Opinion on the gold market is divided. It always is. Some see Trump-led political uncertainty as a sure-fire buffer to prices; others see headwinds in tightening monetary policy, a strong dollar and a soaring US stock market. Regardless of that debate, African gold miner Acacia Mining (ACA) has a lot going for it. Firstly, it has a strong investment case on valuation grounds, which assuming an average gold price of $1,225 (£972) in 2017 puts the stock on a cash-adjusted multiple of just 11.5 times forecast 2017 earnings. The second argument, which owes something to the first, is Acacia's status as a possible takeover target. Throw in a majority 64 per cent shareholder that seems to be a willing seller that's keen to maximise the price it gets in the event of a sale, and the shares should have the kind of support other gold miners can only wish for.
- Potential tie-up with Endeavour
- Growing cash pile
- Strong cost profile
- Increasing production
- Gold price volatility
- 2017 guidance uncertain
Operationally, things have been going very well. On 19 January, Acacia put out a trading update that detailed a fourth straight year of annual production increases and far improved margins at its mines in north-east Tanzania. Despite a 13 per cent rise in output in 2016, all-in sustaining costs were 14 per cent lower at $958 an ounce, while an average realised gold price of $1,240 was ahead of the $1,154 achieved in 2015. The group's two largest mines - North Mara and Bulyanhulu - both saw sizeable increases in production thanks to improved head and mine grades. And while Acacia's Buzwagi mine is coming to the end of its life, an extension to the operation until the end of 2017 should pave the way for a year-on-year increase in production.
The update was Acacia's second announcement in just under a week. A few days before, the miner confirmed media reports of talks "regarding a possible combination" with Canada's Endeavour Mining (CA:EDV), which could lead to the creation of a £3bn company. Although both parties stressed that there was no certainty of a transaction, there is a clear rationale for the deal. Acacia's majority shareholder, Barrick Gold (CA:ABX), reportedly wants to sell down its stake to clear its debts and focus on South America. Acacia's growing cash pile - which JPMorgan thinks could hit $370m by the end of this year and $572m by December 2018 - would support Endeavour's near-term growth and project developments in Burkina Faso and Côte d'Ivoire. It is likely that a deal would look to reduce combined capital requirements and find cost savings, providing a further fillip to earnings.
But at 410p, Acacia's shares are down on the point they reached following news of a potential tie-up with Endeavour. The stock is also still lower than the price Barrick listed Acacia at in 2010, so smaller shareholders can have some confidence that a potential deal should be struck in their favour. Even if a deal doesn't go ahead, Acacia's improved production profile and balance sheet strength are not reflected in its current cash-adjusted forward earnings multiple, which remains low relative to the sector.
ACACIA MINING (ACA) | ||||
|---|---|---|---|---|
| ORD PRICE: | 410p | MARKET VALUE: | £1.68bn | |
| TOUCH: | 409.7-410.1p | 12-MONTH HIGH: | 615p | LOW: 169p |
| FORWARD DIVIDEND YIELD: | 1.0% | FORWARD PE RATIO: | 14 | |
| NET ASSET VALUE: | 431¢ | NET DEBT: | $219m | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m)* | Earnings per share (¢)* | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 0.93 | -929 | -181 | 3.0 |
| 2014 | 0.93 | 114 | 22 | 4.0 |
| 2015 | 0.87 | -123 | 2 | 4.0 |
| 2016* | 1.05 | 210 | 33 | 5.0 |
| 2017* | 1.05 | 221 | 38 | 5.0 |
| % change | +0.3 | +5 | +15 | - |
Normal market size: 5,000 Matched bargain trading Beta: 0.72 £1=$1.26. *JPMorgan forecasts, adjusted PTP and EPS figures | ||||
