|Shares Out. (in M):||943||P/E||NR||12.8x|
|Market Cap (in $M):||566||P/FCF||NR||7.4x|
|Net Debt (in $M):||96||EBIT||0||62|
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Aura Minerals (ORA-TSX, $.52 US). Acquisitions Now, New Mine in 2010.
Unless otherwise stated, all figures are quoted in US funds, at a conversion rate of Canadian $1 = US $1.136.
Mineral estimates assume copper-$2.28 per lb., gold-$934 per ounce and silver- $14.43 per ounce.
Shares outstanding (pre consolidation): 715 million.
Shares outstanding (post 5 for 1 rollback and with equity offering): 190 million.
Market Cap: $494 million.
Total liabilities (after asset purchase): $85 million.
Pro-forma enterprise value after assumed financing: $579 million.
Forecast 2010 Revenue: $251.2 million.
Forecast 2010 EBITDA: $103.3 million
Forecast 2010 EV/EBITDA ratio: 5.6X
Forecast 2011 Revenue: $304 million
Forecast 2011 EBITDA: $131.5 million
Forecast 2011 EV to EBITDA ratio: 4.4X
Aura Minerals has transformed itself from a capital intensive explorer, to a smaller intermediate producer, in one fell swoop.
Aura has agreed to purchase 3 open-pit heap leach gold mines in Brazil and Honduras from Yamana Gold (AUY-NYSE, $9.50).
The acquisition cost has an assumed total value of $257.1 million. This purchase price comprises $90 million in cash (two instalments),
100 million in common shares (pre-rollback), a $70 million promissory note and up to $40 million of contingent royalties, based on production.
The net present value of this transaction is slightly less than $250 million.
2010 production from the acquisitions is estimated at 220,000-225,000 ounces, with a cash production cost of about $555 per ounce.
At spot gold, the acquired mines may throw off $84.2 million of cash flow in 2010. The purchase price is just 3X my 2010 forecast cash flow.
If the change in Yamana's market cap is to be considered a proxy for the transaction, Aura appears to have picked up assets on the cheap.
Based upon the 1.8 million of proven and probable ounces of gold reserves associated with the mines, Aura is adding reserves at
an effective cost of $144.46 US per ounce.
Yamana's market cap has fallen by $1.06 billion (13.8%) since the asset disposal was announced.
The average gold producer has declined by about 8% over that same interval.
This suggests that 5.8% of the price move at Yamana, or $405 million, may be directly attributed to the asset sale.
Aura Minerals market cap in comparison, has only risen by $133 million since the purchase announcement.
Roughly $272 million of Yamana's lost market cap remains unaccounted for.
Perhaps a reason for such a discounted valuation lies in the short life expectancy and high production costs at the mines.
On average, the 3 mines report 6 years of proven and probable reserves. Should gold prices decline, reserve lives of the mines should fall.
This could change the economics of the purchase for the worse. There is always the possibility that Yamana is selling marginal production
at close to the "high" in gold prices.
On the plus side, opportunities to extend the mine lives exist, via confirmation drilling at/near the mine sites.
In addition to the 1.8 million ounces of proven and probable reserves, inferred resources total 2.4 million ounces at the three deposits.
A. The Sao Francisco open pit/heap leach mine started production in 2006 and has potential to more than double reserves.
2010 output is forecast at 90,000 ounces. This mine has been a disappointment to Yamana. Previous expectations were for sustained
annual production in the range of 140,000 ounces per year. Ore recoveries have been lower than forecast.
Consequently, Yamana has de-emphasized reserve delineation.
B. The Sao Vicente mine is brand new, having just commenced production in late 2008. 2010 production is forecast to be as high
as 55,000 ounces. The objective of this resource was to advance the project to production, and build on reserves as cash flow had permitted.
There is no reason that Aura cannot continue with that objective.
C. In the case of the 80,000 ounce per year San Andres mine, a 7 year planned life could potentially triple.
This mine produced intermittently since 1983, but lacked development capital for many years.
Inferred reserves appear to be more than 3X the present level of proven and probable.
San Andres is a proven producer with the ability to throw off substantial cash flow for a very long time.
One view regarding the low sale price may have to do with the fact that several key Yamana Gold executives work for Aura Mining.
The deal was considered to be at arm's length and passes a cursory test.
In the real world, however, some arms are much shorter than others. What a larger company considers to be marginal
may turn out to be an excellent investment for a startup, dependant upon price. Perhaps the ability to purchase assets "on the cheap"
represents an innovative way to increase certain parties' personal net worth, over time.
If I was a Yamana Gold shareholder, I'd personally be a bit miffed about the sale price.
Qui Bono? Aura executive and insiders control 60% of Aura shares, pre financing.
Northgate Minerals (NXG-Amex, $2.21) 2008 purchase of Perseverance Mining makes for a reasonable peer comparison.
In 2008, Northgate paid $282.4 million of cash and assumption of bank debts, to acquire Perseverance of Australia.
The cost (including the bank debt purchase) represented a net purchase price of $403 per ounce.
Northgate added 2 mines with initial production of 170,000 ounces of gold. The Perseverance properties had an estimated
4 year life expectancy, or less than 700,000 ounces of reserves. Gold was produced for cash costs of more than $1,000 per ounce.
Since the purchase, Northgate added capital for exploration, and extended the mine's lives by about 2 years.
Annual production has increased by 20,000 ounces. Cash costs have declined to less than $500 per ounce.
This deal, considered to be very poor at first, now looks reasonable in hindsight.
In comparison to Northgate's' purchase of Perseverance, Aura's acquisition of Yamana assets looks inexpensive by all measures.
Regardless of Yamana's reasons for the sale, Aura Minerals seems to have struck a highly accretive deal, right from the outset.
My conclusion comes not from Aura, but from Yamana Gold. According to Yamana's management,
its 2010 earnings and cash flow (ex the sold mines) are forecast to decline by $65 million and $102 million respectively.
By implication, this suggests that Aura minerals may generate at least $65 million of earnings
and $102 million in cash flow from the transaction.
The Sao Vicente mine in Brazil is now in the final ramp up stage. Yamana had previously indicated potential for a reduced
cash production costs at these properties.
As a multi mine operator, Yamana Gold enjoyed certain economies of scale. Aura's 2010 cash flow forecast at the mines
is $17 million lower than Yamana's old forecast. The difference may be explained by a higher forecast SG&A expense at Aura.
Management of Aura is not building in any potential for mine efficiencies. It appears that they are deliberately setting a low bar.
Aura will be paying for the purchase by rolling back its shares and doing an underwriting.
The existing shares will be rolled back on a 5 for one basis. A bought deal equity issue has been announced at .484 US per share.
$110 million US will be raised. Aura had an estimated $5 million US of net cash on the balance sheet prior to the bought deal.
Netting out the $200 million of total liabilities against the $115 million of total cash results in roughly $85 million of net liabilities,
after all mines are transferred.
$40 million of my forecast liability is contingent based upon production targets being surpassed.
This suggests that if the payment is triggered, Aura may be generating more cash flow than forecast.
Forecast cash flow from gold mining will subsequently support major development initiatives in Mexico and Brazil.
Aura is attempting to restart the Aranzazu copper mine in Mexico by Q2, 2010. With a deposit grade estimated at 1% copper,
Aranzazu reportedly contains as much as 592 million pounds of copper.
At full production, Aranzazu is capable of producing 30 million pounds of copper, 16,000 ounces of gold
and 300,000 ounces of silver per annum. In 2010, based upon half a year of full production, the deposit could generate
$47.5 million US of revenues and $21.6 million US of cash flow. By 2011, Aranzazu may produce annual revenues of $96 million US
and $48.6 million US of cash flow. The capex to bring this mine (now on care and maintenance) on line is estimated at $20 million US.
About $3 million US of additional drilling will be done to firm up reserves. The deposits appear to be open at depth
and width. A 19 year+ mine life span is possible.
The Arapiraca polymetallic project in Brazil is the company maker. This deposit contains as much as 2.1 billion pounds of copper
and 630,000 ounces of gold. Somewhat unusual for copper-gold mineral deposits, the project also contains
18 million tonnes of iron ore (magnetite) reserves considered to be commercial. Resources could be expanded further.
The Arapiraca mine could potentially start up in early 2013. Capex to bring this project to full production is estimated at $500 million.
With an expected mine life of more than 16 years, annual production could be 133 million pounds of copper, 27,000 ounces of gold
and 1.3 million tonnes of magnetite. The combination of metals suggests that this will be a low cost operation.
With current metal prices, annual revenues of $400 million and $240 million of cash flow are possible.
Aura executives have adopted a tried and true formula of growth via acquisition.
From an investor standpoint, there is a lot to like. The gold mines offer a source of cash flow immediately.
Internally generated funds will be available to advance the Aranzazu project to full production in 2010.
Aura will operate four mines next year. Cash generating potential could exceed of $131.3 million for 2011.
Some of the cash flow could be used towards more fully developing the open pit mines and proving up additional gold reserves.
The remainder will go towards advancing the Arapiraca project to production in 2013.
I estimate that $400 million of project financing will ultimately be needed to complete Arapiraca.
I consider this deal to be textbook "company building via accretive acquisitions 101".
There don't appear to be many gaps in Aura's logic. The low purchase price seems to fully offset the limited current mine lives
in the portfolio. Should development drilling add just two years to the purchase' life expectancy,
Aura's buy will look very shrewd purchase. Many small to mid tier miners with higher cost structures,
fewer development opportunities and leveraged balance sheets sell for richer valuations.
Furthermore, Brazil and Mexico are established mining jurisdictions, and offer limited political risk,
relative to many South American mining camps
There are no nagging hedges to impact Aura's income statements.
Often, mine purchases done via bank financing come at a terrible cost, that being forced hedging.
"Mark to market" issues with forward metal sales can take an unprofitable miner and appear to make it profitable
in the short term. This has fooled many an investor into thinking a bad investment could be good.
Metal hedging conversely, has the potential to take a nicely profitable producer, and turn it into a money pit.
Thankfully, bankers appear to have limited input in this transaction. All purchase debts not retired from the financing are to be held by Yamana Gold.
Should Arapiraca obtain project financing, total EBITDA of $780 million is possible through the end of 2013.
Proforma, we are starting out with $85 million of total liabilities. I assume that the contingent payments will be paid out prior to the end of 2013.
Arapiraca project financing of at $400 million seems necessary.
Management hopes to commission Arapiraca before the end of 2012. The deposit is very close to roads and necessary infrastructure.
The Brazilian government has a lenient policy towards mining permits.
I budget $160 million to increase production from the Brazilian, Honduran and Mexican mines over the forecast period.
Gold and copper output could increase by 10% during the next 3.5 years.
In 2013, EBITDA (with a full years output from Arapiraca) could rise to $390 million.
Applying an EV/EBITDA ratio of 4.7X to this value produces an enterprise value of $1.83 billion.
There are 6.6 million out of the money options excerciseable at an average price of $4.4 US.
Assuming full exercise, this will add $29 million of cash, and increase the share count to 195.6 million shares on a fully diluted basis.
I forecast $ $325 million of taxes and SG&A over the next 4 years.
This produces $121 million of total balance sheet liabilities at year end 2013.
If my forecast proves to be accurate, $1.709 billion of market cap may remain.
On 195.6 million fully diluted shares, this suggests a fair market value of $8.73 US per share, at that time.
My analysis assumes status quo pricing for metals. In the event of further commodity recovery,
all producers (that aren't boxed in with hedges), will generate higher revenues and EBITDA.
In of itself, a potential increase in copper, gold, silver or iron ore prices is no reason to choose Aura, over any other established or potential producer.
$8.73 US of forecast fair value compares well to the current post consolidation share price of $2.60.
Should my analysis prove out, the potential compounded return could exceed 30% per annum.
Speculative mutual funds may find Aura to be of interest.
Insiders presently hold almost 60% of the shares pre-financing. Their objectives would appear to be clearly aligned with retail investors.
I believe that an objective of management will be to create an institutional following.
A share price of $5 Canadian is a requirement for that to happen.
The planned share consolidation will be a benefit, not a detriment, in my view.
The asset purchases are being done in stages. The Honduran mine will be transferred in early August,
and the Brazilian mines at year end 2009. As the San Andres mine is profitable, Aura will generate revenues
and cash flow on roughly 35,000-40,000 ounces of gold production. Positive PR going into the consolidation and financing seems likely.
Aura Minerals has potential to move up in cap weight, in due course.
Pre acquisition, Aura was an underfunded, small cap, base metal exploration company,
with an ill defined blockbuster deposit WAY off in the distance.
Investors will now own a gold producer with significant development potential in base metals.
Financing for Arapiraca becomes possible, rather than just a dream.
Should Arapiraca come on stream in 2013, there is no reason to believe Aura won't be valued as a small mid cap.
Near term share price potential may be as high as 55%.
If this transaction between Aura and Yamana represent a zero sum gain, there is now approximately $272 million US of market cap missing.
$272 million of value / 190 million of shares =$1.43 US (post consolidation). After consolidation, the current market value of Aura is $2.60
If just ½ of this "lost" market cap flows to Aura ($.71 US per share), Aura shares would appear to be undervalued by 27.3% near term.
Should all of Yamana' market cap loss ultimately transfers to Aura, the shares appear undervalued by more than 55%.
Mid term potential exists for a three bagger +.
Investors might anticipate more return from a gold and base metal miner at this juncture, given the savage declines in producers.
However, I am not building in any potential for increased metal values.
The corporate presentation may be found here
The corporate website may be found here.
1st mine will be added within the next 2 months. 2 more mines will be added at year end. A developed mine is scheduled for production in Q2, 2010.
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