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Aug 2011 - Dealer of the Year

The Dealer of the Year was...

...quite surprisingly Ivanhoe for its Oyu Tolgoi transaction with RIO, at this years' Diggers 'n Dealers Conference in Kalgoorlie from 1 to 3 August 2011. It came as a surprise to many that it was not either Equinox, Andean or Alacer, especially as (we assume) share price appreciation should have been one of the main factors.

RIO completed its private placement in Ivanhoe (shown as IVA.AX) on 22 March 2010, increasing its ownership from 19.6% to 22.9%, and taking its voting power to ~81% or ~259.5m out of the ~320.5m shares on issue, as announced to the ASX on 24 March 2010. There was no cash or share offer by RIO for the remaining shares.

When measuring share price appreciation, it always depends on the period chosen. Ivanhoe (IVA) closed at A$3.61 on the day ahead of the 22 March 2010, but had slipped to $3.50 by the 24 March. From 24 March 2010 to IVA's close on 3 August 2011 (the last day of the conference, and when IVA presented) at $2.60 is a fall in the share price of ~26%. If measured on IVA's price on 3 August 2010 to 3 August 2011, the fall was ~19% from $3.20 to A$2.60.

Eldorado (EAU) launched a takeover offer of Andean (AND.AX) on the basis of 0.31EAU -per- 1AND, valuing Andean at $6.36 per share, but were gazumped by Goldcorp (G.TO) executing a call option on 3 September 2010 such that Goldcorp acquired a 19.9% holding in AND at C$6.00 per share, and launched a scheme of arrangement takeover for AND on the basis of 0.14G shares or C$6.50 in cash per share.

Eldorado subsequently withdrew their offer on 8 September, and Andean was suspended from trading on the ASX on 8 December 2010 at A$6.62 per share. Andean was A$4.89 on 2 September 2010 and had risen to $6.34 on 10 September 2010. On 3 August 2011, based on G.TO at C$46.80, AND was worth the equivalent of C$6.55 per share or A$6.36 (at A$/C$ 1.03).

So Andean rose by ~30% from $4.89 to $6.36 or ~70% from its A$3.74 close on 3 August 2010 .

Minmetals made a C$7 per Equinox (EQN) offer on 4 April 2011, causing EQN to rise ~29% from A$5.71 on 1 April to A$7.35 on 4 April. Barrick subsequently increased the offer to C$8.15 on 25 April 2011, causing EQN to rise further to A$7.84 on 27 April. EQN was suspended from the ASX on 1 July 2011 at A$7.90. From $5.71 to $7.90 is an increase of ~38%, whereas from its close on 3 August 2010 at $5.21 to $7.90 represents an increase of ~51.7%.

Avoca (AVO.AX) entered into a scheme of arrangement with Anatolia (ANO.TO) to form Alacer Gold (AQG.AX or ASR.TO), such that AVO shareholders received 0.4453 AQG shares. AVO fell on the merger announcement from A$3.20 to $2.92 as the Australian market digested the details, and rose from $3.10 to $3.64 when the merger received FIRB approval on 4 November 2010. AVO closed at $3.30 per share when it was suspended from trading on the ASX on 4 February 2011.

However, when AQG reopened on 8 February 2011, it jumped to close at A$8.30, (or $3.69 per AVO share). AQG subsequently peaked at A$10.36 on 21 April (equivalent to $4.21 per AVO share), and was trading at A$9.20 on 3 August 2011 (or $4.10 per AVO share).

From AVO's close at $2.71 on 3 August 2010 to its $4.21 peak is an appreciation of ~70%, or from $2.71 to its close at $4.10 represents a ~51.3% share price increase.

While it would appear that a case could be made for either Andean, Equinox or Alacer to have won the "Dealer of the Year" award, depending on the share price appreciation period chosen, in our/ERA opinion it should have been Alacer as in the fullness of time it could represent the "deal of the year".

Alacer is still suffering from brand recognition, with a number of people at the DnD Conference asking who is Alacer ?, and being told it's the old Avoca with the Turkish assets. Some people even asked us if the Turkish assets had an operating mine (it poured its first gold bar on 22 December 2010).

Alacer's operating ??pler (pron chirpler) gold mine (with by-product copper and silver credits) is located ~110km west of the agricultural town of Erzincan or ~800km east of Istanbul in the gold mining friendly country of Turkey.

Within the past year, the Government has built a new airport terminal at Erzincan, extending the runway and adding a ~$2m to $3m "radar beacon / landing device" to enable jets to land in fog, primarily for the mine (not even Kalgoorlie has one). The Government is also building a hydro-power station on the edge of the mine primarily for the mine's benefit (ten hydro-power dams/stations are to be constructed in the country, of which the one next to the mine has been given No 2 priority, and is under construction). ??pler currently receives hydro-power from the grid at a cost of ~4.5c/Kwh.

Company tax is ~20%. There is a mining royalty of about 10c/t produced, so 5mtpa costs $0.5mpa. The gold companies receive their VAT back (as an encouragement to mine gold), and ??pler qualifies for a tax rebate because it has been completed before the end of 2011 in an area in which investment is being encouraged. The current Government is in their 3rd term of power, and the country is booming with GDP growth in MQ 2011 of ~11%pa.

The orebody is about 3km long by 1km wide and at least 350m deep, with oxide occurring at depths of 140m downhole as shown inset in Figure 1, sometimes with significant grades (also shown).

Grades are ~ 1.2g/t to 1.5g/t per the current model but are expected to initially be higher especially when the mine starts the Marble pit, after the villagers move to the new village by the end of September. The orebody appears to have formed from "polyps" being injected from depth resulting in the larger Main pit area, with Marble pit from heated limestone, and Manganese pit (currently being mined - there was an old underground manganese mine there). There are a number of ancient shallow workings on the contacts dating back to at least Roman times.

Achieving a head grade of ~1.25g/t in the recently completed June Quarter 2011 resulted in cash costs of $381/oz. Should they improve to ~1.40g/t in Dec Qtr 2011, cash costs could fall to ~$250/oz, or currently with gold prices of US$1650/oz, a ~$1400/oz operating cash margin on the possibly ~50,000oz then produced in the quarter. The grades are affected by crushing of the ore before it is agglomerated and heap leached, improving recoveries by ~10% to 20% from ~54% (non-crushed) up to ~70%.

However, the ??pler mine is also producing more than expected. It was expected to process ~15,500tpd (5.6mtpa), but achieved ~23,000tpd (8.4mtpa) in JQ2011, and has started commissioning the crusher. It is "early days" in the Mine's life, and the mine may simply crush the higher grades and stack the lower grades.

A PFS has been completed on a sulphide / pressure oxidation circuit that could increase production further with ~94% gold recovery and gold production building up to a potentially additional >250,000ozpa, for total gold production possibly approaching 500,000ozpa, of which AQG may then be attributing ~80%. The BFS is in progress and scheduled for completion late in 2012.

The ??pler mine is located near the centre of the ??pler Footprint which covers a radius of ~12km of porphyry-copper type mineralisation from the ??pler mine, with Karakartal ~12km SE of ??pler. Karakartal is more known for the lime-green (or malachite) colour of one of its rivers, and its intersection of 346m @ 0.88g/tAu and 0.43%Cu.

And then only ~50km SE of ??pler is Cevizlidere and its initial resource of ~446mt @ 0.11g/tAu and 0.38%Cu, again within a radius of porphyry-coppers, this time with a radius of ~30km. And that is only 2 of the 8 or so prospects that AQG has in Turkey. In some ways, the region is reminiscent of the Maricunga in Chile, except that it lies ~ 2.5km lower, being ~1.5km to 2km or so above sea level, with near surface visible geology.

Our/ERA target for Alacer as per our recent report dated 29 July 2011 is >A$11 per share (or A$4.90 per original Avoca share). or ~81% higher than its 3 August 2010 close. Only time will tell whether Alacer made the best deal in the 2010/2011 year.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. View, Plan and Drillhole of Alacer's ??pler Operation in Eastern Turkey

  • Monday, 01 August 2011