Monday, 20 June 2011

Focus Minerals (FML.AX) Valuation Part 2 - Crescent Gold (CRE.AX) Acquisition

Updated 20.06.11 - EPS adjustment (sorry for any inconvenience)

It has not been long since my first post for Focus Minerals with an initial price target of $0.14.

Big News


Today on 20 June Focus announced the proposed acquisition of Crescent Gold offering one share for every 1.18 Crescent shares in an off-market bid. The effective acquisition market value is around $72.5 million by my figures and to achieve this Focus will be issuing 940.8 million shares. For the time being, I'll be ignoring the impact of any unlisted options, which should not have a significant impact.

Crescent is currently 1,110,217,187 shares @ 5c or $55.5m market cap

Offer is at 30.5% premium = 6.525c
1,110,217,187 shares @ 6.525c = $72,441,671 market cap
Shares issued by FML = 72,441,671/$0.077 = 940,800,927 shares

This announcement took me and the market by surprise. It was not expected. Recent speculation had been based on a resource announcement, joint-venture or some sort of partnership arrangement. This was clearly not the case and Focus came out with what appears to be a very well planned acquisition.

Details of takeover:
  • Takeover requires 90% acceptance
  • Offer closes 8 August 2011 (7 weeks from now)
  • Deutsche Bank total ownership is 29.23% of Crescent:
    • 19.9% ownership agreed now
    • 9.33% remaining ownership, may be included or may be sold to third party
  • Focus to obtain around 5.4% ownership from $3m secured loan (estimate) plus 18% ownership from the proposed working capital facility:
    - Focus has provided a $3m secured loan which according to plan will be converted to shares and options. I'm going to take a stab and say that the option is to adjust for the spike in the share price of Crescent post announcement and that effectively Focus will get somewhere near $3m shares at around $0.05 or 5.4% ownership*

    - Focus to provide around $10m working capital facility on the same terms as the $3m secured loan which should obtain 18% ownership (estimate)
  • Combined ownership between Deutsche Bank and Focus should be around 52.63% by my estimates
* In May 2011 Focus provided a $3 million secured loan to Crescent which upon shareholder approval will turn into a convertible note.  Once approved, that convertible note will be convertible into Crescent shares at the conversion price of the lower of $0.05 and 85% of 5 day VWAP of Crescent shares, with 1 free attaching option for each two shares provided.

This means that the takeover would be well ahead from the start and has a fairly high chance of success. Focus has done its homework.

Analysis of value post take-over

I'm not a geological expert. This is a pure financial metric based valuation and scenario analysis. The scenario models are on the assumption that Focus can make the geology work for them in a cost effective manner and cheaper than current operations of Crescent Gold. Having reviewed the current projects, I believe that the acquisition can achieve good cost control. The scenarios that I have listed below are based on cost and assumes that both Laverton and Summit are in production. It is also based on calender year production figures due to the production guidance.

Scenario 1: Optimistic

The optimistic scenario, should it be accurate at all, looks fantastic. This scenario is based on the following:
- 100,000pa production from Laverton current and ongoing (figures included for 2012)
- 50,000pa production from Summit Underground starts in 2012 without significant additional costs (figures included for 2012)
- Total cost per ounce remains in line with existing costs of Focus
- Summit Underground cost per ounce target states $650-700 which is less than that of Focus
- Laverton cost per ounce for the end of 2009 based on processing by Barrick Gold was $841 per ounce with long term forecast of $850
- Other costs to double from 2011 estimate
- Assumes that current operation costs of Crescent are not due to actual cost of production and are associated with significant development costs and complexity. For example they recently built a 40 person motel.

If this scenario is remotely possible, there is clearly huge upside!

I actually think this scenario is possible, but I have no idea about what sort of probability it has. It all comes down to the cost control.

Note that the liquidity problem from the forecast has been solved by the recent capital raising.

Scenario 2: Mid-line

This scenario is the same as above, on the basis that overall cost control is there, except:
- Cost per ounce increases slightly from $875 per ounce to $900 per ounce.
- Other costs to increase significantly from 2011 estimate

Scenario 3: High cost of production

This scenario is the same as above, but cost of production blows out:
- Cost per ounce increases significantly from $875 per ounce to $1,100 per ounce for the total current and new production
- Other costs to double from 2011 estimate

Initial Conclusion

  • Optimistic: forecast business value rises from $0.14 to $0.48
  • Mid-line: forecast business value rises from $0.14 to $0.34
  • High cost: forecast business value rises from $0.14 to $0.15

This looks like a very attractive investment decision made by Focus - as long as costs can be controlled!

Under a high cost scenario, this will likely add no value and be a risky venture.

I will only support this on the basis that they are able to control cost - I do not wish to invest in a high cost producer with cost of production any higher than already experienced by Focus.

The business models for Laverton and Summit are based on a forecast cost of production lower than Focus. As long as Focus has done it's homework and can integrate these additional production lines in to the existing business with good cost control, I believe that it will prove to be a fantastic acquisition. This will be the key factor.

Crescent Gold

I'm glad to see that capital has already been raised for the development of Summit Underground Mine ($33m initial outlay).

Production: 100-140,000 ounces per year
31 Dec 2009: “The first campaign equivalent cash costs (C1 unaudited) of A$841/oz came in slightly below the long term forecast of A$850/oz.”

Summit Underground Mine: 6.64g/t $650-700 cost per ounce

Production: 50-70,000 ounces per year starting 2012

The company has been experiencing ongoing cost control issues and I hope that Focus is able to clear this up.

Information from Crescent Gold:

March Quarterly Report:

“The Company  announced  that it had  temporarily  suspended its operations on 18 February 2011  as a safety precaution and mining operations recommenced  on a limited basis  shortly afterwards following dewatering of pits and review of the haul roads. The impact of the rains is expected to reduce production for the full year to December 2011 to between 80,000 and 90,000 ounces (down from a range of 105,000 to 115,000 ounces). Gold produced during the March quarter totalled 14,918 ounces against a forecast of 27,000 ounces.”

From the half-yearly statement:

“During the period mining operations were undertaken at Admiral Hill, Craiggiemore, Mary Mac South and the higher grade Fish deposit. In addition trial mining and some pre‐stripping was completed at the West Laverton deposit”

“A commitment to purchase facilities including a 40 person motel style camp at Fish was made. This should be in place in the first half of 2011. The purchase of the camp was economically justified on the basis of improved productivity from the Fish deposit, but also has significant safety and personnel benefits and will be a major benefit in optimising the economics of the promising Lord Byron deposit, which is adjacent to Fish. It is expected that these two pits will produce approximately 60,000 oz over the next two years alone.”
“Mining operations at Admiral Hill were suspended in October as high cyanide soluble copper levels were identified by grade control drilling earlier than anticipated. The high copper levels led to minor processing delays at the Granny Smith plant due to the stringent cyanide code requirements in operation at that facility. Blending the ore has since been trialled successfully and controlled mining operations will resume during the next quarter following a complete review of the resource.”

“The Company’s cash on hand and funds on deposit as at 31 December 2010 was $30,069,000 (30 June 2010: $8,863,000). The increase in cash on hand is largely due to the raising of capital during the period, namely through a loan facility of $15 million and a rights issue raising which closed at the end of January 2011.”

“In January 2011, Crescent repaid A$5 million of its A$15 million loan facility to Indago Resources Ltd”

2010 Annual Report:
“The operational focus of Crescent during the year was on the development of the four advanced stage projects which progressed to mining status early in the reporting year; Sickle, Euro, Admiral Hill, and Castaway. Line of lode investigations were accelerated on the Craiggiemore, Mary Mac South and Mary Mac deposits, with the result being the Craiggiemore deposit coming on line before the Fish deposit. A start date for commencement of mining at Fish was held off pending results of drilling around Lord Byron. With the economics of the Lord Byron deposit influencing the planning of infrastructure on the Fish project, a scoping RC drill programme was completed at Lord Byron late in
the reporting year. Minor RC drilling on the West Laverton deposit was designed to refine the resource model and update planned pit design”

Laverton Ore Purchase Agreement with Barrick from end 2009:


  1. well researched Steve came pretty much to same conclusion

  2. Great information great details charts graphs pictures financial information on some of these gold silver and other natural resource stocks.