lonsec research post proj financing- $0.81 buy

Surprised that ADU's share price has not risen following securing the equity component ($40 million) of Project Financing... so the gold price is up, the project is increasingly de-risked, market sentiment is positive... and they are near-term producers! Go figure!

Anyway, thought I'd share Lonsec's thoughts on the company.
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SPECULATIVE BUY – VALUATION OF $0.60 - $0.81 per share

With a fully permitted, independently assessed project, Adamus should, subject to finance, join the ranks of the gold producers in late 2010.

The company is characterised by simplicity of operations, a solid resource and reserve base, potential for increased production resulting from improved throughput and recoveries and future exploitation of refractory ores.

Announcement Details

• Adamus has just completed a placement of 115 million new shares at $0.35 per share to raise gross proceeds of $40.25m.
• The placement was made to both professional and sophisticated investors in Australia, Asia and Europe. The shares are to be issued in accordance with shareholder approval obtained on 24 July 2009.
• The share placement is part of the overall capital requirement to finance the development of the Southern Ashanti Gold Project. The estimated capital cost of the project is in the US$74m to US$94m range.
• In addition, the company has received and is currently negotiating a number of offers for bank finance to satisfy its capital requirements. Finalisation of the debt/equity package is expected in the near term - most likely mid-September.

Key Points

• Mineral resources of around 2.1Mozs occur mainly in two separate ore bodies, around 83% of contained gold is in the measured and indicated categories.
• The company has recently increased its reserve base to marginally in excess of 1Mozs. At around A$80/oz, Adamus is one of the cheapest Australian gold stocks on an enterprise value per ounce of reserve basis.
• Based on a minimum treatment rate of 1.6Mtpa, average annual gold production of around 90,000 ozs is expected over a 10-year mine life.
• Gold miners in Ghana have recently negotiated a reduction of around 33% in contracted electricity tariffs. This is expected to reduce cash operating costs at Southern Ashanti by between US$30/oz and US$50/oz. Lonsec has assumed a US$35/oz reduction. Life-of-mine cash operating costs (excluding royalties) are therefore expected to average around US$455/oz with cash costs below US$400/oz in the first two years. On a P&L basis, excluding amortising capital, the costs are likely to average around US$430/oz and below US$380/oz in the first two years.
• Mining and environmental permitting has been completed. The company believes that the construction time will be between 60 and 80 weeks (Equigold/Lihir’s Bonikro mine located in the nearby Ivory Coast was completed in 74 weeks).
• The company believes there is significant exploration potential on its existing Ghanaian tenements and is targeting an ultimate resource of 5Mozs. Lonsec’s valuation has conservatively factored in an additional 1Mozs (3Moz total).
• There is also considerable potential for refractory ore below the Salman oxide pit. Down the track, this ore could potentially be treated to produce a concentrate for further processing at a nearby bacterial leaching plant.
• Lonsec values Adamus’ 90% of the project at between A$86m and A$145m on a US$800/oz and US$900/oz gold price respectively, a constant A$/US$ exchange rate of 0.75 and a pre-tax WACC of 11.3%. This values the company at between $0.60 and $0.81 per share on a fully diluted basis. Hedging 75% of the first four years’ production at a price of US$950/oz would increase Lonsec’s base case company valuation by around $0.08 per share.
• For completeness, Lonsec values the company at $0.82 per share at the current spot gold price of A$1,138/oz (US$956/oz and A$/US$ exchange rate of 0.84).