower realised capex and may yet pursue a smaller initial stage 1 development (say 750ktpa) at a commensurately lower headline capex number.

On our numbers – depending upon timing – Troy has the capacity to self-fund development of West Omai.

Thus any requirement for additional debt or equity finance should be relatively small.

Our pro forma valuation of $2.75 (prev. $3.60) does not include any nominal exploration value for the remaining Azimuth exploration tenure.

Note that we have lowered our Casposo asset valuation by $30 million as a function of anticipated longer negative impacts of the prevailing in-country inflation.

Continued share price weakness represents a good medium to long term investment opportunity in a soundly run, profitable, dividend paying gold producer.

Recommendation: Buy
Price Target: $2.75/sh

Forge Group Ltd (ASX: FGE)

The recent sale of Clough’s shares in Forge has seen the latter’s share price fall by 10 per cent.

We believe it has presented an attractive buying opportunity into Forge.

The company reported one of the better mining service results last month, with an ensuing strong rally despite general nervousness concerning the markets and mining exposed stocks.

The market may think Clough’s decision means that it believes the best is over for Forge, and/or that any takeover premium that may have existed has now evaporated upon its exit from the register.

However, valuation and the balance sheet remain attractive.

Even assuming flat growth in FY14 vs FY13, the company is trading at 7.3 times PE.

 We think given the significant net cash position of $162 million (end December 2012) bodes well for Forge to undertake astute capital management.

Only about 25 per cent of the order book is exposed to iron ore, with two-thirds predominantly power sector work.

We believe a PE of 8 times on forward earnings is more appropriate which yields a valuation of $6.57, on which we base our price target.

Recommendation: BUY

Price Target $6.57

Goldminex Resources (ASX: GMX)

Goldminex Resources has a large and highly prospective portfolio of copper-gold exploration projects located in Papua New Guinea (PNG).

Exploration completed to date continues to highlight the potential for numerous targets to host large scale mineral deposits.

Goldminex Resources’ exploration portfolio has approximately 9,000 square kilometres of exploration tenure principally focused on the Owen Stanley Ranges in the south east of Papua New Guinea.

In July 2011, Goldminex signed a farm-in agreement with Vale, a wholly owned subsidiary of the second largest global mining company in the world, Vale S.A.

Under the Farm-in Agreement, Vale may earn a 51 per cent interest in copper and gold rights of six selected tenements within the Owen Stanley Range by sole funding US$20 million of project expenditure over a four year period.

The flagship project is Liamu which hosts 12 high priority prospects within an extensive intrusive complex and has significant potential to host large porphyry copper-gold deposits.

Geological and geochemical exploration to date has outlined an area in excess of 15sqkm shedding anomalous gold and copper in drainage samples.

A recent 3,292m (6 hole) diamond drill program intersected broad widths of low grade copper mineralisation.

While the grades intercepted are sub-economic, they do however indicate the system is mineralised and extensive.

The Kiki prospect (within the Liamu project area) is a high priority target which has been broadly defined by an airborne magnetic anomaly, geological mapping, alteration and elevated copper-gold geochemistry.

An IP survey was recently carried out over the Kiki prospect (results still pending) which will be used to define drill targets ahead of a likely drill program later in the year.

PNG is situated on the Pacific Rim and hosts numerous world class gold and copper projects including OK Tedi, Porgera, Lihir, Wafi and Hidden Valley as well as hosting some of the world’s largest mining companies such as Barrick, Harmony and Newcrest.

The Owen Stanley region is considered to be highly prospective and although exploration is at a relatively early stage, Goldminex has multiple prospects with large scale potential.

With an EV of just $0.9 million, Goldminex is significantly leveraged to exploration success.

Recommendation: Speculative BUY

Disclaimer: The above is intended as a guide only. The Roadhouse accepts no responsibility for investments made from this advice, successful or otherwise.