Sometimes in the Weekly I write up on companies that I feel are interesting for you guys out there without them being personal purchases, because we all have different needs as investors. An example here, the piece on Lydian International (LYD.to) from last Sunday Sept 30th edition of The IKN Weekly, IKN178. I’m not a buyer of LYD because at the moment I’m a buyer of producer names, not explorer names, but apart from that….well, read for yourself.
Thoughts
on Lydian International (LYD.to)
on Lydian International (LYD.to)
Here’s an idea for those of you
looking for an exploration play and to start with, here’s a five year chart of
the company, Lydian International (LYD.to).
looking for an exploration play and to start with, here’s a five year chart of
the company, Lydian International (LYD.to).
I personally have had LYD on my
radar since late 2009 when Mickey Fulp reco’d, liked and owned the stock (by way of full disclosure, at that time I briefly
owned it and made a bit of money on the trade too, but it was never a big
position, it was taken as a shorter-term trade and I haven’t owned it since).
Fulp eventually dropped coverage of LYD after watching company officers make
some pretty chunky insider sales (a bad
habit that the company has basically kicked, glad to say) at the time, but
the coverage baton was picked up by Brent Cook who has championed this company
to anyone who cares to listen for over two years and also managed to get in
mostly before the big ramp that took it from $1 approx to as high as $3 in mid
2011. But saying that, it’s also fair to say that LYD’s share price hasn’t
really done much more than track sideways for two years and bumble about inside
a $2 to $3 range. Cut to today, and the Friday close of LYD at $2.25 means the
company has a market cap of $281m (124.87m shares out, 132.99m shares fully
diluted as at 27th September). While considering corp structure, we
also note that its $37.8m in cash at bank (that
puts working capital at an IKN estimated $34m) is more than enough for the
company to move forward comfortably and as for the people on board, they come
with high reputations (e.g., Marc
Henderson is a director and that’s enough on its own for the company to pass
muster).
radar since late 2009 when Mickey Fulp reco’d, liked and owned the stock (by way of full disclosure, at that time I briefly
owned it and made a bit of money on the trade too, but it was never a big
position, it was taken as a shorter-term trade and I haven’t owned it since).
Fulp eventually dropped coverage of LYD after watching company officers make
some pretty chunky insider sales (a bad
habit that the company has basically kicked, glad to say) at the time, but
the coverage baton was picked up by Brent Cook who has championed this company
to anyone who cares to listen for over two years and also managed to get in
mostly before the big ramp that took it from $1 approx to as high as $3 in mid
2011. But saying that, it’s also fair to say that LYD’s share price hasn’t
really done much more than track sideways for two years and bumble about inside
a $2 to $3 range. Cut to today, and the Friday close of LYD at $2.25 means the
company has a market cap of $281m (124.87m shares out, 132.99m shares fully
diluted as at 27th September). While considering corp structure, we
also note that its $37.8m in cash at bank (that
puts working capital at an IKN estimated $34m) is more than enough for the
company to move forward comfortably and as for the people on board, they come
with high reputations (e.g., Marc
Henderson is a director and that’s enough on its own for the company to pass
muster).
So anyway, up to now I’ve liked and
watched the company without ever getting involved and the two main reasons for
following it are simple, Messrs Fulp and Cook. When those guys say “Look, this Amulsar project is a good gold
deposit with growth upside and cheap mining parameters for eventual production”,
I listen. But alongside those two, I think that we’re now at a moment when
there’s more to like about LYD as recent newsflow from the company has been
more than interesting. In particular, there are two pieces of news that catch
the eye:
watched the company without ever getting involved and the two main reasons for
following it are simple, Messrs Fulp and Cook. When those guys say “Look, this Amulsar project is a good gold
deposit with growth upside and cheap mining parameters for eventual production”,
I listen. But alongside those two, I think that we’re now at a moment when
there’s more to like about LYD as recent newsflow from the company has been
more than interesting. In particular, there are two pieces of news that catch
the eye:
1) On September 5th LYD
announced (21) the findings of its 43-101 feasibility study (led by KD
Engineering and featuring a team of third party compilers). Here are the bullet
points that came in the NR to get those of you unaware of this company up to
speed
announced (21) the findings of its 43-101 feasibility study (led by KD
Engineering and featuring a team of third party compilers). Here are the bullet
points that came in the NR to get those of you unaware of this company up to
speed
·
Proven and probable open pit
mineral reserves of 2.26 million ounces gold and 9.63 million ounces silver
Proven and probable open pit
mineral reserves of 2.26 million ounces gold and 9.63 million ounces silver
·
Average life-of-mine (LOM) waste
to ore ratio of 2.23:1 (1.80:1 years 1 to 3)
Average life-of-mine (LOM) waste
to ore ratio of 2.23:1 (1.80:1 years 1 to 3)
·
12 year LOM with expansion in
year four from a nominal-ore feed rate of 5 million tonnes per year to 10
million tonnes per year
12 year LOM with expansion in
year four from a nominal-ore feed rate of 5 million tonnes per year to 10
million tonnes per year
·
Steady state annual gold
production for years 1 to 3 of 118,341 ounces per year and for years 4 to 12 of
186,047 ounces per year via heap-leach processing
Steady state annual gold
production for years 1 to 3 of 118,341 ounces per year and for years 4 to 12 of
186,047 ounces per year via heap-leach processing
·
Average LOM cash operating cost
of $468.5/oz
Average LOM cash operating cost
of $468.5/oz
·
Pre-tax net present value (NPV)
of $646 million at a 5% discount rate generating an internal rate of return
(IRR) of 27.7%
Pre-tax net present value (NPV)
of $646 million at a 5% discount rate generating an internal rate of return
(IRR) of 27.7%
·
Estimated start-up capital cost
of $269.6 million
Estimated start-up capital cost
of $269.6 million
Those are good numbers, ladies and
gentlemen, with plenty of the conservative-type pitches and assumptions a guy
like me appreciates reading. Below the headlines and in the details there’s
plenty to like, too (the 43-101 is filed on SEDAR, date September 7th,
and is required reading for those now interested). The project has a fast
capital payback, produces an average of 200,000 oz annual over 12 years and is
generally understood as “simple” mining. Then waiting in the wings, there’s
another 4m oz of inferred category material that can’t make it into a
feasibility study (must be considered waste
by the 43-101 rules) but as the Amulsar deposit has behaved in a predictable
way up to now, we can assign a decent level of confidence to that inferred and
assume there’s plenty of growth left in the deposit (mine life or extra annual production or both, you decide). As for
that IRR, it moves to nearly 50% on current gold prices, which is more than
enough for anyone. As for locals, the government of Armenia has been actively
promoting its mining industry, looks upon Amulsar as a poster child to attract
other companies and its accommodating attitude has been evident in the prompt
delivery of the necessary permits LYD has required through the exploration
cycle.
gentlemen, with plenty of the conservative-type pitches and assumptions a guy
like me appreciates reading. Below the headlines and in the details there’s
plenty to like, too (the 43-101 is filed on SEDAR, date September 7th,
and is required reading for those now interested). The project has a fast
capital payback, produces an average of 200,000 oz annual over 12 years and is
generally understood as “simple” mining. Then waiting in the wings, there’s
another 4m oz of inferred category material that can’t make it into a
feasibility study (must be considered waste
by the 43-101 rules) but as the Amulsar deposit has behaved in a predictable
way up to now, we can assign a decent level of confidence to that inferred and
assume there’s plenty of growth left in the deposit (mine life or extra annual production or both, you decide). As for
that IRR, it moves to nearly 50% on current gold prices, which is more than
enough for anyone. As for locals, the government of Armenia has been actively
promoting its mining industry, looks upon Amulsar as a poster child to attract
other companies and its accommodating attitude has been evident in the prompt
delivery of the necessary permits LYD has required through the exploration
cycle.
2) Last week, LYD announced it had
made final payments to the original vendor of Amulsar and now own the property
outright. The timing of this announcement, right on the heels of the
feasibility study, piques your author’s attention as it’s the type of move made
by a company that wants to clear the way for an eventual sale (because the most
likely exit strategy has been crystal clear since day one on this play) to a
major or mid-tier producer. This brings up the type of price bracket LYD may
demand and on consideration of Amulsar alone (LYD has other properties on its
books) an eventual sale at $4/share wouldn’t bat a single eyelid round this
way. A $4 selling price would value LYD at $532m (f/d) and assuming the price
parameters in the feasibility are accurate, the buyer would have its mine up
and running for $800m all-in. For a 200k/annum gold asset with a low cash cost
profile and upside potential, that works.
made final payments to the original vendor of Amulsar and now own the property
outright. The timing of this announcement, right on the heels of the
feasibility study, piques your author’s attention as it’s the type of move made
by a company that wants to clear the way for an eventual sale (because the most
likely exit strategy has been crystal clear since day one on this play) to a
major or mid-tier producer. This brings up the type of price bracket LYD may
demand and on consideration of Amulsar alone (LYD has other properties on its
books) an eventual sale at $4/share wouldn’t bat a single eyelid round this
way. A $4 selling price would value LYD at $532m (f/d) and assuming the price
parameters in the feasibility are accurate, the buyer would have its mine up
and running for $800m all-in. For a 200k/annum gold asset with a low cash cost
profile and upside potential, that works.
The main concern I’d have is the
political risk of operating in Armenia, as although the government has made all
the right noises regarding Amulsar and mining in general, we’re still in
unknown political waters and risks can pop up from left field. Take for example
the recent story about Armenia falling out with its neighbour over a pardon
granted for a murderer there (22), in which the country’s President resorted to
good old fashioned, rally round flag populist sabre rattling and undisguised
threats of war against the offending neighbour, Azerbaijan. That’s the kind of
political atmosphere that should give anyone pause for thought.
political risk of operating in Armenia, as although the government has made all
the right noises regarding Amulsar and mining in general, we’re still in
unknown political waters and risks can pop up from left field. Take for example
the recent story about Armenia falling out with its neighbour over a pardon
granted for a murderer there (22), in which the country’s President resorted to
good old fashioned, rally round flag populist sabre rattling and undisguised
threats of war against the offending neighbour, Azerbaijan. That’s the kind of
political atmosphere that should give anyone pause for thought.
Overall, there’s a lot to like
about LYD and although not a riskless play, the economics and geology of
Amulsar are more than enough to balance that out and provide the type of reward
scenario that risk-takers like you (and me) go for in the farther flung
countries and mining projects. It’s not one I’m going to cover formally here at
The IKN Weekly because I’m really keen on making progress with coverage on
producers before adding any explorers, but that shouldn’t stop you from taking
a closer look and deciding whether it’s for you. I make no bones about the fact
that the main reason to like is “Cook and Fulp like this one” and so I’m
cribbing off the work of others in a shameless manner, but the recent corporate
developments and the new chinks of light we’re seeing at the end of this 2012
tunnel for explorecos suggest, to me at least, that now may be a good window to
buy into the cut-above-the-average junior exploration name.
about LYD and although not a riskless play, the economics and geology of
Amulsar are more than enough to balance that out and provide the type of reward
scenario that risk-takers like you (and me) go for in the farther flung
countries and mining projects. It’s not one I’m going to cover formally here at
The IKN Weekly because I’m really keen on making progress with coverage on
producers before adding any explorers, but that shouldn’t stop you from taking
a closer look and deciding whether it’s for you. I make no bones about the fact
that the main reason to like is “Cook and Fulp like this one” and so I’m
cribbing off the work of others in a shameless manner, but the recent corporate
developments and the new chinks of light we’re seeing at the end of this 2012
tunnel for explorecos suggest, to me at least, that now may be a good window to
buy into the cut-above-the-average junior exploration name.