Trapeze Capital’s Randall Abramson On St Andrew Goldfields Ltd

St Andrew Goldfields Ltd. (SAS) is a gold mining and exploration company operating 3 mines in the Timmins, Ontario mining district. SAS controls the largest land package in the Timmins mine camp (cumulatively, the 3rd most prolific camp globally). These lands offer significant exploration potential with a 120 km package of claims straddling the Porcupine-Destor Fault Zone which hosts numerous gold deposits and mines in the region.

St Andrew Goldfields Ltd: Gold appears to have bottomed

  • Gold bullion bear market appears to be ending
  • Gold prices remain unsustainably low since half of producers globally have all-in sustaining costs above $1150
  • Gold prices just gave a buy signal in our TRACTM work—since 1990, comparable TRACTM buy signals on 14 occasions have provided ~25% average returns from the gold trough price (gain from recent trough ~13%) with only one decline
  • At CA$1600, gold is near a 2-year high in Canadian dollars

Why is St Andrew Goldfields Ltd’s stock price so low?

  • Gold has been in a bear market since peaking in 2011, depressing virtually all producers’ share prices
  • St Andrew Goldfields management’s guidance in early 2014 for annual production was 75-85k oz, down from a 100k/yr in 2013, though production recovered to 91k ounces for the year
  • SAS has exhibited little growth and had limited earnings in the last 2 years
  • Lack of analytical coverage and a relatively small float has kept trading volumes low at about 300k shares per day

What has remained the same?

  • St Andrew Goldfields Ltd, whose mines are in a low risk mining jurisdiction, is operated by an experienced, highly regarded management team
  • Owns a highly efficient, modern mill and a large land package with significant potential for organic growth
  • Cash-rich balance sheet, with approx. $21 million of cash on hand
  • Below-average all-in costs
  • Last 13 consecutive quarters have been cash flow positive through Q3 ‘14

St Andrew Goldfields Ltd: What’s changed?

  • Production has lifted back near record levels
  • Holt mine has performed well, all-in costs (including royalties and sustaining capital expenditures) below US$1,000 per oz.
  • Holt drill results have been significant and should considerably expand St Andrew Goldfields’ resources and reserves (recent highlights included 21.4 g/t over 21.7m)
  • From St Andrew Goldfields’ Oct 14, 2014 press release:
    • “…recent results targeting the Zone 4 mineralization are potentially the most significant discovery SAS has generated on the Holt property. The mineral potential remains open in all directions and the original intercept is 600 metres west of 1075m level drift (nearest mine opening) and 440 metres west of historical surface diamond drill intercepts. The location is approximately mid-way between Zone 4 and the Tousignant Zone, which is located 3 km west of the Holt shaft…Holt has a very robust mine life…and these recent results may add significantly to the resource base at Holt.”
  • Toll milling for others has commenced which should add to profitability
  • Holloway mine continues to provide production
  • Taylor project’s results have been impressive—bulk sample delivered 9 g/t and 97.4% mill recovery—a production decision is expected this quarter (recent highlights included 20.2 g/t over 9.2m)
  • Taylor production should commence later in 2015 once the final mine closure plan is approved; there appear to be no major hurdles
  • Taylor, a high grade project, should have lower costs than Holt and Holloway, and Taylor royalty is negligible
  • Taylor production should lift overall expected production to 105,000 ounces in 2015 from last year’s 91,000 ounces; and 2016 production should be above 110,000 and 2017 above 120,000 ounces
  • All-in sustaining costs are expected to be around US$1,000 (in Q3 2014 all-in costs were US$1,060)
  • St Andrew Goldfields continues to focus on lowering costs—G&A and operating expenses

St Andrew Goldfields Ltd: The Value Proposition

  • CA$120 million market cap
  • Net of $21 million of cash, ~$100 million Enterprise Value (~$0.27/shr)
  • At today’s $1290 gold price, St Andrew Goldfields should deliver free cash flow of $25 million in 2015
  • Cash earnings—after-tax cash flow less sustaining capital spending—are much higher (note: SAS has $200 million of net operating losses to carry forward)
  • Growth capital spending in 2015 is about $20 million, mostly associated with Taylor, falling to about $15 million in 2016 related to other growth areas
  • At today’s gold price and CAD exchange rate, cash earnings in 2016 (first full year of Taylor production) should be over $30 million
  • Net of $16 million of sustaining CAPX (which we increase by 10% per year) and 30% tax (though SAS won’t pay tax for years to come), SAS should have cash earnings per share of $0.08 in 2015 and $0.09 in 2016 (CF per share would be ~$0.17 in 2015 and 2016)
  • At $0.32 share price, St Andrew Goldfields trades at 4x cash earnings (only ~3x excluding net cash on hand)
  • SAS is likely the cheapest amongst its peers on an EV/ounce and P/Cash earnings basis—at ~1.5x, its EV/ 2015e EBITDA is less than one-third the peer median of ~6x EV/EBITDA (source: Trapeze/Bloomberg)
  • By the end of this year SAS should have net cash on hand of ~$0.13 of per share
  • Potential value is over $0.75 per share at mere 7x 2016 cash earnings of $0.09/share plus net cash on hand
  • Most gold companies trade between their project NAV (excluding corporate overhead, maintenance capital spending and financing structure) and corporate NAV
  • St Andrew Goldfields’s project NAV is ~$1.20/share and corporate NAV is ~$0.65/share (assuming a 5% discount rate and today’s gold price and exchange rate)
  • Reserves expected to be above 700,000 ounces with a total resource of around 3 million ounces (excluding low-grade Aquarius)
    SAS’s land position is remarkable as it controls the largest land package in the Timmins mine camp, offering significant exploration potential from the 120 km package of claims straddling the Porcupine-Destor Fault Zone

Key Risks

  • Gold prices overshoot to the downside depressing earnings
  • Taylor mine commencement delayed

Disclosures:

1. This document is provided for informational and reference purposes only and shall not be construed to constitute any form of investment advice. This document does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Any information is not to be relied upon in substitution for the exercise of independent judgment. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. The information contained herein has been drawn from sources which are believed to be reliable; however, its accuracy or completeness is not guaranteed and the author makes no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. The author has no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed. All investments involve risk, including loss of principal. It should not be assumed that any of the securities mentioned were or will prove to be profitable.

2. Randall Abramson is a director, officer, portfolio manager, and the controlling shareholder of Trapeze Asset Management Inc. and Trapeze Capital Corp. (together, “Trapeze”). Trapeze, their affiliates, and their respective directors, officers, and employees, and Trapeze’s client managed accounts, may hold, buy and sell securities of the Issuer mentioned in the report.

3. Trapeze exercises control or direction over in excess of 5% of one or more classes of the issued and outstanding equity securities of the Issuer, through securities held by accounts fully managed by Trapeze as portfolio manager.

4. Randall Abramson, in his

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