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OPINION

Golden nuggets

Golden nuggets
September 24, 2012
Golden nuggets
IC TIP: Buy

Mr Meyer notes the bullish implications for the gold price post previous rounds of QE and is advising clients to buy the dips and use any price consolidation to buy junior miners and related metal exchange traded products. As readers of my columns will note, I am always on the lookout to profit from trading patterns that have a habit of repeating themselves. So, with the gold and silver price surging by 11 and 25 per cent, respectively, in the past month alone, from my lens there is now significant room for the share prices of certain junior miners to play catch up with the more bullish price environment and one that has yet to be factored into analysts' valuations.

I had more than an inkling this would happen as three months ago I predicted that "the monetary authorities - Federal Reserve, Bank of England and European Central Bank - will be forced into turning on the electronic printing presses on a massive scale in the months ahead due to the deteriorating economic situation in western Europe and the contagion effect it is having on other major economies including the US." ('Golden opportunity', 19 Jun 2012). All three central banks have now obliged as has the 'risk-on' rally in equities and commodities, and gold in particular, which I forecast at the time and one that has a long way to run.

More importantly, this positive environment for precious metals is very good news for two of my stock specific Aim-traded plays on the commodity complex: Azerbaijan gold, silver and copper miner Anglo Asian Mining (AAZ - 45p), and resource investment company, Polo Resources (POL - 2.95p).

I picked out Anglo Asian Mining in that aforementioned article as a way of leveraging off the money-printing actions of the major central banks and, if anything, the investment case is even stronger now with the gold price surging from $1622/oz to $1775/oz. The company is due to report half-year results shortly and I can only reiterate my previous advice that investors are being far too cautious. That's because the company is capitalised at only £50m which is miserly considering last year it made pre-tax profits of £20m from selling 49,304 ounces of gold at an average price of $1,573/oz and 34,593 ounces of silver at an average price of $35/oz. It's worth noting that the average gold price this year has been nearer $1,640/oz, and has risen dramatically in the past month, so it is reasonable to assume that Anglo Asian's average realised prices will be significantly higher, too, and so will profits.

That low valuation would be warranted if Anglo Asian had financial problems, but it doesn't as net assets of around £50m dwarf net debt of £2m, so the balance sheet is barely geared. True, borrowings are set to rise as the company has just secured a $60m (£37m) line of credit to fund the construction of an agitation leaching plant at its flagship Gedabek gold, copper and silver mine. However, the plant will improve gold recoveries - Gedabek produced over 57,000 ounces of gold last year - and commissioning is scheduled in the first half of 2013.

 

 

Priced on only 4.5 times post-tax historic earnings, Anglo Asian shares have potential to rocket back to last year's high of 80p, and a close above 48p - a level that has capped all rallies since June last year - would be a very strong signal that a major share price break-out is under way. I continue to rate the shares a strong buy, offering a potential 77 per cent upside to my year-end target price of 80p.

Golden prospects for Polo Resources

Shares in resource investment company Polo Resources are marking time, at 2.95p, even though the company is making significant progress with its investments and, in particular, its 90 per cent-owned Nimini-Komahun gold project in Sierra Leone.

In the summer, an independent estimate by SGS Canada increased the indicated gold resource at the site from 110,000 to 521,000 ounces and there's another 263,000 inferred ounces of gold, bringing the total potential resource to 784,000 ounces. These estimates were based on drill data in February. However, Polo has just announced new drill results which, according to analysts at Liberum, showed "material widths of high grade infill drilling that support previous drill results and the robustness of the current resource and demonstrate high grade extensions to the orebody, presenting significant upside potential to the existing resource". The broker "expects these results to have material impact on the pre-feasibility study due for completion in early 2013".

In my view, this is major news as the company's investment in Nimini-Komahun is only in the books at £19m, the equivalent of 0.83p per Polo share, and when the pre-feasibility completes it is reasonable to expect a significant uplift on that carrying value. To put this into perspective, the Nimini-Komahun resource is currently being valued at $38.90 an ounce, but if Polo were to use the sector peer average of $84.50 an ounce, then the stake would be valued at $66.3m, or £41m, adding 0.9p a share to Polo's last reported net asset value of 3.89p.

Polo Investment portfolio at 30 June 2012

InvestmentActivityBook value (£m)Value per Polo share (p)
Nimini Gold project in Sierra Leone 19.00.83
Signet PetroleumAfrican oil & gas explorer17.30.75
Ironstone ResourcesClear Hills Iron Ore/Vanadium Project in Canada8.00.35
GCM ResourcesPhulbari Coal Project, Bangladesh6.10.27
Equus PetroleumKazakstan energy and oil company2.60.11
Total 53.02.31
    
Short-term investments, cash and receivables 36.31.58
    
Net asset value 89.33.89

Moreover, Polo is sitting on 1.58p a share of net cash, which means that the market is in effect pricing its investment portfolio at only 1.37p a share, a 40 per cent discount to book value of 2.31p, and that's not even taking into account the likely hefty valuation uplift at Nimini. At 2.95p, Polo's shares have substantial potential upside.