Goldplat (GDP LN) 7 pence, Mkt Cap ?11.8m - Update following Review of Operations

Buy: Target Price 18 pence (Revised down from 20 pence).

?         The company has announced  the outcome of a  review of areas of operations.

?         Kilimapesa (Kenya): Against a falling gold price and operational issues previously highlighted the management have decided to put Kilimapesa under care and maintenance.

?         The cost of keeping the mine on care and maintenance will be met by processing of stockpiles at the mine and will not add to the losses already incurred at the mine.

?         We have already factored in losses of ?750,000 for Kilimapesa in our forecasts for FY 2013.

?         Gold Recovery Ghana -  The Ghanaian recovery business has been impacted by lower margins at their tolling operations of ore with Adamus (now Endeavour) and also at the Tema CIL plant.

?         The Tema CIL plant has also been hit by the volatility of the gold price where expensive material sourced from artisans has impacted profitability.

?         Following a review of the CIL section at Tema, the company have decided to re-direct some of the material through Adamus and close down this section till better priced material can be sourced directly from major gold producers.

?         The other section which includes two fluidized bed incinerators used for the reprocessing of high value carbon material should be operating normally with the current re-commissioning of one of the lines post repair.

?         Goldplat South Africa - The operations at the recovery operations in South Africa are performing well with all new initiatives on target.

?         The CIL plant to process new tailings re-treatment commissioned in March is performing well and the second rotary kiln to process high grade wood chips is on target to be commissioned in July 2013.

?         The CIL plant is expected to generate profits of around $600,000 a year with material for 5 years of production.

?         The rotary kiln will double the capacity at GPL and treat the wood chip stock pile with seven years worth of capacity.

Conclusion:   

The care and maintenance programme at Kilimapesa will contain losses at the operations and will pay for itself till the company is able to negotiate better terms to make this operation against the current gold price. We had factored in losses for Kilimapesa of ?750,000 already and do not expect losses to widen from here. Kilimapesa contributed only a small amount to our valuation at ?2.5m which we have now removed from our valuation.

The performance of the CIL section at Tema will impact profitability at the gold recovery operations in Ghana where high cost material sourced from artisanals combined with transport costs makes this section currently uneconomic. This operation  has also been less able to absorb gold price volatility as opposed to South Africa where contracts are mainly with larger gold producers and where there is a stockpile available to optimise margins.

Against this backdrop closing down the CIL section at Tema until material can be sourced more efficiently and through contractual arrangements with larger mining companies makes sense.

Gold Recovery Ghana (GRG) accounts for 45% of group profits. With the Adamus (Endeavour) tolling operations  accounting for 55% of operations at GRG and the CIL section for around 35%, we are reducing our Group EBITDA forecasts for 2013 from ?4.22m to ?3.9m or around 7.5%. For FY 2014 we are reducing our EBITDA forecasts to ?4.7m from ?6.09m reflecting a lower contribution from GRG and no profit contribution from Kilimapesa. We expect GRG's operating profits to be reduced by ?850,000 and the profit contribution from Kilimapesa of ?300,000 is no longer included.

The South African operations are performing ahead of expectations and with a lower rand and flexibility in operations has been able to mitigate the impact of the recent volatility in gold prices.

We believe management are addressing the key issues in the underperforming areas and the basis for growing profits in the underlying business remains intact with potential for a step up in growth through expansion into Burkina Faso.

The downgrade brings our EPS down to 1.3 pence for FY 2013 and 1.8 pence for FY 2014 putting the stock on a PE of 5.4x and PE of 3.9x. The current cash flow forecasts support the potential for a dividend payment at the same level as FY 2012 putting the shares on a dividend yield of 8.6% at the current market price.