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Gold for Cash for More Gold: Junior Gold Producers Rising to the Occasion
With increasing volatility in the US dollar, the gold bugs are licking their lips at the possible gains on the horizon for their yellow wealth. Despite the current run up of gold prices, there's a mixed blessing in store for the gold miners as equity valuations have significantly lagged the performance of the underlying commodity. Case in point: Barrick Gold [ABX - TSX] saw its 52-week low come on June 17 of this year, despite the fact that gold had only recently powered through the $1500 threshold. While the equity prices have not reflected the run up in gold prices the cash positions on these large caps continue to bulge. With the current market selloff, acquisition targets are becoming increasingly cheaper. M&A activity is surely to follow.
In comparison, the expectations on junior and emerging producers are different. These companies are all striving to hit the next level from junior to mid tier to senior producer to achieve higher equity valuations. At this time, the route of the mid-cap junior producer may be the sweet-spot investors are looking for. Between organic growth, mergers and acquisitions, and grass roots exploration, emerging mid tiers offer the best risk reward ratio for investors.
Back to June 17, when Barrick hit its 52 week low, junior producer Timmins Gold [TMM - TSX] received a 4% bump in share price the same day. Gold was gaining steam, along with the $US on that day, due to unrest in Europe and the resulting exodus from the Euro. Flashing forward to this week, where the dollar is under siege, London is on fire and gold is heating up, we must look at the same pool of juniors and determine who has the room to move and how fast can they spend their cash.
Residing in the same peer group as Timmins, we find Endeavour Mining [EDV - TSX] which last week released an operational update that should provide enough evidence that they are poised to grow into that mid tier level. Currently trading at $2.30, Canaccord Genuity gold analyst Nicholas Campbell has Endeavour's target price at $5. This price would represent a potential gain of 116%, based on the fact that relative to its peer group EDV is grossly undervalued.
How undervalued?: While its peers collectively seem disconnected from the price of gold, receiving an average P/NAV multiple of 0.72, EDV it's even further discounted trading at a P/NAV of 0.38 (based on a spot price of $1663.8 gold). All this leads to a conclusion that EDV is one of the cheapest emerging mid-tier gold producers in Canaccord Genuity's coverage list.
With its upcoming exploration and development program EDV should emerge into a new set of peers as a mid tier gold producer. Among its recent announcements were the intentions to add production of a second mine by late 2013 / early 2014. With its Youga Mine in Burkina Faso already producing 84,000 oz, the Endeavour team is steadfastly working through the updated feasibility-study of its Agbaou project in Cote D'Ivoire which MDM International Engineering's previous feasibility study reported would add another 73,100 oz per year once production begins.
Meanwhile, as Agbaou's production looms, Endeavour is diligently attending to its flagship in Burkina Faso, Youga. While current life of mine reserves remaining is 4-5 years, Endeavour's exploration work in the vicinity causes the company to anticipate an extension of Youga's life by 2-3 years, given additions from pit extensions. Youga's satellite zones, A2NE, Zergore, Nanga and Tail deposits collectively contain 159,000 oz indicated and 165,000 oz inferred totaling an additional 324,000 oz to the mine life. From an exploration standpoint, Endeavour has potential upside not only in the 12 targets within 3km of Youga, but another 40km away at its potential Ouare mine where EDV is currently conducting a 25,000m drill program. With all this work surrounding Youga, potential to establish 6-7 years LOM at the current 84,000 oz/yr production level is possible, when you include extensions and satellite deposits.
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