Australia | Oct 30 2007
By Greg Peel
And so it has come to this.
Beleaguered shareholders in gold producing hopeful Perseverance Corp ((PSV)) will likely find the 20c cash offer made yesterday by Canadian miner Northgate Minerals about as good as could be hoped for. The offer represents a 38% premium to the October 26 closing price and a 51% premium to the volume weighted average price (VWAP) since July 12. It’s a sad end to a once promising story.
Not that the story is no longer promising. UBS analysts suggest Perseverance could be worth 82c if the potential upside of the company’s production and exploration were factored in, but the fact of the matter is delays in the ramp-up of the Forestville plant have left the company with a crippling cashflow problem. If shareholders were not to accept the Northgate offer, note various analysts, Perseverance would be forced to try to raise more equity at less than the previous trading price of 14c – not something that would necessarily be well received by the market.
Perseverance was once a Buy with a bullet. Prior to management announcing the first production downgrades due to ramp-up problems, Perseverance was one of those rare companies that was ascribed a perfect score in the FNArena database – seven brokers, seven Buys. The company’s biological method of extracting gold had been proven in South Africa, and its sizeable exploration area proved tantalising as Perseverance set about producing gold from long ago abandoned Victorian mines.
But it is the nature of mining, and certainly of complex new mining methods, that problems and delays are always only just around the corner. Perseverance may well have been able to sort the problems out eventually, probably by FY09, but the company had bled cash. There was just not enough to keep going without turning yet again to the market. At the previous peak of the gold price in May 2006, Perseverance shares traded close to 50c. Gold hit US$725/oz then, and traded over US$790/oz last night. The recent gold price rally was about the only thing that dragged the shares back from under 10c.
Those shareholders who had decided it might just be best to hang on were hoping for a white knight. Mind you, Perseverance was always one of those stocks one could have been considered a target – even at 50c – given the pace of global gold industry consolidation. 20c is hardly inspiring, but at least it’s an “out”. And analysts are suggesting taking the money.
The Perseverance board has recommended shareholders accept the offer, and Northgate’s rescue package now has the company pretty well tied up. Northgate will acquire all of the company’s bank debt and hedge book, and provide bridging finance. If shareholders reject the offer the deal falls through and Perseverance will have to come up with the cash to pay Northgate back. This factor means analysts see little hope of another bidder emerging. The offer has come ahead of the September quarter production report, but given the company had already flagged negative cashflow for the first four months of this financial year, notes ABN, there is little point in holding off for a surprise.
Such is the price of Perseverance.