The clamour for gold has trailed off since the US Federal Reserve launched a relatively modest third stimulus package in September. But industry analysts are cautiously optimistic about next year's prospects after a fairly lacklustre 2012. Meanwhile, Indonesia-focused gold producer Archipelago Resources (AR.) may generate optimism of its own as it upgrades estimates of its resources.
- Resource estimates likely to be raised
- Record third-quarter production
- Falling cash costs
- Low-cost producer
- Slowdown in Chinese gold demand
- Shares may be difficult to trade
Archipelago's main project is the open-cast Toka Tindung Gold Mine in Indonesia. Toka Tindung was commissioned late last year, and should produce about 160,000 ounces (oz) a year over the next six years. However, that figure could rise appreciably as a result of exploration at four other drill targets, two of which are satellite pits of Toka. True, there is no guarantee of success, but this year Archipelago has already raised the estimate of its resources to 2.69m oz. And little exploration work has been carried out within its 400 sq km catchment in Indonesia.
Archipelago's production ramp up is another reason for further optimism. Record third-quarter output of 36,184 oz, leaves the group on target to meet full-year production of 135,000 oz-145,000 oz. In addition, cash costs have been trending down on increased production and a reduction in the volume of waste extracted from the mine. Archipelago expects cash costs to be between $580 and $640 per oz (£367 to £405). None of Archipelago's London-quoted peers can come close to that figure.
And concerns over Archipelago's ability to meet its enhanced production schedule should be set against the ease with which it hit initial planned capacity at its processing plant. This reflects good quality ore at Toka Tindung and a straightforward production process. Meanwhile, Archipelago is studying a low-capital, heap-leach operation that could allow it to raise annual output to 230,000 oz.
| ARCHIPELAGO RESOURCES (AR.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 61p | MARKET VALUE: | £348m | |
| TOUCH: | 60-61p | 12-MONTH HIGH: | 75p | LOW: 48p |
| DIVIDEND YIELD: | nil | PE RATIO: | 5 | |
| NET ASSET VALUE: | 24p | NET CASH: | $7.4m | |
| Year to 31 Dec | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | nil | -2.6 | -0.8 | nil |
| 2010 | nil | -12 | -2.4 | nil |
| 2011 | 93 | 26 | 2.2 | nil |
| 2012* | 235 | 117 | 20.4 | nil |
| 2013* | 230 | 113 | 19.7 | nil |
| % change | -2 | -3 | -3 | – |
Normal market size: 4,000 Matched bargain trading Beta: 0.4 *Westhouse Securities forecasts £1=$1.58 | ||||
Archipelago does not hedge its gold production, so its share price is ultra sensitive to movements in gold's spot price. Consequently, it is especially important for potential investors to have a feel for where the price may be headed. Industry delegates at this month's London Bullion Market Association predicted the gold price would be $1,849 per oz by next September (against $1,725 currently). True, this figure is little more than glorified guess work, but it's lower than earlier estimates owing to a slowdown in Chinese demand and it helps underpin the notion that the gold price will stay high for the time being.
Prospective investors should also note that Archipelago's principal shareholder is Indonesia's largest conglomerate - the Rajawali Corporation - which owns 52.4 per cent of the equity. Although dedicated support from a heavyweight local partner reduces some risk, the limited free float of stock could make the share price especially volatile.
