Timmins Hostile Bid for Capital Gold – How much are they really paying?

As this bid has now turned hostile, and given Timmins has now increased their cash offer to $0.25 per Capitlal Gold share, and will need to take on additional debt and dilution to meet expenditures. I have decided to objectively determine how much value is in this merger to ensure Timmins shareholders are not paying too much. My findings below –

Timmins 2011 Expenditures (ex. Tax)

$21m Drilling program, $6.14m Capital expenditure at San Francisco, $2.55m Property option payments, $10m Gammon cancellation fee, $10m Merger transaction costs, $ 15.7m Cash payment in consideration to Capital Gold shareholders

Other – Estimated 6668 gold ounce loan still payable to Sprott. This is deducted in combined cash flow. No other significant liabilities.

Capital Gold Corp 2011 Expenditures (ex. Tax)

$30 m Capital expenditure (not clear at present if the entire balance is for El Chante only?).

Other – No significant other liabilities. Current cash balance can safely cover current liabilities. No significant long term liabilities.

Total => $95.4m

Combined Entity 2011 Cash flow

Calculations assume a base case scenario –

San francisco 95k ounces @ $500 cash cost / ounce;  El Chante 65k ounces @ $500 / ounce => $152m. There is also an estimated 6668 ounce gold loan repayable to Sprott. Therefore, adjusted combined entity cash flow => $142m (2012 => $152m).

Financing

Okay, now I am going to conclude that Timmins will go all out with the financing. For argument sake, we will assume half Equity financing (at $2.40, with one half warrant for every share of the combined entity), and half debt (non convertible). Sprott has already agreed $20m financing.

Total Capital requirements => $95.4m.

Equity financing needs = $47.7m. 19.9m shares + 9.95 warrants.

Debt financing needs = $47.7m (inc. $20m arranged financing from Sprott).

Combined F/D entity shares outstanding => 145,111,661 + (62,871,000*2.27) + 19.9m + 9.95m  => 320m.

Combined F/D entity market capitalisation @ $2.40 (60 day Timmins average share price  => $768m.

Estimated combined entity Enterprise value => (F/D Market Cap = $768m) + $47.7m Debt – $35.3m cash from options/warrants if exercised => $780m.

(Assumes all cash equivalents are reserved for Capex / transaction and other expenditures listed above).

Projected Enterprise value after consideration of 2011 cash flow ($142m), interest payments @ 10% ($4.77m), and income tax @ 30% ($23.2m) => $780m – ($142m -$4.77m – $23.2m) => $666m.

Summary – As the above shows, we could expect an enterprise value of $666m by year end. This would give an EV/CF of 4.38x. Given most mid tiers are trading in the 7 – 11 range, we could reasonably expect the share price to double within one year post merger. Possibly by year end, if we experience the usual autumn/winter gold stock bullishness!

As for reserves, we have a combined 2.2m gold ounce P+P, and a total of approximately 2.5m gold ounces M+I at the producing mines. The projected enterprise value is certainly not excessive in relation to reserves and resources. It is also reasonable to expect increased reserves by year end given Timmins current $21m drilling program.

Caveat Emptor (Buyer beware!) – It is common for post merger stocks to sell off due to the perceived reduced value of the combined company (transaction costs incurred, acquired company purchased at a premium, management conflicts etc..) and those selling once they have received their cash payment. Therefore, be cautious when buying. I will only accumulate more of these on weakness to reduce post merger sell off risks.

Deer Consumer Products Inc (DEER)

One of my favourite non mining shares is Deer Consumer Products. They are a NASDAQ listed Chinese kitchen appliance make (think juicers, soy milk makers, toasters, kettles, that kind of thing). They supply for some major names internationally, such as Alba, Kenwood, Disney, Black & Decker.

Lots more info on their site http://www.deerinc.com/

Throughout 2010, they have made many inroads targeting the Chinese growing domestic middle classes, under their own name for the likes of Tesco and Walmart, and many others based in China.

Today I am excited, as they announced a $0.05 quarterly dividend. Okay, so the company is trading at around $11/share (369 Market Cap). However, I believe a dividend is so much more than just a yield. It is also very much a vote of confidence. In light of a number of US listed small cap Chinese companies turning out to be outright frauds, this first dividend should provide a vote of confidence.

Performance

Deer’s performance in 2009 was stella. Initially trading OTC, it graduated to the NASDAQ in mid 2009.

Management announced a $75 million offering at $13/share in early 2010, a $2 discount, causing the share to plummet. Meanwhile, quarter after quarter performance increased.

For the last 4-5 months, the share price seems stuck in a very tight $11 trading range. From experience, I know that with the kind of chart pattern seen above, once breakout to the upside does occur, the price can go very high, fast. This is something I would place a high probability happening soon, so long as the broader markets can stay up just a little while longer.

Fundamental Performance & Growth

Date     Net Income(k)       Revenue(k)      EPS (Quarterly)

3’10       9,266                           55,260                 0.28

2’10       6,021                           34,410                 0.18

1’10       4,037                          23,900                  0.12

4’9        5,873                           32,620                   –

3’9        4,123                           26,540                   0.18

2’9        1,715                           15,310                    0.08

1’9        0.657                           6,872                     0.07

Date   Shares Issued(FD k)     Net Assets/Share(FD)

3’10          33,590                              3.90

2’10          33,700                              3.55

1’10          33,770                               3.36

4’9           23,190                               –

3’9           23,270                               1.60

2’9           21,710                               0.918

1’9           10,010                               1.65

2010 P/E => 12.4 (with about $34m cash!)

Current Net Asset/Share = > $4.9 (FD)

Estimates 22% earnings growth in 2011!

Complete earnings details can be found here http://finance.yahoo.com/news/Deer-Consumer-Products-Inc-prnews-2047567069.html?x=0&.v=1

February Update

New Additions

New additions to the portfolio, Gold One Int. (GDO.ax), and Atna Resources (ATN.to).

Whichever way you value these two, they are cheap. Both have had some set backs in 2010, but they have overcome, and are striding in the right direction, both technically and fundamentally. A full review of both to come in the next few days (I promise).

Timmins Gold Corp (TMM.v)

Bruce Bragagnolo still insistent for a merger with Capital.

Meanwhile, Capital has been desperately busy digging up any dirt on Timmins, for which their effort leaves much to be desired. Decide for yourself – http://www.capitalgoldcorp.com/investor_relations/images/february-14-2011.pdf

At least 35% of Capital’s shareholders have stated they will block the Gammon Gold merger, as they favour a Timmins merger. Sprott Asset Management for one, has major interests in both Timmins and Capital, and they would like nothing more than to see these two combined, to achieve a significant re-rating of the combined business entity.

Meanwhile, at Timmins San Francisco mine, they have a $21m drilling program in place for 2011. Critic’s of Timmins complain the San Francisco mine life is on the shorter side. The program should put their minds at rest. Also, Timmins has published some encouraging drill results from their newly purchased property 20km north-west of their San Francisco pit.

Carpathian Gold (CPN.to)

The market seems to have lost interest in Carpathian, as evident by their chart. They have recently acquired a mill and crusher which exceeds the plant’s requirements. From what I gather, it was acquired at a discount too. What’s also encouraging, is all key personnel have been hired at the Brazil mine.

We can look forward to results of a full feasibility study and an expansion of resources before the end of Q1 … Should hopefully give the price some momentum …

Be sure to watch the Mines & Money interview with Carpathian’s CEO Dino Titaro below –

2011 Opportunities

Opportunities for 2011. The list is by no means exhausted, and I expect to do a full review on each company in due course. I may also be in the market for some Oil and Gas juniors this year. So, if you have any suggestions, please let me know.

Brief summary –

Timmins Gold Corp (TMM.v)

Enough coverage already. When they have this merger business is sorted, I will buy more. This will be a multi-billion dollar company one day if they get Capital Gold corp. Looking increasingly likely.

Carpathian Gold (CPN.to)

I only brought a half position as the market had already had a good run. I’m looking to get the other half on a correction. If there have been significant developments, I could add more than half.

Full review here – https://goldstocktrader.wordpress.com/2010/12/01/carpathian-gold-cpn-to/

Jaguar Mining (JAG)

Possibly a soon to be asset in distress. A Brazilian Gold mining company which looks to have tripped over itself attempting to grow too fast. They have had some major ore dilution issues at one of their three mines, pushing operating costs up to $795 per ounce!

However, management expects dilution issues to be fixed during 1st quarter, and their hedge book will have been eliminated too.

Plans are to expand from ~150,000 ounces, to 210,000 ounces this year, and then onto 500,000+ ounces per year by 2015!

They possess an advanced stage project in feasibility stage, projected to produce 154,000 ounces per year.

However, if gold drops sharply, the market will not tolerate Jaguar’s thin cash margins, and the stock could drop fast. Good buying opportunity?

I can only say after a full review.

Silver & Silver Wheaton (SLW)

My embarrassing confession. I missed the silver rally! Still, I’ll get in on a correction. For those who don’t know Silver Wheaton, they are a silver streaming company, meaning they front the money for mine developments, in return for mined by-product silver at a fixed price. They are averaging $4, and  expecting silver streams to grow annually. Their silver reserves are well diversified, so SLW could be a better option than holding silver bullion, as their costs are pretty much fixed, and huge cash flow will fund growth. Essentially low risk leveraged exposure to the price of silver.

Northern Dynasty Update

I have set stop to break even, comfortably up over $2 since buying, I am taking a free ride now.

Northern Dynasty – My disclosure

I  opened a Contract for Difference position on Northern Dynasty on Friday’s open, at $11.20. Firstly, I’m not really a fan of these leveraged instruments, but I think in this case, it was a better option.

I had been a little concerned about buying NDM due to their environmental concerns. Admittedly I was a little spooked by Taseko’s Mine rejection recently. Also, they were trading very close to the $10 resistance level. On Thursday, NDM comfortably broke $10 on high volume, so I figured $10 would now become very strong support. Also, given Thursdays price action, this sort of buying tends to carry on for at least a few days.

I opened a CFD position, as I was able to open it with a guaranteed stop for a tiny premium. So, if a Taseko issue presented itself, I can only lose just over 10% at the most.

Northern Dynasty Minerals (NAK)

Introducing Northern Dynasty Minerals.

Their Pebble project, a very large un-mined deposit of Gold, Copper and Molybdenum in north america.

Measured + Indicate resources of 55B lb Copper, 66.9M oz Gold, and 3.28B lb Molybdenum. At current prices, that’s a M+I  Gold equivalent reserve of 261.5M ounces!

Now, the project is a 50/50 joint venture between NDM and Anglo American, but that’s still 130.75M Gold equivalent ounces belonging to NDM.

Now, for Anglo American to retain their 50%, they must spend at least $1.425  billion throughout the development of Pebble. NDM has $38.9 million in working capital, but does not need to spend a cent on pebble until Anglo American’s $1.425 billion has been spent. *Hunter Dickinson, has a history of developing projects and selling them on, so there’s a good chance Anglo American will acquire NDM, quite possibly before NDM spends a cent on Pebble. So, don’t expect any share dilution for the forseeable future.

*The companies parent company, Hunter Dickinson, has a business model, which is to develop projects, and sell them on realising a large profit. They are also responsible for Taseko mines and Continental Minerals. https://goldstocktrader.wordpress.com/2010/11/28/continental-minerals-kmk-v/

The downside – NDM’s shareholding is not a controlling one. There is also much environmental controversy surrounding the Pebble deposit, and environmental concerns can stop development right in its tracks in these first world countries. Just take a look at Taseko Mines Prosperity project in British Columbia, which was refused federal authorisation to proceed. Share price opens nearly 50% lower the next day.

How much is Northern Dynasty worth?

Whatever someone will pay for it. Currently, at friday’s closing price of $13.41, with 93.9 million shares outstanding, NDM costs $9.64 per Gold equivalent ounce.

Comparing Continental Minerals, which was acquired by Jinshan for $21.26 per Gold equivalent ounce, We could reasonably expect an offer in the higher twenties.

As mentioned, NDM is not a controlling shareholder, and a deposit of this size will likely go for a discount compared to a smaller deposit. However, Continental Minerals acquisition price was below market expectations due to it’s remote location. Whereas, the Pebble deposit is in the much more competitive location of Alaska. Therefore, the higher twenties is still a reasonable target price for NDM.

Timmins Gold on the move

Timmins Gold breaks to new highs today.

The most obvious reason I see why this stock has been underperforming the uber bullish rally in recent weeks, is because of their merger with Capital Gold proposition, of 2.27 Timmins shares for each Capital Gold share.

Once again, Management has rejected Timmins offer, without giving any real explanation, and instead favours a merger with Gammon Gold.

http://finance.yahoo.com/news/Capital-Gold-Corporation-prnews-4116100712.html?x=0&.v=1

Timmins offer is more superior, and would create a merger of two near equals, which would surely give way to a significant re-value, as the combination would enter mid tier status. Their combined operating cash flow would equal $160M, plenty to fund organic growth, or acquisitions to significantly grow production.

http://finance.yahoo.com/news/Timmins-Gold-Makes-Final-iw-971584845.html?x=0&.v=1

I do not see why they rejected the merger. It does make you wonder if there have been some back handers, and non disclosed special gifts between Capital and Gammon management?

Anyhow, Timmins CEO Bruce Bragagnolo insists they have support for the merger from Capital Gold’s shareholders, who can overturn managements decision.

The mining business is a dirty business. In more ways than one!

I do not like to match news stories to market moves, but I feel the rejection news has been the driver of Timmins move to new highs today.

Is there anything cheap left? (Part I)

The last few days I have been searching the market for stocks to re-invest the profits I have taken recently.

What have I found?

Well, nothing that is blatantly cheap!

I think the safest way to play this bull market, is to buy things that appear cheap, with a lot of  immediate upside potential. Past examples include:

• Timmins Gold 2 months from production commencement, trading at 2x projected cash flow (oct 09)

• Avion Gold trading at 4.5x cash flow, while quickly developing projects to more than double production by 2012. (jun 10)

• Great Panther Silver trading at 4x – 4.5x cash flow, increasing reserves, with silver looking ready to break out. (aug 10)

And most recently, Carpathian Gold.

Generally, you find these deals on broad market weakness. By the way, I say ‘deals’, because that’s the way I look at these companies, kind of like how a property developer might look at a property. Make your money on the way in!

Carpathian Gold (CPN.to)

I recently brought this one, and I am now starting coverage.

Carpathian Gold is a near term production company, with two main projects, Riachos Dos Machados (RVM), and the Rovina Valley Project (RVP).

Firstly, a little about the projects –

RDM is a past producing mine in Brazil, capable of production of 100,000 ounces Gold per annum, with projected cash costs of $428/ounce according to their preliminary economic assessment. On top of this, the mine has 812,000 ounces in the measured and indicated category and growing.

Now get this, the mine is yet to have results of it’s full feasability study, but they look to have secured all the funding they need to put the mine into production.

They recently engaged in a $51.6 million brought deal financing with an investment syndicate between  Cormarck, Canaccord, Hayward, and Jennings Capital. Essentially, this means some well known institutions have actually gone long on Carpathian’s shares.

As well as this, they have arranged a $30 million gold stream financing deal, of which $7.5 million already received, and a $75 million financing facility with the Macquarie Bank. The last, is a $$22 million financing from CAT, for equipment. Now, all this financing does have some conditions, such as a put/call collar structure for a proportion of gold produced (I will update the structure when the deal becomes more apparant), and the completion of a feasability study, which I do not see any issues with, given this is a past producing mine. http://www.carpathiangold.com/site06/Default.aspx?tabid=226

RVP is a larger project in Romania which has 759 million lb copper deposit, and 3.07 million ounces of gold, both in the measured and indicated categories. Combined, this is a gold equivalent of 5.23 million ounces. The PEA suggests costs of $379 per ounce gold, with copper as a by-product.

Value

Now, say for instance management were to dump the RVP project (which they won’t), I think it would fetch between $129-155 million on the market, perhaps more if the buyer was enthusiastic of their inferred mineral category.

The company has a market cap of $240 million (428m share fully diluted @ 56 cents). Now for argument sake, lets give RVP a half way value of $140 million. This means you are only paying $100 million for a company projected to produce 100,000 ounces per year. Plus two Hungarian exploration properties thrown in free!

Or to value another way, $44 per gold equivalent ounce. For small cap producers, $150 per ounces is more reasonably sounding.

I recently brought a half position in Carpathian at 56 cents. The reason being I wasn’t sure if the market would pull back or head higher. Either way, it’s a hedge if it goes higher, and I’ll buy more if it pulls back.

Anyone who snatched this below 30 cents, well done you got a steal!