Gold for Cash for More Gold: Junior Gold Producers Rising to the Occasion

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As gold prices rise, so do cash producers' cash flows.

ANALYSIS – ProspectingJournal.com – 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.

Youga Gold Mine

Residing in the same peer group as Timmins, we findEndeavour 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.

Endeavour Mining's priority targets within 3km of Youga Gold Mill

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.

Endeavour is transitioning into a mid tier gold producer.  With crucially low equity valuations of gold producing companies, the surging gold price climate provides companies like EDV with cash to spend and deals to be had, opportunities to make a gold production acquisition and further leverage its production profile. While the dollar teeters, and gold surges, now is as good a time as ever for juniors to gobble up assets, develop projects and take that important leap to the next level.

G. Joel Chury
ProspectingJournal.com

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Disclaimer: The author does not currently hold any shares of any of the companies mentioned in the article. However, some members of Cordova Media Inc. which owns ProspectingJournal.com, may or may not have interests in one or more of the companies mentioned at the time of publication. Staff members from the Prospecting Journal reserve the right to acquire interests in any of the companies mentioned after 36 hours have elapsed upon initial publication of this article. Endeavour Mining is a sponsor of ProspectingJournal.com.

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Jeff Nielson
...
written by Jeff Nielson, August 11, 2011
Good stuff Joel!

As it turns out, I happen to have some "personal familiarity" with Endeavour Mining - or rather its MINING ASSETS. Go back a little further in time and the "flagship project" at Youga was the brand-new mine of a company called Etruscan Resources.

They had a GREAT "stable" of properties in Africa. However, they made what I thought was a strategic mistake and attempted to advance about 4 projects simultaneously - rather than merely focusing on a couple and keeping the rest of them "on the back-burner".

Then the Crash of '08 hit, and suddenly a junior miner with VERY high cash-demands was virtually cut-off credit at a point when dilution had ALREADY become a bit of a concern.

The Youga Mine was late in getting commissioned (which isn't uncommon for any mine), and this further aggravated Etruscan's problems. I had sold out long before that, but I continued to follow the company.

Meanwhile "Endeavour Mining" was actually a venture-capital company back in those days - and not a true mining company at all. Naturally it FOCUSED on financing in the mining sector, so it was always a "mining" company in that sense.

So Endeavour Mining (which had the capital) connected with Etruscan Resources (cash-poor/asset rich). Being the one WITH the money, they were able to take-over Etruscan (and its African land package) and suddenly have a company with one producing mine (and also a JV with Semafo on that other mine?) and several prospective exploration properties.

My suspicion about the "discount" on this stock would be that the market is waiting to see if management can EXECUTE effectively with these assets. The original holder definitely failed to execute its game plan effectively, and management of Endeavour are perhaps still perceived as "bankers" more than miners by some.

That said, it's precisely situations like this which represent "opportunities" for investors. As you say, the assets are arguably "mis-priced", and so if Endeavour's management team DOES do a good job in administering/developing these assets then they will obviously win the confidence of the market - and that "discount" will disappear.

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