First published 29 September 2011.
“MY OL’ PAPPY ALWAYS TOLD ME YOUR FATE IS IN YOUR HAND. STAND PAT OR DRAW, IT’S YOURS TO CHOOSE. LUCK DON’T HAVE A THING TO DO WITH HOW YOU PLAY THE GAME. MAVERICK DIDN’T COME HERE TO LOSE.”
– Theme tune from the Brett Maverick television series.
I’LL BE danged if the boys ain’t been whooping it up at the Denver Gold Forum with gold around $1,800 at that time, so let’s take a look at South Africa’s marginal and junior gold producers through a poker player’s eyes.
It’s not a bad analogy given the risk/reward profile on offer from some of them with gold sitting above R400,000/kg and let’s not forget the personalities and track records of some of the executives involved.
We are talking mainly about the marginal mines – typically high-cost with short remaining economic lives – which are going to churn money if the gold price stays where it is and managements deliver on their operational guidance.
On the other hand, should the gold price pull back sharply and/or management screw up again, then those shares are headed for the JSE equivalent of where
they buried the corpses after the shootout at the OK Corral – Boot Hill.
Latest example is Village Main Reef (Village) aka “the Last Chance Saloon’ for those shareholders in Simmer & Jack Mines (Simmers) who didn’t throw in their hands after Village rustled Simmers and acquired the Tau Lekoa and Buffelsfontein (Buffels) gold mines.
Many opted to “get out of Dodge’ and dumped their newly acquired Village equity,
in the process driving the Village share price down 40% to around 126c within weeks of the takeover being finalised.
But there’s now a new riverboat gambler dealing the cards – Village’s CEO
Bernard Swanepoel.
He’s quick on the draw to point out the upside if gold stays above R400,0000/kg.
Swanepoel comments: “We’re going to generate the kind of cash that will make a
mockery of our current share price.’
Swanepoel made a lot of money for investors when running Harmony up to the point where he got involved in the corporate gun play that erupted when Harmony launched a hostile takeover bid for Gold Fields and lost.
So another couple of lines from the Brett Maverick theme seem appropriate:
“No one recalls the first hand, they all know who won the last. And every man must find his place in time.’
Pardner, if you sold your Village stock at 126c you are already regretting it with
the share price back at levels north of 170c.
You are riding drag and eating dust behind this particular thundering herd of gold companies that stand to gain handsomely if current gold prices hold up.
They include the likes of Pan African Resources (Pan African); DRDGold, Great Basin Gold and Wits Gold which, until recently, have been about as popular with investors as a sheep herder stringing up barbed wire across the open cattle range.
In the June quarter, Village actually lost R12,231 on every kilogramme of gold it
produced when notional cash expenditure (NCE or total cost of production versus the lower cash cost of production) accounting is applied.
But, for the current September quarter, Village is forecasting it could make a profit
of R77,257/kg on an NCE basis representing an overall profit margin of 20% versus
a negative 4% in the June quarter.
For the year to June on an average gold price received of R308,221/kg, DRDGold
pushed up its operating profit 76% to R477m and increased its dividend 50% to
7.5c/share.
The group gets its profits from its lowcost surface dump retreatment operations
and is in the process of selling its deeplevel Blyvooruitzicht mine.
Hopefully, CEO Niel Pretorius can convince the same kind of high-rolling Chinese investors to buy the mine who recently bought control of gold companies like Taung Gold and Gold One International.
DRDGold non-executive director – and long-standing gold bull – James Turk recently bought 200 000 shares in DRDGold at R4/share through a trust. He told Miningmx: “One rarely goes wrong purchasing good value, and mining shares in general represent good value in my view.’
Pan African is another gold company that did well in the year to June at much
lower gold prices than now rule.
It upped its dividend 37.9% despite missing its production target and CEO Jan Nelson says there’s more where that came from as the gold price rises and the new Phoenix plant, which will recover platinum from chrome tailings dumps near Rustenburg, kicks in.
Pan African is also about to spin off its Manica gold project in Mozambique as a
separate venture – probably on the Australian Stock Exchange.
Pan African has not confirmed where that listing will be, but Nelson and the
Manica management team were spotted in Perth during the recent Africa Down
Under conference.
Wits Gold – the brain child of “uber’ gold bull Adam Fleming – is now under new
management in the form of Philip Kotze, the former CEO of Anooraq Resources.
He’s implementing a revised strategy which is that Wits Gold is actually going
to develop one of its projects into a mine instead of merely finding potential gold
mines and then looking for someone else to develop them.
Wits Gold reckons its most advanced project – De Bron/Merriefield in the Free
State – is comparable to Great Basin Gold’s Burnstone mine and a feasibility study is
due out by the end of next year.
Even with the booming rand gold price some shares – Central Rand Gold (CRG)
in particular – simply do not look worth the risk.
There’s a relevant piece of “cowboy wisdom’ applicable here which states that,
“the quickest way to double your money is to fold it over and put it back in your
pocket.’
You need to stay alert even when things are going well, otherwise you could end
up holding the investor equivalent of the “dead man’s hand’.
Those are the cards – two pair, aces over eights – that legend says Wild Bill Hickok
was holding when he was shot in the back while playing poker in a saloon in the town of Deadwood, South Dakota.
Things can turn sour remarkably quickly and, because most investors seem to
have short memories, let me remind you of a few juniors that have not delivered the
goods after making promising starts.
The recent list includes Simmers; Pamodzi Gold; Mintails; Thistle Mining, Aurora and Rand Uranium.
So the jury is out on CRG with the “hanging judge’ presiding and First Uranium
could be next on the court roll. First Uranium right now is crucially dependent
on its gold production but keeps hitting one problem after another.
– The writer owns shares in Pan African and DRDGold. The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.
