What happened today, when I see articles like this "everybody...

What happened today, when I see articles like this "everybody says its a buy" I start shorting ehheheheh




Sino Gold - Everybody Says It’s A Buy…
October 13 2005 - Australasian Investment Review – (AIR)

In a word association game based on China and commodities, the most popular responses by Australian investors are likely to be iron ore and coal given their importance in Australia-China relations.

But the fact most people think of iron ore and coal when they think of commodities in China goes a long way to explaining why stocks such as Sino Gold (SGX) are somewhat overlooked on the Australian share market.

Sino is an emerging gold producer with extensive experience in China, an experienced board and good growth prospects, explaining why a number of brokers have buy ratings on the stock.

The latest to emerge with a favourable outlook is Merrill Lynch, who has initiated coverage on the stock with a Buy rating and a target price of $3.00, compared to current share price levels of around $2.20.

The broker notes the $3.00 target price represents a multiple of only 1.3x net present value (NPV), which if achieved would see the stock still trading at a discount of as much as 22% to its domestic peers, suggesting some allowance is being made for the sovereign risk of dealing in China.

Sino management, which includes ex-Macquarie Bankers Nick Curtis as Chairman and Jack Klein as President/CEO, has many years experience in dealing in China though, evidenced by the fact that the company is the only foreign gold mining company currently operating there.

This experience is also likely to give the company inside running on new projects in the future, with Austock suggesting the Chinese gold industry is well placed for further consolidation.

Current prices appear to offer an opportunity as Merrills calculates the company’s base case DCF valuation at $2.30 and an expansion case valuation, which assumes production increases are achieved, at $3.05, suggesting as much as 28% upside from current levels.

Austock notes the company’s valuation remains dependent on the long-term gold price, but suggests at a gold price of US$500/oz its valuation is $2.91.

Merrills also notes Sino’s multiples assuming it reached its target price would represent a 44% discount to Zijin, China’s largest gold mining company.

Shaw Stockbroking and Southern Cross Equities are others to rate the stock a Buy at current levels, a recent report by Southern Cross including a share price target of $2.75. Austock has a Speculative Buy rating on the company.

The attraction of the stock is threefold, as it is an emerging producer that will be able to lift production in future years; it has a number of attractive exploration areas; and the previously mentioned possible inside track on new projects in China.

Looking at the company’s production profile, it is the 82%-owned Jinfeng project that is of immediate interest given the Jinchaling mine is due to stop production by year’s end.

Jinfeng will initially be an open cut operation with a current expected life of five years, to be followed by an underground operation of six to seven years.

One advantage is the underground operation is not accessed from the mouth of the open pit, meaning commencement of underground operations can be brought forward, the broker expecting this to occur.

Merrill Lynch notes current resources are 3.5Moz while reserves are 2.1Moz, but with an exploration budget of US$3.1m and 15 drilling rigs on site an expansion of reserves and resources is regarded likely.

In a recent report on the company Austock suggested based on 2.1moz in reserves the stock is the least expensive of the three Asian gold producers it covers on an EV/Reserve ounce basis, the others being Oxiana (OXR) and Kingsgate (KCN).

Recent exploration drilling returned encouraging results, one sample from the underground region returning 24m at 14.5g/t from 621m suggesting the mineralisation extends at depth.


Exploration of the open pit area has been similarly encouraging, a northwest extension of the mineralisation likely following drilling results released in late September where the best result returned 15m at 4.5g/t.

First production at the mine is scheduled for the third quarter next year at an initial rate of 180,000oz annually, though the broker notes management has plans to extend this to 300,000oz annually by 2008.

The broker cautions there could be some slippage to the production timetable given the tight schedule, but suggests this would not be a major issue given the expected 12-year mine life.

Impressively, the company has kept costs under control as it moves towards production at Jinfeng.

Southern Cross Equities notes the project’s capital cost is US$70m, which compares favourably to Lihir (LHG) where US$160m was spent to expand production by 140,000oz annually. Austock estimates the company has allowed for up to 10% in contingency costs,

On Shaw Stockbroking’s estimates Jinfeng should have cash costs of about US$183/oz when operating at 1.2mtpa capacity, the broker noting the company will use the BIOX process and should achieve about 85% recovery rates.

Merrill Lynch is cautious on the BIOX treatment system to be used, the process being more complex and so requiring well-trained staff and careful commissioning of the plant.

As of the end of August 75% of the earthworks at the mine had been completed, resulting in a number of ore zones being revealed.

This may see a lower strip ratio of waste to ore of less than the 13:1 average expected being achieved, which would produce additional mine feed and so result in lower costs than currently expected.

The company intends to take advantage of its relatively low cash costs, as while about 600koz of production is hedged it represents just 23% of annual production at 180koz or 14% of production at 300koz, meaning the company has good leverage to the gold price.

In terms of exploration potential, aside from additional drilling at Jinfeng the company is most excited about its White Mountain prospect.

The company has an 80% interest in the prospect with an option to move to 95%, and Southern Cross Equities believes it is shaping up as a serious gold project.

The broker notes Sino has identified mineralisation over 900m with the core zone representing about 400m of strike.

Previous drilling had identified a resource of up to 500,000oz but this remains open and an increase is likely given infill drilling has produced results such as 31m at 11.7g/t and 20.4m at 8.2g/t.

Austock suggests an updated resource statement for the prospect is likely by December this year, but an additional 20,000m of drilling would be required to produce anything more than an inferred resource.

Eagle Research suggests if White Mountain can achieve annual production of 150,000oz the company would be on track to reach total production of 500,000oz annually, which is management’s target in coming years.

Financially the company has everything in place to develop Jinfeng and pay for drilling programs both there and at White Mountain.

As Southern Cross Equities notes the company has recently raised US$35m through an issue of 7-year convertible notes, while it also has a US$40m debt facility in place.

Austock notes as of June 30 the company had about $56m in cash reserves on the balance sheet, Merrill Lynch suggesting the company could generate free cash flow of about $40m annually by 2007, putting the stock on a P/E of about 8.7x.

In Merrill Lynch’s view, the period leading into the commencement of production at Jinfeng looks an attractive entry time, as the broker expects the market to re-rate the stock once gold is being produced.

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