Conviction trade for 2013
Cashflow generated from operations was $35.4 million and at the period end it had debt of $63 million and cash of $22.6 million.
Drilling will continue over the remainder of the year and an updated ‘Resource & Reserve Statement’ is expected to be published in early 2013.
The second half will see increased output and thus lower cash costs per ounce — 3rd quarter numbers which came out on October 30th confirmed this. The guidance is for full year output of 135-145,000 oz and at a cash cost of $580-640 oz. The increase in output will be largely down to greater tonnage being processed but also down to the fact that Archipelago is now consistently finding higher gold grades in situ. Toka Tindung has a mine life of 9 years with an additional 7 years output guaranteed from stockpiled rock. Output is sustainable at c140,000 oz for the Life of Mine. But, it gets better. That LOM estimate is based on the current 2.58m oz Au Resource and 1.47m oz Au Reserve. However, Archipelago is continuing to drill the area around its existing pits and a few weeks ago announced a series of drill hole results from that programme. I will not bore you with all the grades, but the concluding statement reads:
This indicates that the company can increase the life of mine, but also by tackling higher grades sooner can increase its output in earlier years.. With a fixed cost base that would have a material impact on free cashflows and any DCF based valuation.
The results confirm the highly prospective nature of Toka Tindung and indicate significant potential to extend Archipelago’s already substantial 2.58m oz Au Resource and 1.47m oz Au Reserve.
For now, I treat all of that as “potential” upside and allow very little for it. Instead, I value the company purely based on the nine plus seven years production we have at Toka, and using a 10% discount rate (arguably harsh) and a $1600 gold price, I arrive at a valuation of 95p per share. At $1800 gold in 2013 that jumps to c120p per share. And I suspect that the new resource estimate will also prompt me to increase my valuation in the early part of 2013. This is not a stock that promises to be a ten bagger. But it is a sound, cash generative and expanding company. And amid the detritus of the AIM mining sector its shares, I believe, are significantly undervalued.
CHART - ARCHIPELAGO RESOURCES
January 2013
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