Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Good evening Dasut. I took the data from EDV published financials. They have not "hedged" as per historic hedging programmes of the likes of Barrick etc where a certain percentage would be locked in at a set price. But the reason for hedging is the same - a balance sheet with considerable debt.
EDV have spent $9m buying call and put options to hedge 350,000 oz production with a floor price of $1375 and a ceiling price of $1500. The options contacts expire 30/6/20.
When a trend gets going producer gold miners can generate leveraged increase of x2 to x3 vs the % rise in gold. As happened in H1 2016 with unhedged CEY 60p to 180p. Today's EDV's options contracts may mitigate their balance sheet financial risks and reassure their creditors but it also limits their gold price leverage potential.
Another potential risk they have is physical. What would happen to their $600m debt covenants if production in B.F. was halted for several months and they couldn't produce enough gold to sell to meet their total costs and interest payments ? They also raises the question as to what security they have put up for the loans and to whom ?
On 350,000 oz of their annual production EDV has a hedging options collar with the sell price at $1500 through to end June 2020. A very important key difference to the profitable, cash flow positive, debt free and unhedged CEY.
Cey captures as gross profit every dollar above $1500 of gold sold while EDV has another six months of their fixed price options collar limiting their gross profits cut-off at $1500. If gold keeps rising that will make EDV's relative balance sheet vs CEY worse over the next six months.
Not forgetting our gallant suitor EDV has over $600m of net debt half of which is due to be repaid in 2021. After interest EDV continues to make significant annual losses and pays no dividend. Yet in their proposal their Chairman boasted that EDV " will continue to be prudent allocators of capital".
The best opportunity for EDV to grab CEY was continued gold mine sector scorn, gold price weakness and stuttering Sukari production. Yet recent M&A in the sector has brought both publicity for the gold miners and highlights their relative value vs other fully priced sectors. Gold is + 4.4% price since the merger proposal announcement and major and mid sized gold co's GDX ETF is +8.12% for December. Gold's merits and price rise are getting noticed.
If CEY Q4 production meets minimum guidance that could really get a change in sentiment and the share price can start to reflect true intrinsic value.
From the start I have thought that Endeavour was the wrong company with the wrong metrics for Centamin. Will a rising gold price close their window of opportunity ?
The Reuters article quoting Joe Foster of Van Eck was misleading. It failed to state that Van Eck is one of the largest shareholders for all NYSE,TMX and LSE listed miners. They are a passive fund holder not a typical institutional shareholder that can trade in or out of a miner like CEY if they don't like the results, management strategy or the dividend policy. Van Eck's ETF's have to hold the quoted companies in the sector to have integrity and credibility that they are offering investors a true basket of quoted gold miners.
Van Eck run two of the 11 gold miner ETF's, GDX (large and mid size co's) and GDXJ(mid and small Co's) EDV and CEY are constituents of both funds. They have around 35 major and mid sized miners in GDX and 35 mid and smaller miners in GDXJ all holdings included on a weighted average % that gets increased or decreased every 3 months. The funds are "passive" in the sense that Van Eck add or reduce holdings depending on the individual performance of each stock vs their peers and the demand for the ETF vs other investment options. They have no analysts and make no individual recommendations. But their shareholding size does not give them influence over a company Board's decision making.
Of course ETF fund managers like takeovers because a takeover generates new positions, commission and fees and attracts investors attention to the sector.
However, Van Eck are not going to sell their holding if Centamin doesn't offer a time extension to EDV. The headline is sensationalist and misleading. Centamin is much more likely to be influenced by institutional shareholders in for the long term and primarily driven by dividend yield projections. Something notably absent from the pitch from Endeavour.
https://www.telegraph.co.uk/business/2019/12/19/centamin-gold-merger-talks-hopeless-endeavour/
IN all paper mergers, as a rule, you are offering a "partnership of equals" to merge management, shares and capitalisation. Thus it is a good idea to act with and project an image of goodwill, integrity and empathy to your target throughout the process. I would argue that since 3/12 EDV have ignored all rules of chivalry and common sense. Relying on the market to force the CEY Board to do your bidding requires a lot of variables to work in your favour. But EDV chose a hostile approach from the start and their financials appear to be their Achilles heel.
1) Going public 3/12 behind the back of the CEY Board. That was an ambush and a hostile act. Yet EDV's proposal clearly show they need the CEY Board to persuade all CEY shareholders that a merger is in their best interests. It was an odd start and it has just got odder since.
2) since 3/12 market makers, brokers and banks have been active in both CEY and EDV shares. Did EDV calculate that this new cohort would be enough to pressure CEY Board to roll over at the terms offered? Two weeks in and CEY is trading 5p above the pre offer price while EDV is -$1.93 -7.48%. At this stage the respective share prices are not a ringing endorsement for the merger.
3) If you sign (10/12) a Non Disclosure Agreement (NDA) that should trigger openness and honest dialogue. But since agreeing reciprocal due diligence face to face with J E-R in Perth 14/12 EDV appear to have reneged on the agreed protocol in less than a week. Why ? what are they trying to hide ? If you don't offer trust and integrity at this pre-offer stage why should CEY Board agree to your unfair to CEY shareholder terms ?
4) narcissists like to control the narrative. They like to give you their options and pretend that you have to chose from those options only. But that is nonsense. All individuals and company Boards have free will to exercise as they see fit. EDV's initial public announcements was all about ambushing the CEY Board and getting institutional and retail investors on side. Their announcement hid their negatives and omitted key attributes of CEY like the $300m cash and no debt. That means their merger "narrative" and justification were inauthentic. There is no reason for CEY Board to act the wounded, defenceless beast. This flawed offer just confirms CEY's potential either going it alone or with a much better match.
J E-R has played this approach very well and has no need to play to the EDV narrative or meet their demands. It is now up to EDV to share full financial information with CEY Board otherwise their approach is finished and their credibility with it. The PUSU deadline of 31/12 is the only leverage CEY Board has and they should not agree to extend it.
Thank you for your kind comments. I'll try and contribute in what I expect to be a volatile next few weeks. As of 16/12 will we see an acceleration of the loss of confidence in Trump's tariff war and a negative reaction on Wall St ?
13/12 UK election result impact on stocks and GBP
15/12 potential additional US tariffs on China
impact of REPO market demand changes
31/12 major banks year end book squaring
31/12 deadline for a formal merger offer from Endeavour
Since the lousy RNS in Feb I've kept my holding and kept quiet for the last few months. But now we have a new challenge to address. I completely agree with your comments Cowichan.
I have a question about Sawiris ? Why didn't he invest the $230m he put into Endeavour in Sept 2015 into Centamin ? He could have been both patriotically invested in gold mining in his home country and he would have earned $25m + in dividends. His private La Mancha co has taken 10-30% holdings in 3 companies. But so far he has earned nothing with Endeavour.
Endeavour's website title says : "creating a premier African gold producer". I note there is no mention of profits and dividends. In contrast the Centamin home page sums up their key relative attractions : "growth through cashflow" and "the Board aims to distribute at least 30% of annual net cash flow." They've met that promise since 2015.
EDV has got 4 middling mines in W.Africa financed with a large amount of debt. They have more than $600m debt outstanding and 350,000 oz of production is hedged. If gold rises above $1500 in H1 2020 the options collar means that EDV get nothing out of the higher gold price whereas CEY will see any rise go to the bottom line.
Why did they refuse a "standstill agreement" which is standard procedure? I wonder if EDV didn't want a standstill agreement because they would have had to declare what security they have had to put up to secure their substantial loans. The day before EDV went public I read a Simply Wall St analysis of EDV which concluded : "mediocre balance sheet with moderate growth potential". Their getting hold of a Tier 1 mine like Sukari, on the cheap before the pendulum swings up for gold miners would solve a lot of their cash flow problems. But where is the added value for Centamin ?
Centamin is not their first merger attempt. It would be interesting to know if EDV had one when they had their merger talks with Accacia from Jan-Mar 2017. Those talks broke down. Barrick made an offer for Newmont which also failed to gain traction. On the other hand Barrick buying Randgold made sense because the giant Co was run by a Goldman Sachs banker who was failing with the operational challenges so the Rand buy got them Mark Bristow one of the the best operational CEO's and more reserves/resources. Apparently they had been having friendly meetings 2015-2018.
Subsequent merger/takeovers of Newmont-Goldcorp and very recently Kirkland acquiring Detour in an all paper deal have not met with much investor enthusiasm because they rightly questioned where the value added was coming from.
The bride Centamin has every right to be very choosy with suitors who came calling. A well established top 20 mine with free cash flow will immediately add cash flow and profits, and she has a $300m dowry. Sami El-Raghy's commendable organic growth philosophy should be honoured and not squandered. Aim high Centamin stakeholders.We can do better than this cynical Endeavour approach.
I hope you are well. I'm still on the roller coaster. Our time will come with CEY and gold when investors seek out risk off assets. We don't need a black swan event. I'm confident that If anyone can put fear and uncertainty and margin calls and losses back into complacent markets it is Trump. "Tariff wars are easy to win". Are you sure Donald ?
Despite Trump's bullish tweets the US economy now appears to be slowing rapidly : re housing data, retail, manuf, & sentiment indices. Today JPM cut their Q2 US GDP forecast to +1% down from their last forecast 2.25% a month ago. Europe with or without Brexit is fragile especially the banks: Deutsche Bank closed at 6.37 Euros today a new all time low.
It's probably going to be a bumpy ride over the next few months for our beleaguered sector but if one can hang on I think that there is a good chance of a repeat of the surge up move in H1 2016 once again. But first it's batten down the hatches.
Have a good Bank holiday weekend.
Daft as it might sound perhaps it's an algo trading off the anniversary of the first production cut and the dire performance since ? As of yesterday's close CEY was -71.94p -44.2% down over the last year from 25/5/18 and the production cut.
Painful, ugly, scorned and low volume trading for Centamin and the sector. But this shall pass when fear returns to general momentum stocks and the gold mine sector is sought out as a safe haven.
Wheaton Precious metals Randy Smallwood "mining companies need to deliver on promises and create value for shareholders".
https://www.kitco.com/news/2019-03-27/Mining-Companies-Need-To-Deliver-On-Promises-Randy-Smallwood.html
US Non farm Payrolls just released. +20,000 jobs added in Feb vs economist consensus of +180,000 jobs. It was the smallest gain since sept 2017. At same time the average wage in US on a Yr on Yr basis rose +3.4% from +3.2%, the biggest gain since the 2009 recession.
The Trump-Xi summit in Florida penciled in for 27/3 has now been delayed. Brexit H of C votes next week and US stock market quadruple witching on Friday 15/3.
Trump's decision to pivot from calling the stock market a bubble in 2016 as a candidate and now embrace it may well turn out to be his biggest strategic error if the rally since 26/12/18 is just a bear market rally. His tax cuts and corporate buy backs have largely sluiced through and US corporate earnings are turning down. The only growth is the national debt, the deficit, corporate and domestic debt. Soon the slowdown in Asia and Europe will appear in the US. The US will not be the exception whatever Canute Trump claims otherwise.
What can Trump and the Fed do to keep the bubble going for a little while longer? Caveat emptor.
it has now failed at this level 4 times in the last few months. Is that a warning of trouble ahead ? Maybe Mnuchin and his elves can keep it up through to the Trump-Xi trade summit and maybe through to June's FOMC meeting. Meanwhile Asian,European and US data continue to disappoint. The next four weeks has plenty of potential for fireworks:
19-20/3 FOMC meeting
26/3 CEY AGM
27/3 Trump-Xi trade summit
29/3 Brexit
3/4 CEY Q1 Prelims
I haven't much time this week. But just read a few posts and heartily second both of yours. I think it was Rick Reid the billionaire mining investor who said :
"the cure for low prices is low prices"
Rebess i feel as though I have lent you my anxiety- you put it so well. Better times will return my friends.
While Centamin is still licking its wounds it's worth looking at other drivers of gold and gold stocks over the next few days.
Firstly GDX the ETF for major and medium gold miners bottomed in September at $17.28. GDX broke out and above its 4 month bullish channel on the same day that the Jan Comex gold option expired on 28/1. GDX closed 28/1 at $21.45 and gold that day $1303.
GDX now forming a second 10 day or so bull flag around $22.5-23.5. Next target $24.
Comex gold options expiry is tomorrow 28/2. Post the Jan Options expiry spot gold ran up $40 in 3 weeks which also helped the Centamin share price rally through Jan and three weeks of Feb.
Agreed repression it would be good to see some Director buying some shares here. I'm not sure that our CEO has bought any shares. His activity in the Directors deals box above over the last couple of years seems to consist of transfers of share options and some sales.
The late Harry Michael when he was CEO in 7/9/11 he bought 0.5m shares at around 105p p share. Two weeks later on 22/9/11 Josef bought 0.5m shares at 111p.
Today's price is even more of a bargain for the Directors to show confidence in Centamin with an investment.