Cheapest Gold Profit Growth Puts Regis in Play: Real M&A
With open-pit mines near the earth’s surface, the Perth- based producer has an operating margin of 45 percent, the second best among Asian competitors with market values higher than $1 billion, according to data compiled by Bloomberg. Analysts are estimating an almost fourfold increase in net income by 2014, meaning Regis would give a buyer more long-term earnings growth for less money than 36 other precious-metals mining peers globally, the data show.
While Regis’s 34 percent stock jump this year has swelled its market capitalization to A$2.1 billion ($2.2 billion), the miner’s growth prospects and lower-cost operations will appeal to acquirers, according to Bank of America Corp. Regis plans to start production at a second pit this quarter that will help quadruple gold output in two years, progress that may elicit a takeover bid from its biggest shareholder Newmont Mining Corp. (NEM) or Toronto-based Barrick Gold Corp. (ABX), said RBS Morgans Ltd.
“Regis is very appealing as a takeover target for a big outfit,” James Wilson, an analyst at Brisbane-based RBS Morgans and a geologist who has worked in Australia, Africa and China, said in a telephone interview. “It fits the bill for a reasonably long-term mine life and big production.”
Regis said today it agreed to acquire the McPhillamys Gold Project in the state of New South Wales from a unit of Newmont and Alkane Resources Ltd. (ALK) for A$150 million in shares. The purchase will add 2.5 million ounces to Regis’s gold resource base, increasing it to 9 million ounces, it said.
Regis rose 4 percent today to A$4.72, its highest in more than a decade, in Sydney trading. The benchmark S&P/ASX 200 Index dropped 0.1 percent.
Kim Massey, the company secretary and chief financial officer at Regis, declined to comment on the potential for a sale yesterday. Regis is focusing on starting production at its second mine, he said.
Led by Managing Director Mark Clark, the former head of Lihir Gold Ltd. before it was acquired by Newcrest Mining Ltd. in 2010, Regis is digging for gold about 350 kilometers (217 miles) north east of Kalgoorlie. The resources town, in the center of Western Australia, is famous for its nearby gold pits.
At the Moolart Well site, Regis produced 105,413 ounces of gold in the year ended in June. Production is due to start by the end of September at the Garden Well development, 30 kilometers to the south. This second project will help vault annual output to more than 400,000 ounces by June 2014, according to Regis.
“The attraction comes from its growth, its gold-only production, and its low cost,” Stephen Gorenstein, a Melbourne- based analyst at Bank of America, said by e-mail. “The combination of these things is getting harder to find, which makes it likely to be attractive to both investors and corporates.”
Regis trades at a so-called PEG ratio, which compares a company’s price-to-earnings ratio with projected profit growth, of 0.1, based on estimated income for the year ending June 2013, data compiled by Bloomberg show.
That means Regis offers buyers the greatest potential earnings power at the lowest relative price among precious- metals miners that have market values higher than $1 billion, the data show. A PEG ratio of 1 indicates a company is fairly valued relative to its rate of earnings growth.
While Regis trades at 28 times estimated profit for the year that ended June, its price-earnings ratio drops to 7.4 for the current fiscal year because its projected earnings growth is so steep, according to data and analysts’ estimates compiled by Bloomberg.
“Some of the growth is priced in, but not all of it,” said Steuart McIntyre, a Sydney-based analyst at RBC Capital Markets. “We see significant upside from here,” he said, citing management’s record, future contributions from Garden Well, and the possibility of a dividend payment this year.
Central to Regis’s appeal is its management, led by Clark and Chairman Nick Giorgetta, according to WestOz Investment Co., Regis’s biggest institutional shareholder. Regis turned its first annual profit since 2005 in the fiscal year that ended in June 2011, 10 months after commissioning Moolart Well. Clark is due to start production at Garden Well by the end of next month, keeping with a timeline he laid out two years ago.
“They have been able to deliver,” said Philip Rees, chief investment officer at Perth-based WestOz, which oversees about A$260 million of assets. “We like the management and the assets. We’re confident in the outlook.”
Regis had an operating margin of 45 percent in the six months ended in December, the most recent period for which data is available. That means the company made more money for each dollar of sales than every Asian peer valued at more than $1 billion except Perth-based Medusa Mining Ltd. (MML), data compiled by Bloomberg show.
Barrick, the world’s largest gold miner with a market value more than 15 times larger than Regis, produced bullion for total cash costs of $613 an ounce in the three months ended June 30. Last quarter, Moolart Well produced gold for A$611 an ounce, including royalties, and by the time Regis produces 400,000 ounces of gold each year, its cash costs may be only A$500 an ounce, according to Stephen Thomas, an analyst at Bell Potter Securities Ltd.
“In this current cost environment it’s very hard to deliver projects on time and anywhere near the original capital cost,” Thomas said in a phone interview from Perth. “There are other producers that produce at lower cost but there aren’t any others at that size of production.”
Of the company’s 2.9 million ounces of reserves, 1.7 million are at Garden Well, while Moolart Well holds 520,000 ounces, Regis said. The company is drilling for further deposits at Garden Well and due to finish an assessment of its Rosemont Gold deposit, 9 kilometers to the northwest, this quarter.
To become a target of larger miners including Barrick (ABX) and Newmont, Regis needs to produce at least 200,000 ounces of gold a year and have sufficient reserves to maintain that level of output for a decade, said Wilson, the RBS Morgans analyst. Garden Wells will carry Regis across that threshold and a takeover is more likely once the project starts, he said.
“Why take them over before they’ve commissioned their second operation?” said Wilson. “Wait for them to get it running, then do it.”
Barrick is looking for acquisition opportunities and there may be more on the market than there were last year, Mike Feehan, the company’s president of the Australia Pacific operations, said this week at the Diggers & Dealers conference in Kalgoorlie. He declined to comment on its interest in Regis.
“Newmont looks at opportunities all around the world however it is our policy not to comment on market rumour or speculation concerning any one company,” Brian Watt, a Perth- based spokesman for Greenwood Village, Colorado-based Newmont, said in an e-mailed reply to questions. Newmont owns 16 percent of Regis.
A larger miner of the scale of Newmont, valued at $23 billion, may find it difficult to run Regis better than Clark and his team, Andrew Muir, Sydney-based analyst at JPMorgan Chase & Co., said in a phone interview. A combination with another small miner might offer more benefits, he said.
“If you put similar-sized companies together and you get increased exposure, diversified cash flows, possibly listings on two exchanges -- that would make sense,” said Muir.
This week, Silver Lake Resources Ltd., which has a market value of A$595 million, offered to buy Australia’s Integra Mining Ltd. for about A$426 million. The purchase, which may double Silver Lake’s annual output, brought the total value of gold mining takeovers this year to $3 billion, data compiled by Bloomberg show.
Regis has climbed 71 percent in the past 12 months, more than any Australia-listed precious-metal miner with a market value exceeding $1 billion, data compiled by Bloomberg show. The surge means there may be cheaper targets for buyers, said John Robertson, an investment manager at EIM Capital Managers Pty, a Melbourne-based, resources-focused fund manager.
“Everything in the gold sector in that up-and-coming category can be categorized as a takeover target,” Robertson said. Regis is “fully priced, which doesn’t mean it won’t be taken over, but it does reduce the likelihood.”
Still, bullion is currently in its 12th straight year of gains as investors seek a haven from Europe’s debt crisis and the possibility of accelerating inflation.
Gold for immediate delivery currently trades at $1,612.13 an ounce, still 16 percent below the metal’s all-time high last September. Analysts expect it to rise to $1,781 an ounce in 2013, before falling back to $1,650 an ounce in 2014, according to the median of estimates compiled by Bloomberg.
Regis’s stock gain, in part, reflects the quality of the company’s management and the accessibility of its deposits, JPMorgan’s Muir said.
Bidders won’t be deterred by the price, according to Wilson at RBS Morgans.
“There’s a whole swag of North American players who could be interested,” he said. “There will be rousing interest.”
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