Australia | Oct 10 2006
By Chris Shaw
With Bendigo Mining (BDG) announcing a significant downgrade in its reserves yesterday there remains a hole in the Australian gold sector between large producers such as Lihir (LHG) and Newcrest (NCM) and the second tier miners. Perseverance Corporation (PSV) has moved to fill this gap by announcing a scrip offer for Leviathan Resources (LVR), which would double its production to more than 200,000 ounces annually for the next couple of years.
The bid, which is 1.7 Perseverance shares for every Leviathan share, has met a mixed response though, primarily because Leviathan offers a limited mine life at its Stawell project and has not enjoyed any recent exploration success despite a significant program. Merging the two companies would create a combined 5,800 square kilometres of exploration ground, Merrill Lynch suggesting there remains potential for some exploration success in the future.
Austock Securities likes the bid from the point of view of Perseverance as on its estimates it would be acquiring Leviathan at a discount to its valuation. At the same time it considers the pricing of the offer as attractive as Perseverance is only paying $87 per ounce of reserves and $45 per ounce of resources, which it suggests is cheap.
In contrast it suggests Leviathan management accepting the deal is an indication the company is not confident it can achieve its production forecasts, which it notes has been a longer-term issue for the company.
While Stawell has a limited mine life the broker points out it would provide a cash flow boost for Perseverance, a view shared by Merrill Lynch. The broker estimates the cash flow generated through production over the next couple of years would be enough to finance the bid, meaning the company is paying nothing for the exploration ground and mine assets being acquired.
With management likely to transfer staff and parts of the plant to its Fosterville project in time for its ramp up in two to three years as Stawell’s reserves are exhausted, the broker suggests the acquisition fits in well in timing terms. Austock estimates moving these assets could help lower the costs associated with the planned expansion by as much as 50%, while Merrill Lynch notes there is also potential for some cost savings from lower corporate costs. As a result, the broker has retained its Buy rating.
Also giving the company a Buy rating is UBS, as the broker estimates Perseverance could lift its offer to as much as $0.63 before it becomes dilutive for earnings, which lowers the potential for a rival bidder such as Bendigo Mining or Ballarat Goldfields (BGF) to emerge.
In contrast GSJB Were rates the stock as Underperform, L/T Hold, questioning the reason why the company is making the bid as Stawell is a mature asset with high production costs. Given this it sees no reason for Perseverance to pay a premium for the assets being acquired, particularly given Leviathan’s poor exploration record.
The market suggests there is some uncertainty as to the merits of the deal, as Leviathan shares are trading below the value of the offer. With Perseverance shares currently up 2c at 33c Leviathan should be trading at around 56c, but the shares are currently down 0.5c at 53c. The FN Arena database shows Perseverance is rated as Buy three times, Accumulate once and Underperform once, while Leviathan scores one Buy rating.