Like you I am just an investor/speculator with an interest in the gold sector which I believe has the best scope for providing significant returns over time so long as certain marcroeconomic conditions hold for the most part around the world. One of those conditions is that real interest rates set by central banks are negative (ie the interest rate minus inflation results in a negative number). At present this is the case in the UK, Europe, USA, China and India (I think).
I do not work in the finance sector so I do not have that advantage. However, I do have qualifications in economics, accounting and finance. Not that I am really an expert in anything.
My number crunching on ADU/EDV post merger is pretty basic. I can see positive outcomes depending on what the gold price happens to be. Overall I see the merged company as being a reasonable investment proposition, but not with spectacular upside. The main drivers for increased value will be finding more gold via exploration, building the new mine in the Ivory Coast, and perhaps getting some production out of ADU's sulphide complexed ore in Ghana. These are medium to longer term reasons for holding ADU, which should do OK in about 2 years if one can wait. In the meantime the market and POG fluctuations can make holding EDV/ADU a painful experience (just take a look how MML has recently fallen off its highs as an example).
I have not made an estimate of what the cash backing will be of the merged company once they pay off ADU's loans and pay down some of the hedge. I had a chat with ADU and it seems that while they are still intent on paying off the loan they may not reduce the hedge above what is contractually required. The impression I got was that at most they might pay down some of the hedge so that the hedged production only representated 25% of EDV's total production of 172,000 ounces. If GFC2 came along they may in fact be better off not paying off any of the hedge but using it towards acquiring some cheap assets and to build the new mine in the Ivory Coast.
ADU has around $58m in loan facilities (see last quarterly report) and the merged entity would have about $220m in cash and some 245 shares on issue. Therefore if they repaid the ADU loans the cash balance would fall to $162m, or $0.66/share. They will need most of that money to fund the Ivory Coast mine over the next two years and exploration activity. However they should generate a useful surplus from their current mining operations over those years and have another $CAD100m to come in from the exercise of 33 million EDV options and warrants (from memory).
Diversifying across other goldies is a good idea, and is something I have also done. Selling out of an investment is sensible if there are better options or if circumstances change negatively. I agree with you that GFC2 could result in our goldies being thrashed as they were in GFC1.
loki
ADU Price at posting:
69.0¢ Sentiment: LT Buy Disclosure: Held
