Sometimes in the Weekly I write up on companies that I feel are interesting for you guys out there without them being personal purchases, because we all have different needs as investors. An example here, the piece on Lydian International (LYD.to) from last Sunday Sept 30th edition of The IKN Weekly, IKN178. I'm not a buyer of LYD because at the moment I'm a buyer of producer names, not explorer names, but apart from that....well, read for yourself.
Thoughts on Lydian International (LYD.to)
Here’s an idea for those of you looking for an exploration play and to start with, here’s a five year chart of the company, Lydian International (LYD.to).
I personally have had LYD on my radar since late 2009 when Mickey Fulp reco’d, liked and owned the stock (by way of full disclosure, at that time I briefly owned it and made a bit of money on the trade too, but it was never a big position, it was taken as a shorter-term trade and I haven’t owned it since). Fulp eventually dropped coverage of LYD after watching company officers make some pretty chunky insider sales (a bad habit that the company has basically kicked, glad to say) at the time, but the coverage baton was picked up by Brent Cook who has championed this company to anyone who cares to listen for over two years and also managed to get in mostly before the big ramp that took it from $1 approx to as high as $3 in mid 2011. But saying that, it’s also fair to say that LYD’s share price hasn’t really done much more than track sideways for two years and bumble about inside a $2 to $3 range. Cut to today, and the Friday close of LYD at $2.25 means the company has a market cap of $281m (124.87m shares out, 132.99m shares fully diluted as at 27th September). While considering corp structure, we also note that its $37.8m in cash at bank (that puts working capital at an IKN estimated $34m) is more than enough for the company to move forward comfortably and as for the people on board, they come with high reputations (e.g., Marc Henderson is a director and that’s enough on its own for the company to pass muster).
So anyway, up to now I’ve liked and watched the company without ever getting involved and the two main reasons for following it are simple, Messrs Fulp and Cook. When those guys say “Look, this Amulsar project is a good gold deposit with growth upside and cheap mining parameters for eventual production”, I listen. But alongside those two, I think that we’re now at a moment when there’s more to like about LYD as recent newsflow from the company has been more than interesting. In particular, there are two pieces of news that catch the eye:
1) On September 5th LYD announced (21) the findings of its 43-101 feasibility study (led by KD Engineering and featuring a team of third party compilers). Here are the bullet points that came in the NR to get those of you unaware of this company up to speed
· Proven and probable open pit mineral reserves of 2.26 million ounces gold and 9.63 million ounces silver
· Average life-of-mine (LOM) waste to ore ratio of 2.23:1 (1.80:1 years 1 to 3)
· 12 year LOM with expansion in year four from a nominal-ore feed rate of 5 million tonnes per year to 10 million tonnes per year
· Steady state annual gold production for years 1 to 3 of 118,341 ounces per year and for years 4 to 12 of 186,047 ounces per year via heap-leach processing
· Average LOM cash operating cost of $468.5/oz
· Pre-tax net present value (NPV) of $646 million at a 5% discount rate generating an internal rate of return (IRR) of 27.7%
· Estimated start-up capital cost of $269.6 million
Those are good numbers, ladies and gentlemen, with plenty of the conservative-type pitches and assumptions a guy like me appreciates reading. Below the headlines and in the details there’s plenty to like, too (the 43-101 is filed on SEDAR, date September 7th, and is required reading for those now interested). The project has a fast capital payback, produces an average of 200,000 oz annual over 12 years and is generally understood as “simple” mining. Then waiting in the wings, there’s another 4m oz of inferred category material that can’t make it into a feasibility study (must be considered waste by the 43-101 rules) but as the Amulsar deposit has behaved in a predictable way up to now, we can assign a decent level of confidence to that inferred and assume there’s plenty of growth left in the deposit (mine life or extra annual production or both, you decide). As for that IRR, it moves to nearly 50% on current gold prices, which is more than enough for anyone. As for locals, the government of Armenia has been actively promoting its mining industry, looks upon Amulsar as a poster child to attract other companies and its accommodating attitude has been evident in the prompt delivery of the necessary permits LYD has required through the exploration cycle.
2) Last week, LYD announced it had made final payments to the original vendor of Amulsar and now own the property outright. The timing of this announcement, right on the heels of the feasibility study, piques your author’s attention as it’s the type of move made by a company that wants to clear the way for an eventual sale (because the most likely exit strategy has been crystal clear since day one on this play) to a major or mid-tier producer. This brings up the type of price bracket LYD may demand and on consideration of Amulsar alone (LYD has other properties on its books) an eventual sale at $4/share wouldn’t bat a single eyelid round this way. A $4 selling price would value LYD at $532m (f/d) and assuming the price parameters in the feasibility are accurate, the buyer would have its mine up and running for $800m all-in. For a 200k/annum gold asset with a low cash cost profile and upside potential, that works.
The main concern I’d have is the political risk of operating in Armenia, as although the government has made all the right noises regarding Amulsar and mining in general, we’re still in unknown political waters and risks can pop up from left field. Take for example the recent story about Armenia falling out with its neighbour over a pardon granted for a murderer there (22), in which the country’s President resorted to good old fashioned, rally round flag populist sabre rattling and undisguised threats of war against the offending neighbour, Azerbaijan. That’s the kind of political atmosphere that should give anyone pause for thought.
Overall, there’s a lot to like about LYD and although not a riskless play, the economics and geology of Amulsar are more than enough to balance that out and provide the type of reward scenario that risk-takers like you (and me) go for in the farther flung countries and mining projects. It’s not one I’m going to cover formally here at The IKN Weekly because I’m really keen on making progress with coverage on producers before adding any explorers, but that shouldn’t stop you from taking a closer look and deciding whether it’s for you. I make no bones about the fact that the main reason to like is “Cook and Fulp like this one” and so I’m cribbing off the work of others in a shameless manner, but the recent corporate developments and the new chinks of light we’re seeing at the end of this 2012 tunnel for explorecos suggest, to me at least, that now may be a good window to buy into the cut-above-the-average junior exploration name.