Australia | May 22 2008
By Chris Shaw
Gold prices have been volatile of late but there are still more market watchers who see the price heading to US$1,000 an ounce than expect it to fall back to US$800 per ounce. For gold producers the question is do you close out any hedging to take advantage of any further price gains, or are current levels good enough to lock in some earnings?
Sino Gold ((SGX)) has chosen the former option with the group announcing a $204 million capital raising, $122 million of which will be used to close out its hedge book while a further $77 million will go towards acquisitions, development, exploration and general working capital expenses.
The issue will involve two phases, the first where Gold Fields Ltd will take a $68 million placement of shares at $5.03 each to lift its stake to 19.9%, while stage two of the raising will see shareholders offered shares at $4.00 on a two new shares for every 15 held basis.
Austock Securities estimates the raising will dilute the group’s net present value by around 8% to $4.77 per share, while using current gold price assumptions it will be earnings and cash flow accretive medium-term but dilutive longer-term. To reflect the changes the broker has lifted its profit forecasts in 2008 to $27.6 million from $18.9 million previously, in 2009 to $89.4 million from $65.8 million and in 2010 to $127.9 million from $107.6 million. Beyond 2010 its forecasts have fallen by around 4%.
The broker is positive on the move overall given it will not only strengthen the company’s balance sheet but will also generate stronger cash flows given output will no longer be hedged, with this expected to be a positive in terms of increasing the company’s capacity to pursue longer-term growth options.
Austock also likes the fact Gold Fields is stumping up to increase its stake in the company, suggesting this demonstrates support for the outlook for Sino longer-term. Its only question is why the company is raising more than the $122 million it needs to close out the hedge book, as there appears to be neither a need or an easily identifiable option for the extra money at present.
Despite this question the broker retains its Buy rating, though with a reduced price target of $6.70, down from $7.22 to account for the additional shares on issue. Merrill Lynch made a similar change in factoring in the issue and lowered its target to $7.50 from $8.00 while also retaining a Buy rating on the shares given the stock continues to trade on a lower multiple than its peers.
Macquarie is another to recommend the company as a Buy, suggesting the company has timed it well in closing out its hedge book given gold is presently closer to US$900 per ounce than US$1,000. The broker leads the way at least according to FNArena’s database with a price target of $9.00 on the stock, rating Sino as its preferred exposure among the smaller gold plays on the Australian market.
Overall the FNArena database shows Sino is rated as Buy twice and Hold twice, with an average price target of $8.10, which compares to a median price target acording to Thomson One Analytics of $7.79. The stock is currently in a trading halt, having last traded at $5.32. This compares to a trading range over the past 12 months of $4.55 to $8.87.