Amara Share Discussion Threads

[darcon] 20/4/2016 11:16

The PRU shares have appeared in my TDW account under international equities. No sign of the warrants as yet

[amargosa] 19/4/2016 20:50

From the Hot Copper site:

Very in depth report below. Target 70c


Summary

Perseus operates the Edikan mine in Ghana where recent improvements have gone unrewarded in the face of concerns that have now disappeared. Expect a positive surprise with Q1 results.
The Amara acquisition will create a very attractive portfolio and offer a credible growth story for Perseus, something that has been lacking.
Perseus is severely undervalued; the reasons for this undervaluation are about to disappear.
The pro-forma Perseus has positioned itself as a consolidator of West African gold mining with plenty of scope for further accretive deals.
One could be forgiven for discounting Perseus Mining (OTCPK:pMNXF) as yet another gold mining failure being exposed by the current resource sector bear market after a cursory glance at the company's share price chart - but this would be doing this company grave injustice. In fact, quite to the contrary of such an initial perception we view Perseus Mining as a veiled success story; and moreover, we also believe that the company has just positioned itself to benefit greatly from an advantage it has been forced to create by the ongoing bear market.
To put it bluntly: we see a strong bull case emerging for Perseus Mining; and we are sticking our head out accordingly in the present article. Here is a bulleted summary of our case to set the scene:
Perseus has brought the Edikan mine into production and has operated this marginal asset successfully throughout the ongoing bear market.
Where others would have failed, Perseus has persevered - and paid back its debt to boot. After five years of operations Perseus has proven its mettle as an open pit bulk miner; one of the best and most efficient not just in Africa in our opinion.
Recent investments have set the Edikan mine up for free cash flow in coming years, a reliable foundation on which to build out the company.
The acquisition of Amara Mining (OTCPK:CLUGF) will complement the company's portfolio, and its skill set to the dot. The pro-forma Perseus has a strong balance sheet, and several options to morph into one of less than a handful West-African mid-tier gold miners.
Valuation appears significantly lower than for peers. The reasons for this under-valuation will most likely disappear in the very near future.
The company has taken the market by surprise by stepping up as a consolidator in West Africa, and in doing so has turned into a veritable target itself.
We view the pro-forma Perseus as a worthy long-time investment vehicle, with a short-term potential to return a double within months.
[​IMG]
A Brief Summary
When Perseus acquired 90% of what was then called the Ayanfuri property from AngloGold Ashanti (NYSE:AU) in 2006 it was a motley collection of 23 shallow past-producing oxide pits. These pits had previously yielded about 300,000 ounces of gold over 7 years from a heap leach operation and AngloGold Ashanti clearly saw no further value in this asset, despite the proximity to the major's Obuasi mine. Perseus purchased the property for a song, considered the fresh rock mineralization that had been ignored by AngloGold Ashanti and built the re-named Edikan mine around this fresh approach.
Fast forward to date and note that Obuasi has been put on care and maintenance, a veritable headache for which AngloGold Ashanti is running out of options. Perseus, on the other hand, is sitting on a 2.3 million ounce reserve, sufficient to support 10+ years of mine life at a production rate of around 200,000 ounces per year - hence our description of Perseus being a veiled success story in the introduction to this article.
Nevertheless, Edikan is a low grade asset and not many would have thought it possible to operate this mine profitably, especially in a bear market. Perseus has proven doubters wrong time and again, as the gold price has gone from bad to worse practically ever since first gold was poured in 2011. Simply staying afloat has been a challenge not many would have mastered, let alone paying back its debt and keeping the balance sheet presentable. We tip our hat to Perseus for this achievement, and furthermore we would like to point out that investments made over the past couple of quarters have primed the Edikan mine for strong cash flows well into 2017 and beyond. These investments include relocating a local village and considerable pre-stripping of the Fetish and Chirawewa pits, or Eastern Pits collectively. As a result, Perseus will be able to access some of the highest grade ore within its mining inventory in coming quarters, a fact that was lost on investors who focused too much on perceived negative aspects in the last financial report.
Disappointing December Report? Not Really...
Investors simply skimming along the surface of the half yearly December 31 report would have noticed all-in sustaining costs, or AISC, increasing to $1,208/oz, up 22% compared to the corresponding y-o-y period in 2014; plus a 23% reduction in gold output; resulting in a 70% drop of the bottom line despite a comparable y-o-y top line result. Disappointment clearly governed investor response, practically denying Perseus participation in the rally enjoyed by other gold miners year-to-date, and especially since publication of this report on February 15.
We beg to differ in our assessment of this report. Digging deeper we observe that during the September and December quarters underlying unit costs have decreased considerably as a result of cost saving efforts made throughout 2015: for example, mining unit cost per tonne reduced 48% to $2.40 y-o-y; and processing costs decreased 15% to $9.19/t y-o-y; and the crusher worked 25% above nameplate when required to do so. The reason for higher per-ounce costs is not rooted in the performance of operations, but in the fact that a significant portion of the mill feed was sourced from low grade stockpiles, and from old leaching heaps. Consequently, Perseus was processing ore with an average grade of just 0.8g/t as opposed to 1.07g/t a year earlier; and due to the lower grade metallurgical recoveries also dropped from 87% to 84% compounding the negative impact on production and cost.
The reason for the low grade mill feed in late 2015 can be found in permitting delays for mining the Eastern Pits. These delays had been a concern for a while and had served as another factor holding back the share price.
Plus, in addition to the low grade mill feed, Perseus has also been spending significant capex on the mentioned housing relocation program to gain access to the Eastern pits, leading to negative free cash flow for the December quarter - a fact that led to some detailed questions by analysts in the conference call, and a number of eloquent replies by the CEO Mr. Jeff Quartermaine who also pointed towards the reduced capex spending in 2016, and the much improved grades once ore from the Eastern pits could be sourced.
Long story short: all relevant approvals from the Ghanaian Environmental Protection Agency have now been obtained, and Perseus has started to mine the Fetish and Chirawewa pits early this quarter. At a reserve grade of 1.2g/t ore from these pits represents a 50% improvement over recent quarters and investors can expect a significant boost in production, improvements in metallurgical recoveries, and consequently a substantial drop in cash costs per ounce - finally reflecting the mentioned savings in the underlying unit costs. We expect the March quarter to shape up as one of the best quarters in the history of the Edikan mine; and we are modeling production of 55,000 ounces of gold at AISC close to $1,000/oz for a quarterly free cash flow of $11 million; not just for the March quarter, but also for subsequent quarters.
For all these reasons we are noting down the upcoming March quarterly report as an important catalyst for our bull thesis.
[​IMG]
(Drilling at Yaoure project. Source: Amara website)
Amara Acquisition
On February 29, Perseus announced the friendly takeover of Amara Mining which will add the Yaoure project in Cote d'Ivoire to the company's portfolio. Amara had released its much improved PFS for the Yaoure project in Cote d'Ivoire shortly prior to this announcement, documenting a project quite similar in nature to the Edikan mine, except higher in grade and simpler to mine and operate. The Yaoure project displays impressive economical parameters, including an IRR of 38% for an assumed gold price of $1,200/oz owing to the relatively low initial capital requirement of just $334 million - which in turn compares very favorably with the NPV (8%) of $555 million (all numbers after tax).
The ore body is simple to mine in a single open pit scenario with a low strip ratio, the mine site is already disturbed and should be uncomplicated to permit, and all salient infrastructure is readily available. Processing is very similar to Edikan and experience gained at Perseus' flagship mine should be directly applicable to the Yaoure mine starting with mine construction all the way to future operations.
Cote d'Ivoire has developed into a comparatively safe and desirable mining destination with a modern mining code and a stable political environment. Both Randgold (NASDAQ:GOLD) and Endeavour Mining (OTCQX:EDVMF) have been operating here very successfully and have shown their commitment to expand their presence in Cote d'Ivoire. Amara was one of the first movers in the country and has clearly picked one of the most attractive and lowest hanging fruits.
Our valued fellow author The Investment Doctor has termed the Amara acquisition a dream come true, and we have to concur: the Yaoure project represents a perfect fit for the Perseus' skill set, geographical footprint and financial capacity.
A Valuation Conundrum
If approved by shareholders, each Amara share will be exchanged for 0.68 new Perseus shares, plus 0.34 new Perseus warrants exercisable at A$0.44 for a period of 3 years.
There are two ways to value this deal:
Considering each company's 20-day VWAP this offer represents a 28.3% premium for Amara shareholders when ignoring the warrants (and around 45% when including the warrants in the valuation) for a deal value of about $65 (A$85 million). Current Amara shareholders will own 35.1% of the pro-forma company before exercise of the warrants, and about half the company if all warrants are converted into shares. At first sight we were flabbergasted by the fact that Perseus shareholders were supposed to give up such a large portion of their producing mine, in exchange for a PFS-stage project that will take significant investment before it will generate cash flow. Until we looked at the valuation in dollar terms, that is.
Perseus is paying just $20 per reserve ounce (or $14.8 when also considering Amara's second project in Sierra Leone). Compare that to recent deals in Canada where reserve ounces crossed the table for 20 times this valuation and more; or much closer-by the offer for True Gold (OTCQX:RVREF) by Endeavour Mining implying a valuation of $177 per reserve ounce. Admittedly, these deals are not directly comparable to the Amara deal for a variety of reasons, but the price tag of $20 per reserve ounce seems like a pittance, and especially so considering the high quality of the Yaoure project.
And that's the conundrum alluded to in the title of this section: depending on which view one takes when valuing this deal one could arrive at two completely contrary conclusions. And here is how we explain this apparent conundrum:
Perseus is a beaten down stock and using its equity as the currency for the deal means that it has to give up a large portion of the emerging pro forma entity. The sacrifice of half of the Edikan mine only makes sense for Perseus shareholders if the combined company will be able to create adequate value from the new asset offsetting the sacrifice in the longer run.
Amara on the other hand is giving up on a high dollar valuation of its project, but gets a chance to claw a large slice of the combined cake. Accepting this low dollar valuation for the Yaoure project only makes sense for Amara shareholders if they believe that the combined company will be re-rated by a market that realizes its value, thus generating returns in dollar terms.
For both companies this deal only makes sense if the pro forma company thrives. Both management teams, both boards and substantial portions of each company's institutional shareholders have voiced their support for the deal. This puts pressure on the pro-forma leadership to live up to the perceived potential, a situation we like in a junior miner.
In our view shareholders of each company are giving something up, in exchange for a common long-term goal. The described short-term sacrifices on the two respective sides of the deal only make sense if the evolving entity represents and creates value beyond the sum of the parts. And after considerable analysis we have convinced ourselves that indeed, this is a highly likely outcome of this transaction.
[​IMG]
(source: investor presentation, Randgold data added.)
Optionality
Not again, we hear readers sigh. Optionality has been used as an excuse for promoting uneconomical gold in this bear market more often than we care to remember. But here you have it, the pro-forma Perseus will offer investors options; options to adapt to the turns of the gold price moving forward. Here is a summary of the pro-forma asset portfolio:
A 90% stake in the Edikan mine in Ghana.
The PFS-stage Yaoure project in Cote d'Ivoire.
The FS-stage Sissingue project, also in Cote d'Ivoire.
The FS-stage Baomahun project in Sierra Leone.
A balance sheet with no debt and $127 million (A$165 million) in working capital.
Let's put this puzzle together.
First and foremost, there is the Edikan mine - primed for a sustained period of elevated cash flows starting practically immediately as explained earlier in this article. This mine will keep the lights on, ensure continued balance sheet strength, plus it will throw off funds to develop the growth projects in the portfolio.
The Yaoure project is hands-down one of the best developed gold mining projects in Western Africa, it fits the company's skill set and it can be developed into production within a relatively short time frame. Importantly, the amount of capital necessary to build this mine is quite manageable for Perseus without diluting the share registry. There are still studies to be performed on this projects, but we believe that if desired Yaoure could be moved to production fairly quickly. Quite clearly, Yaoure will be the company's new growth project. Yaoure will almost double gold output and add significantly to Perseus' cash flow. Importantly, Perseus will be able to call the shots on timing and funding without pressure, thanks to Edikan providing stable cash flows and ensuring stability.
Perseus had been moving towards developing Sissingue as its second mine prior to announcing the acquisition of Amara; and quite frankly, it is for this very reason that we have not invested in Perseus before. This is a relatively small deposit with a resource of 880,000 ounces and we are not convinced that it would have moved the needle sufficiently for Perseus to justify the necessary investment.
On the other hand, the Sissingue project is located in close proximity of Randgold's Tongon mine, a thriving asset, and Randgold has explicitly stated that it was looking to expand its reserve base. Furthermore, Randgold's Morila mine is located about 150 km to the North of Sissingue, just across the border in Mali. Morila is currently winding down and the processing plant will stand idle once stockpiles and tailings have been depleted. The Sissingue reserves are of obvious strategic relevance to Randgold, but so far selling its only growth project has not been an option for Perseus for obvious reasons. Now that Yaoure has taken centre stage for Perseus we would not be surprised to see the two companies agree on a transaction in short order; and we would not be surprised if such a transaction will generate a significant contribution towards funding the Yaoure project.
The Baomahun project in Sierra Leone is the wild card in the portfolio. A feasibility study has shown that this project will require higher gold prices, and will need to incorporate underground bulk mining. We believe that this project will be put on the back-burner until market conditions improve; or perhaps it will be spun out as Perseus has done before with other projects not fitting its requirements - Manaus Resources (ASX ticker MSR) comes to mind.
In conclusion:
Perseus currently has a solid producing asset with immediate upside pending, but no attractive growth project.
Amara currently has a highly attractive development project, but lacks the ability of bringing it to account.
Together, the pro-forma company will be able to rely on Edikan as a solid foundation, organize an attractive funding package for Yaoure and have the in-house capability to build and operate it.
The pro-forma Perseus will have a very strong balance sheet, access to capital and for-sale assets to boot.
These four points summarize why we see substantial value beyond the current sum-of-parts. The pro-forma Perseus will emerge as another West African mid-tier gold play, a serious contender for further consolidation of attractive but financially stressed assets. We are convinced that once the market realizes this evolution, the appropriate re-rate will set in.
[​IMG]
Valuation
We have discussed the deal value earlier in the piece and have pointed to a price tag of just $20 per Yaoure reserve ounce (with the Baomahun reserve thrown in for free on top of that). Let's turn to a valuation on company level, and consider the slide above for starters which we have sourced from the presentation accompanying the conference call after the deal and which correlates very closely with our own data.
The first of the two charts compares resource ounce valuations across a basket of West African gold miners. Clearly, the current Perseus is valued lowly, due to the perceived operational issues at Edikan and its lack of growth options; and Amara's resource is valued lowly because it has not presented a credible path to production. The combined entity resolves both reasons, and we see absolutely no reason why the pro-forma Perseus should trade any lower than say, Asanko Gold (NYSEMKT:AKG) or Teranga Gold (OTC:TGCDF) implying a 300% to 400% upside.
The second chart on the slide illustrates NAV multiples across the same peer group, based on data sourced from BMO Capital Markets Equity Research. Again we find that the market is valuing the pro-forma company significantly below comparable peers, and if we use Asanko Gold and Teranga Gold as our measuring stick again we note an implied upside of 50% to 100%.
N.B. Both Teranga and Asanko have roughly equal or less annual production, fewer reserve ounces, fewer resource ounces and no growth plan beyond their current single operating asset.
Turning to a cash-flow based valuation we note an expected annual cash flow of roughly $40 million going forward, based on the discussed improvements. This translates into almost 25% cash flow yield considering the pro-forma enterprise value of $166 million, and 16% cash flow yield when considering just the market capitalization and ignoring the substantial $76.4 million in cash. We contend that there are very few, if any other, gold miners out there with such a high free cash flow yield, with many gold miners struggling to generate free cash flow at all.
And turning to a DCF model for the Edikan mine, and assuming that FCF of $40 million can be maintained for a remaining 15 year mine life, we compute a value of $434 million for this asset alone at a discount rate of 5% and a gold price of $1,200/oz, or almost twice the current enterprise value (and close enough to BMO Capital Markets' valuation in the slide above).
In conclusion, we are convinced that Perseus is severely undervalued at present, and even more so in its future pro-forma constellation.
Why This Opportunity Exists
As outlined in detail above we see a confluence of factors creating the present opportunity.
The market has been skeptical about Perseus' ability to operate Edikan profitably in the present gold price environment. The last half-yearly report seemed to have confirmed some of the concerns on surface, while several positive indicators have gone either unnoticed or simply unrewarded. The apparent main concern (permitting of the Eastern pits) has since been removed, and we expect the unnoticed positive indicators to come to the fore in short order.
Perseus has been unable to convince the market (and your humble scribe) of the merits of the Sissingue project. The Yaoure project is a vastly different kettle of fish and will change the market perception significantly as soon as the deal closes.
Perseus has recently been dropped from the holdings of the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) which has added to the selling pressure. We expect the pro-forma Perseus to be re-admitted at the next opportunity after the deal closes, reversing the effects and leading to increased buying from institutions.
Perseus trades very liquidly on the Australian Stock Exchange, but less so in Toronto and on the OTC exchange in the US. Comparative lack of trading liquidity was quoted as one reason for its elimination from the GDXJ, and also for the lack of coverage by North American analysts. The pro-forma Perseus will most likely drop its London listing it will inherit from Amara, and move the business from British shareholders to the TSX ticker instead. This will lead to a veritable uptick in trading volumes and analyst interest in North America.
Catalyst & Price Targets
There are two short-term catalysts that should crystallize a good portion of the available upside for Perseus: closure of the deal with Amara, and release of Q1 results. Both events can be expected before the end of May. (Amara will hold its shareholder meeting on April 8, and court approvals are expected by mid-May.)
Operational improvements at Edikan will become visible to the market, and in combination with higher grades from the Eastern pits will lead to sustained free cash flow generation at the discussed levels. Continued solid performance at Edikan documented in upcoming reports will add further support to the expected re-rate.
In the mid term, we expect news about further technical improvements of the Yaoure project following the ongoing review by Perseus specialists, and announcements of development plans to drive value for the combined company.
A sale of Sissingue is also an event we would like to see before long.
We believe that it will not take too long after deal completion for the market to realize that its previous concerns have been addressed, giving rise to a re-rating at least to peer levels. We therefore formulate our immediate price target of A$0.70 to be reached before the end of the year, or roughly 85% on average of the listed peer comps listed in the valuation section. Based on a share price of $A0.40 at the time of writing this represents a short-term upside of 75%.
In the longer term, we expect Perseus to continue consolidation of assets in West Africa, to build the Yaoure mine, and to grow into a strong regional mid-tier player. The share price will obviously depend on the gold price, but a look at Endeavour Mining shows where this journey might take long-term investors.
Investment Thesis & Takeaway
Perseus is a solid operator and will have a highly attractive development pipeline after completion of the Amara acquisition. There are sufficient catalysts for the market to take note and repair the under-valuation from which Perseus has been suffering. We believe that management of the pro-forma company will be under pressure from shareholders of both parties participating in this deal, a good starting point for bringing out the significant value of the combined portfolio.
Perseus will have free cash flow from its Edikan mine, and it will be in the company's capacity to decide on the optimum timing and on the best way to fund mine construction at Yaoure. Perseus has a strong balance sheet and may well be contemplating further acquisition to underscore its newly earned label as a West African consolidator. On the other hand, the company's attractive collection of operating and development projects has turned it into a veritable target itself. If Perseus can't crystallize its value in due time, a takeover will do just that.
We are viewing our investment in Perseus as a long-term hold, but fully expect the share price to appreciate substantially before year end.
The easiest way to play this opportunity is by purchasing Perseus shares on the ASX or TSX, or on the much less liquid OTC ticker. A potentially attractive alternative would be to buy Amara shares on the London Stock Exchange. There is practically no arbitrage to benefit from, but there will be warrants issued on closure that represent an attractive bonus. Investors should make sure that their brokerages will handle these warrants adequately, especially in the likely event that the London listing will be terminated.

[nabcom] 19/4/2016 16:10

Thanks awesome45, I seem to remember they eventually contacted with options when I was last in a similar situation.

[onedayrodders] 19/4/2016 16:09

No issues with TDW ... very smooth and I didn't need to do anything other than confirm my accept vote via the phone.

New shares will be in my ISA account and I will be able to trade them no problem.

[awesome45] 19/4/2016 15:55

Nabcom - Barclays said they would advise when they know what is going on. Useless.

[onedayrodders] 19/4/2016 15:37

Perseus share price doing well .. up to 0.49

;o)

[nabcom] 19/4/2016 06:04

Same here, hold a few from some time ago, wasn't paying attention, anyone know what the position is at Barclays?

[stuart14] 18/4/2016 15:17

Makes no sense at all!

Sounds like I'll hold them but cant trade them until they get the UK listing. Bizarre!

[darcon] 18/4/2016 14:47

Stuart14 - you will need to check with your broker.

[stuart14] 18/4/2016 14:42

Sorry- i'm not up to speed here. Hold some shares that are worth a fraction of what I paid for them.

Can someone just let me know the latest? Do I now hold some shares in Perseus, or are they buying my shares for cash?

Thanks

[capt bligh] 18/4/2016 14:38

hxxp://hotcopper.com.au/threads/perseus-mining-so-much-value-beyond-the-sum-of-parts.2750573/#.VxTt5vkrKUk

[onedayrodders] 18/4/2016 10:15

With a fair wind behind the Gold price Perseus could have a run back to their 2011 high ...which will be a ten bagger from here.

[amargosa] 18/4/2016 07:40

Thanks guys, it may well be TDW I eventually xfer to, unless anyone has any other suggestions? I'll take a look at Jarvis.

PRU trading at 47c currently. I must admit I was hoping to pick up a few more ama before the suspension, but the expected dip didn't occur.

[sequoia] 17/4/2016 18:16

If your with TDW they will also set up Australian dollar account, so if they start paying a dividend it's paid straight into that account.

[john148] 17/4/2016 16:15

Jarvis have said its okay to trade in new shares but I would check again.

[onedayrodders] 17/4/2016 16:02

cheers amargosa

[onedayrodders] 17/4/2016 13:23

TDW are fine for this merger .. no need to do anything and can easily trade once converted

[amargosa] 16/4/2016 19:24

ODR, that was the price assuming a set exchange rate and the price of
pru shares at a certain point. Both have changed.

Dacon thanks for that. I was looking at TDW to transfer to from Selftrade; they look good, but have quite a high currency commission rate.

[onedayrodders] 16/4/2016 15:43

probably a naive question but I thought the offer for AMA equalled 16p ... how come we are now above that ?

[darcon] 16/4/2016 09:16

TD Waterhouse

[amargosa] 16/4/2016 07:33

Which broker are you with?

[darcon] 15/4/2016 12:11

In. I bought 500k yesterday after checking I would be able to trade the PRU shares.

[amargosa] 15/4/2016 09:59

PRU shares sitting at the exercise price currently. Warrants are a free ride too. The question is: in or out?

[888icb] 15/4/2016 07:33

I sold this am as the ability to trade after today is very uncertain as they may not list the new shares in London.

[amargosa] 12/4/2016 07:17

Yep, and yet delisted by the end of the week.