Monday, 29 May 2017

Acacia Mining (LON:ACA) - A distressed Gold mining opportunity

Acacia mining is a Tanzanian gold mining company which is controlled by Barrick Gold the Canadian gold major. Acacia was spun off from Barrick in 2010 as African Barrick Gold changing their name in 2014 to Acacia mining. 

The stock hit a 52 week low this week plummeting 34% to as low as 250p per share on news that a continued dispute with the Tanzanian government remains unresolved. The dispute relates to 277 containers of ore concentrates containing gold and byproducts for export. The government claims Acacia is underreporting the mineral content of the ore by a factor of 10. The company state the content is accurate and inline with historical norms during the life of the mines. 

Acacia reports that if the government "were correct it would imply that the company "is the world's third largest gold producer" and "produces more gold from just three mines than companies like AngloGold Ashanti produce from 19 mines, Goldcorp from 11 mines, and Kinross from their 9 mines"

So it is a shakedown. The government apparently want to build a smelter in Tanzania presumably for local employment and taxation purposes - hence the findings of the committee restricting exports of the concentrates. The most likely outcome is some revised 'royalties' and a resumption of production down the line. 

These concentrates are around 30% of revenues for Acacia as they also produce Dore which is not under restriction. However in just a week they lost more than this % of market cap with the stock down 46% since March 3rd when the export ban began. They lose $1m a day from this export ban. Note that they could be forced to stop production completely in two of their three mines if the dispute continues due to physical limits at the port for storage and lack of clarity on the future. 

Which means Tanzanian workers laid off - so this could get unpopular. 

Such disputes highlight the geographical concentration risk of Acacia. All their production is in Tanzania (with some exploration elsewhere). The government has a variety of disputes with Acacia related to taxes principally as one would expect with any major resource exercise in a small frontier nation. Of particular concern is this:

Acacia Mining Annual Report 2016

What about nationalisation? Well mining is a bit unlike oil in this respect as it tends to have a bit more ongoing capital intensity and more chance of being loss making for periods of time. With global gold miners struggling for profitability due to rising costs across the industry, and falling ore grades, countries have better value capture from imposing set royalties on price and volumes (they save special price dependent 'windfall' taxes on profits for the good times....).

All in sustaining cash cost is decent enough and falling. It is toward the lower end of the industry;

Acacia Mining Annual Report 2016

The reserves are also pretty good with 27.5m Oz of reserves and resources. If we divide this by the share capital we get 0.06 oz of gold per share. Now with $1,200 oz gold and an with an AISC of $958 we can derive a broad profit based value of $14.52 a share  ((1,200-958)/0.06) or £11.16 (@ £:$ 1.30). Now this is a bit of a basic calculation but it shows some of the value on offer as that £11.16 / £2.86 (closing 29th May) is 3.9x the current value. But of course if the mines get shut down or appropriated then it doesn't matter what your value is and clearly this doesn't take into account the time value of money.

So it is really a bit of a punt but it seems cheap with clear and present risk. I do generally have a favourable and prudent macro view on gold and the whole mining sector has been in a bearish cycle for many years now;

Google Finance: GDX & GDXJ vs GLD and S&P 500

I want more exposure to gold miners generally so have also bought some shares in Goldcorp (NYSE:GG) which is one of the global majors and almost all its mines are in less risky locations across the Americas. More on that later.

So I have been a new buyer of Acacia this week around the lows taking this holding to around 2.5% of the portfolio and I have a similar amount in Goldcorp. I would like to have had more in depth research on Acacia but frankly I saw the dip as event driven and with a precursory read of the annual report I felt it was worth a modest investment. Much like my recent foray into Brazil sometimes an opportunity can appear which seems rather time limited.

Disclaimer: I am long LON:ACA and NYSE:GG  as mentioned in this article at present. These are opinions only, not investment advice. If in doubt read my disclaimer.

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