re: Ann: EVG commences construction on Las La...
CY7,
I hear what you are saying but disagree on both counts. Here is why:
HEDGING:
True, companies that have hedged in the recent past have not benefited from it. This is because the POG has been in a sustained upward trend in terms of pricing. It may be that it is entering a new LT trading range for many reasons talked about on the GOLD thread.
However, POG will not continue to rise indefinately, and on an historical basis may in fact fall. If EVG can hedge/ forward sell at an historically attractive USD margin then they can lock in excellent returns over-and-above their project modelled numbers.
As their costs, debt and revenue are all in USD this will ensure much greater USD profits over the life of the project.
The AUD/ USD exchange rate only becomes relevant when monies are returned to Australia for the payment of dividends to shareholders. With all of the growth opportunities presented to EVG in Latin America I would not expect large amounts returned to Australia anytime soon.
In terms of the risk of delivering/ production delays/ etc I think these risks are relatively low. Especially if only 50% of production is hedged/ put. The tailings are all above ground and easily accessible, the construction is funded and has commenced. Plough has indicated that the only operational issue may be continuity of electricity supply - however, I think that only hedging 50% of production covers this risk.
PROFIT PROJECTIONS
True, at present the AUD rate of 75c is a long way from where the exchange rate is at present. As stated above, this is largely irrelevent to EVG until monies are returned to Australian shareholders. In all fairness to EVG it was accurate at the time of their model creation.
However, if you wish to make the point (which is fair enough), remember you must present both sides of the coin.
EVG also incurs its costs in USD, thus a rise in the AUD reduces the AUD costs as well as reducing the AUD revenues.
Thus:
Cost of USD$325oz @ AUD 75c = AUD $433oz cost Cost of USD$325oz @ AUD 91c = AUD $357oz cost
THUS: With production of 65koz per annum at LL this will reduce operating costs by AUD $4.9 million per year !!!
The cost savings per year are 20% of the total market cap of EVG !!!
IMO:
1) the POG in USD will continue to rise in the medium term
2) With advice from Mac Bank, EVG will hedge 50% of LL production at an opportune time
3) USD profits will be much better than modelled profits for LL
4) More USD cash flow from each of the 6.7 years of LL project life to fund development of Ecuador and Venezuelan (and possibly Peru) projects, not to mention other new projects
5) Over time, AUD/ USD exchange rate will fall (maybe a few years out). USD reserves will be converted back to AUD at opportune time in business life/ growth cycle that will further benefit shareholders.
I should shut up now, as I am still trying to build my EVG position :-)
Just my thoughts CY7 and welcome your feedback.
Cheers John
EVG Price at posting:
8.9¢ Sentiment: Buy Disclosure: Held
