Successful investing is all about risk management. As in, don’t make investments that risk losing you money. Of course over time you will make some bad investments as you are always investing without perfect information. The key is therefore to minimize the occurrence and magnitude of your losses.
With that in mind how about we look at a company that currently has no cash flow and its main asset in the Democratic Republic of Congo! Nothing like contradicting myself within one paragraph.
Gold Stocks, But Not Gold
Here is my deal. I don’t have a lot of faith in my ability to predict where gold prices are going to go. To me, the price of gold relies far too much on emotion and not enough on the utility of the commodity and supply/demand fundamentals. But I’ve done a bit of reading and I’ve come to the conclusion that gold miners are not priced at valuations that come anywhere close to reflecting the current price of gold. So I’d like to take advantage of that valuation gap, but not be exposed to gold prices.
So why not go long the gold miner equities and short the commodity?
I haven’t done it yet, but am looking into it.
If gold goes up further, the miners should go up more as they don’t reflect the current gold price. If gold drops, the miners should drop less because they were never priced for current gold prices. And if gold stays about where it is the miners should eventually rise as their cash flows come in and the realization that gold at $1,800 is not a passing fad sets in.
To carry out this strategy I think I would like to assemble a fairly large basket of undervalued gold miners. Maybe five to eight of them if I can find enough that look attractive. So it is time to start turning over rocks.
Rock No. 1 – Banro Corporation
Banro is a Canadian based gold development company. It has four 100% owned mining concessions along a major gold belt in the Democratic Republic of Congo. The company is on the verge of production from its phase 1 gold mine at its Twangiza project.
On Aug. 15, 2011, Banro announced that it is still on schedule for fourth-quarter production:
“Banro Corporation ("Banro" or the "[Company") (BAA; TSX:BAA) is pleased to report that construction of its wholly-owned Twangiza Phase 1 gold project in South Kivu Province, DRC, is proceeding on schedule with gold production expected to begin in Q4 2011.”
I’ve watched other resource producers through the years, and what I’ve noticed is that in the few months before a major project comes on stream the stock price does tend to drift upwards in anticipation. With the end of the Twangiza project clearly in sight and as of June 14, 2011, $68 million of net cash on the balance sheet, Banro is fully funded through completion of the project.
So now might be a good time to get into Banro if the price is right.
To know if the price is right we need to have some idea of what Banro’s reserves and future production might be worth. If the current enterprise value is at a large enough discount to that, then we might have an attractive investment.
Banro’s Resources:
Twangiza and Namoya Banro have development projects. Lugushwa and Kamituga Banro have upside through exploration. I don’t like paying anything for exploration potential, but I sure do like buying development assets at a discount AND getting exploration upside thrown in for free.
To get a very high level idea of how Banro is being valued by the stock market here is the enterprise value of the company per gold ounce:
209 million fully diluted shares
$4.50 current stock price
Enterprise value of $940 million
6.7 million ounces of gold reserves
Market valuing at $940 / 6.7 = $140 per ounce
If you include the reserves and resources it is more like $940 / 11.3 = $83 per ounce.
Interesting data points with gold at $1,700 per ounce and capex spending on the first phase of Twangiza pretty much completed. Cash cost over the first five years of Twangiza is expected to be $356, so Banro appears to have a project viable at considerably lower gold prices.
Is the Valuation of Banro Attractive?
I have a bit of a hard time with net asset value calculations. They imply a certain degree of certainty to something that involves a huge number of assumptions. What I do like is using recent acquisition multiples to determine what an asset or a company might be worth. If knowledgeable profit motivated parties are willing to pay a certain price for a type of asset, then I think that is the most useful data point I can use.
I was able to find some recent African gold company transactions to use as an estimate of the attractiveness of Banro’s valuation:
The most useful way to look at this is as follows:
Average price per reserve - $440/oz
Banro current implied price per reserve - $140/oz
Average price per resource - $246/oz
Banro current implied price per reserve - $83/oz
Average gold price when these transactions happened - $952
Current gold price - $1,800
So we have Banro trading at a reserve and resource multiple that is about a third of the level of these transactions AND gold prices have doubled since these transactions occurred. Banro is trading at a third of these multiples, and these multiples were set at gold prices that are half of where we are today.
Now, there are of course lots of variables, and I certainly have more work to do on Banro, but on first blush it looks pretty darn attractive from a valuation perspective.
And please remember, there is real political risk involved here and I’m considering Banro as part of a basket of gold producers/developers. I don’t currently own any shares but may in the near future.
With that in mind how about we look at a company that currently has no cash flow and its main asset in the Democratic Republic of Congo! Nothing like contradicting myself within one paragraph.
Gold Stocks, But Not Gold
Here is my deal. I don’t have a lot of faith in my ability to predict where gold prices are going to go. To me, the price of gold relies far too much on emotion and not enough on the utility of the commodity and supply/demand fundamentals. But I’ve done a bit of reading and I’ve come to the conclusion that gold miners are not priced at valuations that come anywhere close to reflecting the current price of gold. So I’d like to take advantage of that valuation gap, but not be exposed to gold prices.
So why not go long the gold miner equities and short the commodity?
I haven’t done it yet, but am looking into it.
If gold goes up further, the miners should go up more as they don’t reflect the current gold price. If gold drops, the miners should drop less because they were never priced for current gold prices. And if gold stays about where it is the miners should eventually rise as their cash flows come in and the realization that gold at $1,800 is not a passing fad sets in.
To carry out this strategy I think I would like to assemble a fairly large basket of undervalued gold miners. Maybe five to eight of them if I can find enough that look attractive. So it is time to start turning over rocks.
Rock No. 1 – Banro Corporation
Banro is a Canadian based gold development company. It has four 100% owned mining concessions along a major gold belt in the Democratic Republic of Congo. The company is on the verge of production from its phase 1 gold mine at its Twangiza project.
On Aug. 15, 2011, Banro announced that it is still on schedule for fourth-quarter production:
“Banro Corporation ("Banro" or the "[Company") (BAA; TSX:BAA) is pleased to report that construction of its wholly-owned Twangiza Phase 1 gold project in South Kivu Province, DRC, is proceeding on schedule with gold production expected to begin in Q4 2011.”
I’ve watched other resource producers through the years, and what I’ve noticed is that in the few months before a major project comes on stream the stock price does tend to drift upwards in anticipation. With the end of the Twangiza project clearly in sight and as of June 14, 2011, $68 million of net cash on the balance sheet, Banro is fully funded through completion of the project.
So now might be a good time to get into Banro if the price is right.
To know if the price is right we need to have some idea of what Banro’s reserves and future production might be worth. If the current enterprise value is at a large enough discount to that, then we might have an attractive investment.
Banro’s Resources:
Property | Measured and Indicated | Inferred |
Oz Gold | Oz Gold | |
Twangiza | 5,600,000 | 400,000 |
Namoya | 1,138,305 | 543,125 |
Lugushwa | 2,735,000 | |
Kamituga | 915,000 | |
Total | 6,738,305 | 4,593,125 |
Twangiza and Namoya Banro have development projects. Lugushwa and Kamituga Banro have upside through exploration. I don’t like paying anything for exploration potential, but I sure do like buying development assets at a discount AND getting exploration upside thrown in for free.
To get a very high level idea of how Banro is being valued by the stock market here is the enterprise value of the company per gold ounce:
209 million fully diluted shares
$4.50 current stock price
Enterprise value of $940 million
6.7 million ounces of gold reserves
Market valuing at $940 / 6.7 = $140 per ounce
If you include the reserves and resources it is more like $940 / 11.3 = $83 per ounce.
Interesting data points with gold at $1,700 per ounce and capex spending on the first phase of Twangiza pretty much completed. Cash cost over the first five years of Twangiza is expected to be $356, so Banro appears to have a project viable at considerably lower gold prices.
Is the Valuation of Banro Attractive?
I have a bit of a hard time with net asset value calculations. They imply a certain degree of certainty to something that involves a huge number of assumptions. What I do like is using recent acquisition multiples to determine what an asset or a company might be worth. If knowledgeable profit motivated parties are willing to pay a certain price for a type of asset, then I think that is the most useful data point I can use.
I was able to find some recent African gold company transactions to use as an estimate of the attractiveness of Banro’s valuation:
Enterprise | Reserves | Resources | EV per | EV per | Gold | |
Value | Oz (mil) | Oz (mil) | Reserve | Resource | Price | |
Moto Goldmines | $629 | 3.8 | 15.8 | $165.53 | $39.81 | $937 |
Red Back Mining | $6,959 | 7.3 | 12.5 | $953.29 | $556.72 | $1,138 |
Equigold NL | $953 | 1.9 | 3.1 | $501.58 | $307.42 | $910 |
Orezone | $221 | 1.6 | 2.8 | $138.13 | $78.93 | $821 |
Average | $2,191 | 3.65 | 8.55 | $440 | $246 | $952 |
The most useful way to look at this is as follows:
Average price per reserve - $440/oz
Banro current implied price per reserve - $140/oz
Average price per resource - $246/oz
Banro current implied price per reserve - $83/oz
Average gold price when these transactions happened - $952
Current gold price - $1,800
So we have Banro trading at a reserve and resource multiple that is about a third of the level of these transactions AND gold prices have doubled since these transactions occurred. Banro is trading at a third of these multiples, and these multiples were set at gold prices that are half of where we are today.
Now, there are of course lots of variables, and I certainly have more work to do on Banro, but on first blush it looks pretty darn attractive from a valuation perspective.
And please remember, there is real political risk involved here and I’m considering Banro as part of a basket of gold producers/developers. I don’t currently own any shares but may in the near future.
