Tag Archives: miners

A share tip circled in a newspaper share listing

South32 Ltd is worth more than I expected

A share tip circled in a newspaper share listingDisclosure: I own shares in BHP Billiton and South32.

Back in January, ahead of the spin-off of South32 Ltd (LON:S32) from BHP Billiton plc (LON:BLT), I wrote How much is BHP Billiton spin-off South32 worth to shareholders?.

That article is currently the most popular post on this site, so I thought I’d look back at my three valuations and compare them to how the market has valued South32 shares, which started trading towards the end of May.

Price-to-sales ratio

My prediction: I suggested that based on its peer group, South32 might trade with a price-to-sales ratio of 1. This would equate to a share price of 115p.

The reality: As I write, South32 shares trade on a P/S ratio of 0.85 and a share price of 105p. If the P/S ratio rose to 1, the share price would be 123p.

Conclusion: I was pretty close.

Book value

My prediction: Based on the figures provided by BHP before the spin-off, my calculations suggested that South32 could have a book value of $11.3bn, which would equate to 140p per share.

The reality: The pro-forma balance sheet in the South32 UK prospectus suggests a net asset value of $12.95bn. This equates to 158p per share, so I wasn’t far off. However, the shares currently trade at a slightly larger discount to book value than I expected, on a price-to-book ratio of 0.7.

Note: users of Stockopedia and other data services might see the firm’s book value stated as $16.7bn, giving a per share figure of $3.14 or about 204p. This figure is listed in the same prospectus document as “Invested capital attributable to members of South32” based on the new firm’s historical accounts. It appears to be stated before the adjustments made in the demerger. I’ve chosen the more conservative pro-forma figure, but I’m not entirely sure which is more accurate. DYOR as usual. We’ll get a more accurate idea when South32 publishes its first set of accounts as an independent company. Year-end is June 30, so probably in Aug/Sep.

Conclusion: Based on the pro-forma figures, my estimate of book value per share wasn’t far off, but the market is being a little more cautious than I expected.

Price-to-earnings ratio

My prediction: I suggested that South32 could start trading with pro-forma earnings per share of around 9 cents, or roughly 6p.

The reality: I was partly right. The trailing twelve month (TTM) figures give earnings of 9.4 cents per share, in-line with my calculations. I suggested the shares could trade on a P/E of 10, giving a share price of just 60p per share.

This was my worst-case scenario and has been proved partly right: South32 is trading on a P/E of 11, but it’s a forecast P/E, based on this year’s forecast earnings of about 9p per share.

Conclusion: Analysts have crunched the numbers and expect South32’s full-year earnings to be better than I expected.

As my estimate came from simply extrapolating the BHP EBIT figures, the analysts’ techniques and information should be better than mine. In this case I’m happy to have been proved wrong too cautious.

Buy or sell South32?

In my original article, I suggested that South32 shares could be received very cautiously by the market. As it’s happened, I think they’ve had a fairly positive reception, helped by a strong earnings outlook than I estimated.

At 105p, selling South32 would give a 7% yield on BHP shares purchased at 1,500p, or 5.25% on shares purchased at 2,000p. If you’re not interested in holding a small portion of South32, then selling will effectively give you a tidy special dividend.

I’m going to hold for a little longer, however, as I think some modest upside might be possible.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.

A tunnel in a deep mine

71% Profit In Four Months

A tunnel in a gold mineMy two mining share suggestions from September 2012 have delivered a 71% gain in four months.

Back in September, I suggested two small-cap mining shares I thought could perform over the coming year, Aquarius Platinum (LSE: AQP) and Goldplat (LSE: GDP).

So far, the pair have delivered a 71% gain, but it’s all been a bit one-sided as Aquarius has outperformed even my expectations, while Goldplat has been hit by two of the classic risks that face junior miners.

Here’s how things look at the moment:

Aquarius Platinum
Recommendation price (8 September 2012): 36.3p
Current price (15 January 2013): 72p
Gain/Loss: +98%

Recommendation price (21 September 2012): 16p
Current price (15 January 2013): 11.5p
Gain/Loss: -27%

Both companies have had some notable newsflow since September, so let’s take a closer look.

Aquarius Platinum

To a large extent, Aquarius was a victim of the wider problems facing the South African platinum mining industry, and in many ways it was less severely affected than its larger peers Anglo American Platinum (Amplats) and Lonmin.

My position was that Aquarius looked a superior bet for a prompt recovery thanks to its prompt action mothballing unprofitable mines, its solid cash balance and its price/tangible book value ratio of just 0.3.

What’s more, although it made a loss last year, Aquarius’ management was confident that the company would deliver positive cash flow this year, as long as platinum prices remained above $1,300/oz. At the time, platinum was around $1,400/oz and had already bottomed out, in my view.

So far, that’s how it’s turned out. Platinum prices have stabilised around $1,600/oz, the industrial unrest is over, and to cap it all, Amplats (the world’s largest platinum producer) announced today that it would mothball two of its mines in South Africa, helping to reduce platinum production and improve support for the price of the white metal.

Aquarius Platinum Mimosa operations (courtesy of Aquarius Platinum)

Aquarius has been forced to sell 51% of its Mimosa mine in Zimbabwe to meet local ownership requirements (image courtesy of Aquarius Platinum)

Two potential risks

There were only two remaining flies in the ointment:

1. The impact of the ongoing indigenisation implementation plan for the company’s Mimosa mine in Zimbabwe.

2. The question mark over whether Aquarius would be required to stump up the money required to complete its purchase of the southern portion of the Booysendale deposit from Northam Platinum.

The indigenisation plan has now been agreed and although Aquarius now owns less of this profitable mine, the deal should remove any further potential for disruption or uncertainty relating to indigenisation — the partial transfer of resource assets to local ownership.

The Booysendale question remains, and such has been the spectacular ramp up of Aquarius’ share price in recent weeks, there has been speculation that a different kind of deal may be in the pipeline. Could a merger with Northam be on the cards?

Final thoughts: I am surprised at the scale and rapidity of the recent gains in Aquarius Platinum’s share price, and am mindful that the Booysendale acquisition could still result in a cash call by Aquarius that could hit its share price.

If I owned shares in Aquarius (I don’t), I might be tempted to sell now for a near-100% profit in four months. If I chose to hold on, then I’d expect some volatility over the next year or so before some stability returns to the industry.


When I originally recommended Goldplat, I believed it had takeover potential — and quite possibly it still does, but the picture isn’t quite as rosy as it was back in September.

Firstly, a brief recap: Goldplat has a profitable and well-established gold recovery business (extracting gold from mine tailings, or waste) in Africa, and is currently using the cash flow from this to help establish a new gold mine in Kenya.

Kilimapesa has a JORC-compliant resource estimate of 671,446 oz of gold and production was expected to ramp up this year, providing attractive cash flow that could be used to fund further gold mining opportunities and fund the company’s newly-established dividend.

What’s gone wrong?

What’s happened has been slightly different. The Kenyan government has obviously been looking around, and has seen that Zimbabwe’s natural resource indigenisation programme is having some success (just look at what’s happened to Aquarius Platinum!).

In its AGM statement in October, Goldplat revealed that the Kenyan government was changing the law to mandate a 35% local equity participation in mining licences. Debate as to whether this will apply retrospectively to Goldplat’s mining licence at Kilimapesa is still ongoing — but I wouldn’t bet against it. The problem with miners is that they can’t switch jurisdictions — if the goalposts move, they have to try and make a profit anyway.

What’s more, Goldplat’s January 11 trading statement said:

Plant expansion at Kilimapesa Gold Mine in Kenya delayed due to uncertainties in Kenya’s mining legislation and operational difficulties at the mine.

It turns out that the expansion programme at Kilimapesa Gold Mine has been suspended until the outcome of the indigenisation negotiations becomes clear. However, this has resulted in increased operational costs at the mine, which will lose money during H1 2013, according to Goldplat.

Although Goldplat’s management are keen to reassure shareholders that “the improved results from the gold recovery operations are expected to cover the losses at Kilimapesa”, that isn’t really the point, and if it is allowed to continue, it will simply weaken the whole business in the longer term.

Final thoughts

If I owned shares in Goldplat (I don’t), I might hold on until later this year to see if the indigenisation threat can be resolved. However, I would be prepared for a long slog back to profitability — and if this didn’t appeal, I would take a loss and sell.

In a few years’ time, Goldplat’s management (and its shareholders) may end up wishing that their company had stuck to the profitable and safe business of gold recovery, and hadn’t decided to try its hand at being a mine development company…

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any purchase decisions.

A tunnel in a deep mine

Gold ETFs – A Better Bet Than Gold Miners?

A tunnel in a gold mineThe price of gold has risen by 129% in the last five years alone — so you might imagine that gold miners will be throwing off profits faster than the Bank of England can print money.

Strangely enough, that hasn’t happened. Very few of the big London-listed gold miners have been able to transform this increase in the price of their core product into a corresponding increase in their share price.

As a result, Gold ETFs like the SPDR Gold Trust (NYSE: GLD.US) and its UK equivalents, Gold Bullion Securities (LSE: GBS) and ETFS Physical Gold (LSE: PHAU) have proved more profitable investments for many private investors than many gold miners.

I looked at some of the best- and worst-performing gold shares in a recent article for the Motley Fool (click here to see the article) and will be returning to the subject in the next week or so to take a closer look at exactly why some gold miners have performed so badly when gold prices have risen so strongly.

After all, oil companies usually manage to report bumper profits when oil prices are high, sending their share prices soaring. So why not gold miners?

Watch this space, but in the meantime I would like to take this opportunity to let you know that my recent small-cap gold pick, Goldplat (LSE: GDP), goes ex-dividend tomorrow — so if you want to receive it’s maiden dividend, then you’ll have to move fast.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any purchase decisions.

Aquarius Platinum Mimosa operations (courtesy of Aquarius Platinum)

A Platinum Recovery Play

Aquarius Platinum Mimosa operations (courtesy of Aquarius Platinum)

Aquarius Platinum's Mimosa operation (courtesy of Aquarius Platinum)

Back in July, I took a look at the platinum sector in an article for the Motley Fool.

My conclusion then was that while there was still some risk involved, one share in particular stood out as a potential value and recovery play.

The company was Aquarius Platinum (LSE: AQP), the world’s fourth-largest producer and a company that has lost 76% of its value so far this year.

Like its four London-listed peers, Aquarius’ operations are in South Africa and Zimbabwe — two countries that carry substantial political and economic risks, as has been highlighted by the terrible events at Lonmin’s Marikana mine recently.

In my original article, I concluded that I wouldn’t touch Lonmin shares at the moment, because the company’s tardy approach to cost cutting and its looming financial problems meant it was dramatically overvalued. I wasn’t keen on Impala Platinum either, and Anglo American — while the world’s largest platinum producer — is too diversified and large to be a meaningful recovery play on platinum.

A number of factors combined to make me interested in taking a closer look at Aquarius Platinum, and my suggestion to interested readers was to wait for the company’s full-year results and then take a closer look.

The results came out on 8th August — and the case now seems stronger than ever, especially given the share’s recent sub-40p price tag.

Straight value

Let’s start with some statistics:

  • Share price (closing 07/09/12): 36.3p
  • Net tangible asset value per share (30/06/12): 124p
  • Price/tangible book ratio: 0.3
  • Cash (30/06/12): $180m
  • 52-week high/low: 234.6p / 33.1p

My main case for investing in Aquarius Platinum is as a straightforward value play.It is currently trading at around one-third of its tangible book value, so something pretty disastrous would have to happen for the breakup/sale value of the company to be much less than 35p per share, especially as it has enough cash to cover a year’s operations (with one caveat, which I’ll come to).

Value & Recovery?

A volatile and cyclical industry like mining is not ideal material for a pure value play — there are simply too many other things that can go wrong. That’s why the remainder of my investment case for Aquarius is based on my belief the platinum market will recover and that the company will return to profitability.

The current platinum surplus will take some time to clear, but demand for platinum is not going to disappear. Aquarius has several mines that are running profitably at current price levels and the company has said that it expects that as long as platinum prices don’t drop below around $1,300/oz, then the company should be able to generate positive cashflow going forward. The platinum price is currently over $1,500/oz and has previously bottomed out around $1,400/oz.

Aquarius has been proactive and transparent in its approach to cost-cutting and idling unprofitable mines and I have been impressed with the quality and honesty of its communications with the market. This is a far cry from the head-in-the-sand approach adopted by Lonmin, which is about to breach its banking covenants and may need to raise as much as $1bn to continue trading.

Risks remain

It’s not all sweetness and light. Leaving aside the current depressed market conditions, there are a number of other possible risks that could derail Aquarius’ business or force it into a dilutive equity raising exercise.

Nationalisation: Some politicians in both Zimbabwe and South Africa would like to nationalise foreign-owned mines, in an attempt to keep the economic benefits at home, rather than exporting the profits.

I don’t think full nationalisation is likely, but tax hikes and ownership grabs are always a possibility. In Zimbabwe, royalties on gold and platinum production rose at the beginning of 2012 and the country’s Indigenisation & Economic Empowerment Act of 2007 required foreign-owned companies to cede 51% of ownership to local shareholders, a process that is still ongoing.

For Aquarius, this means 51% of its Mimosa mine (in which it has a 50% stake), will be transferred to local ownership. The details of this transfer are still being negotiated but it has been described as a ‘sale’.

The Booysendale Question: In May 2011, Aquarius agreed a $146m deal to buy the southern portion of the Booysendale deposit from Northam Platinum. Aquarius CEO Stuart Murray had been chasing the deal for a long time and it was hailed as a game-changer, with 31m oz of platinum group metals — an increase of 24% on Aquarius’ resource base.

Better still, it could be accessed by extending Aquarius’ existing Everest mine, a much cheaper proposition than building a new mine. But how things change…

Aquarius now can’t afford to pay for Booysendale and isn’t keen to go ahead with the transaction at present. It also has problems at Everest that have made it uneconomical and this mine has been idled for the forseeable future.

This quote from the recent preliminary results hints at the problem:

Aquarius is of the view that its present cash reserves are sufficient to manage its operating mines for the next twelve months based on present market dynamics but point out that Aquarius will need to secure additional funding if it was required to conclude the Booysendale acquisition. In noting the necessity for securing additional capital, Aquarius is taking advice on a number of alternatives.

Luckily for Aquarius, South African bureaucracy is such that as of February this year, the deal still hadn’t been approved by the relevant government department.

A long wait?

A recovery in platinum prices and demand is by no means certain and is almost certainly not imminent. Although the price of platinum has risen by around 10% since the Lonmin troubles started, it could soon drop back down again when Lonmin resumes operations.

I think that Aquarius is a fairly risky play and it could yet go horribly wrong — so it’s definitely not one to bet the house on. On the other hand, if things go well, it’s not hard to see the share price doubling or tripling quite fast.

That’s all for now, but in my next article I’ll give you the details of a gold share I’ve been admiring recently — and explain why I think it has serious takeover potential.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any purchase decisions.

A share tip circled in a newspaper share listing

A Platinum Opportunity?

A share tip circled in a newspaper share listingPlatinum miners have been through the mill over the last year, shedding shareholder equity, battling strikes and rising costs and dealing with the political and infrastructure problems inherent in operating in South Africa.

As if that wasn’t enough, the price of platinum has fallen and the world market is currently in surplus, meaning that some platinum mines have been producing platinum at a loss.

It’s clearly a situation that can’t last and the miners are finally beginning to do something about it, cutting various combinations of costs, production and investment from their operations.

I recently took a look at the world’s four biggest platinum miners to see if any of them looked remotely like attractive investments — or recovery plays.

Three of the four failed to make the grade, but one share did stand out as a good candidate for a recovery — but to find out which one, you’ll have to take a look at the full article, which is published on the Motley Fool website.

Click here to read the full article.