TRANS-SIBERIAN GOLD #TSG

TRANS-SIBERIAN GOLD

#TSG

Written on 9/12/15 so all values as per that day.    

MCAP - £16.9mill

EV - £25.7mill
Target = 45-60p

 

What do it do?

Well surprisingly enough, this is a gold miner! It does what it says on the tin. Please note it actually mines, it is a producer. Silver is also produced and makes a smaller contribution to the bottom line.

Where does it do it?

Well surprisingly enough again, Siberia!

Main project - Asacha

• VNIPI Feasibility Study - 2003
• Additional Metallurgical Testwork - 2005-2007
• Environmental Impact Assessment - 2005
• Environmental Management Plan - 2006
• New Mineral Resource/Ore Reserve Estimate - 2006
• Development mining commenced - 2007
• Business Plan and Capital Cost Update - May 2008
• Gold production commenced - September 2011

JORC RESOURCES - as of 31 December 2014 MINERAL RESOURCE - Asacha
Category	Zone	Tonnes 000	Au Grade g/t	Ag Grade g/t	Contained Au oz. (000)	Contained Ag oz. (000)
Measured	Main	103	18	29	58	96
Indicated	Main	670	20	59	438	1,265
Indicated	East	3	56	30	6	3
Total M & I		776	20	55	502	1,364
Inferred	Main	129	13	29	50	120
Inferred	East	285	27	43	250	390
Total Inferred		414	22	38	300	510

Mining and production at Asacha in the first nine months of 2015 is shown in the following table.

	Q1 2015	Q2 2015	July 2015	August 2015	Sept 2015	Q3 2015	Year to date 2015	Year to date 2014
Mine development (m)	1,152	686	386	447	398	1,231	3,069	2,515
Ore extracted (mt)	43,598	44,535	14,798	13,628	15,529	43,955	132,088	148,648
Ore processed (mt)	39,699	39,814	13,980	13,690	13,710	41,380	120,893	117,626
Average gold grade (g/t)	7.43	8.17	7.77	7.02	8.12	7.64	7.74	7,32
Average silver grade (g/t)	13.43	12.79	10.35	10.55	11.37	10.75	12.30	12.50
Gold recovery rate (%)	95.19	95.97	95.34	94.88	95.31	95.19	95.46	95.06
Silver recovery rate (%)	73.25	78.84	76.32	77.24	71.70	75.08	75.69	70.82
Gold in dore (oz.)	9,044	10,044	3,303	2,976	3,401	9,680	28,768	26,203
Silver in dore (oz.)	12,747	12,847	3,534	3,852	3,485	10,871	36,465	33,147
Gold refined (oz.)	9,508	8,238	4,556	2,020	2,972	9,548	27,294	24,126
Silver refined (oz.)	13,304	10,116	6,139	1,946	3,846	11,931	35,351	31,347

Economics

So there are a number of reasons why TSB has gotten a lot more interesting recently.

1) Rouble devaluation

2) Oil crash

3) Mining sector unloved

4) Russia unloved

Here are the numbers up to the end of last year. Hardly inspiring and if the cut off was half year 30th June 2014 when the rouble started to weaken, the numbers would look pretty dire...

$ Millions $ Millions $ Millions $ Millions $ Millions Income Statement 31 Dec '14 31 Dec '13 31 Dec '12 31 Dec '11 31 Dec '10 Revenue 46.18 44.24 44.89 11.93 n/a Operating Profit / Loss 4.44 (13.28) 0.68 0.59 (3.64) Net Interest (3.18) (3.23) (4.11) (1.45) (0.05) Pre-tax Profit 1.29 (16.51) (3.42) (0.81) (3.65) Post tax Profit (0.13) (15.66) (4.73) 4.58 (3.52) Profit for the Period (0.13) (15.66) (4.73) 4.58 (3.52) Equity Holders of Parent Company (0.13) (15.66) (4.73) 4.58 (3.52)
The first half of this year to 30th June 2015 have again improved...

	Note	6 months to 30 June 2015 unaudited $000	6 months to 30 June 2014 unaudited $000	12 months to 31 December 2014 audited $000
Revenue	12	21,487	20,072	46,184
Cost of sales	13	(12,989)	(19,751)	(31,607)
Ore stock inventory impairment		(1,297)	-	(4,134)
Gross profit		7,201	321	10,443

So what has happened to produce the dramatic and continuing fall in cost of sales?

      1)    Rouble Devaluation

From mid-2014, the rouble/$ has fallen off a cliff and is falling further

As most costs are in Russia, wages etc then clearly this is an advantage. When we look at the current year only it looks very good for the second half and going forward. Into the new year and the rouble is still tanking vs the $

The average rouble/dollar price is clearly lower in the second half of the year than the first and falling away again.

          2) Price of Oil

Similarly to a lot of the costs being in roubles, the price of oil is a significant cost in running a mine. It has been as obliging as the rouble in helping out TSG

The second half of 2014 benefited from the falling oil price, the first half of 2015 was better and the second half is even better.

   3)    Spot Gold

The caveat is clearly that the price of gold is lower. In % terms it’s not down too much this half compared with the first and the rouble/price of oil more than makes up for this fall

So what does all this mean going forward for profits?


Please note that "cost of sales" differs from the much quoted "cash cost".  Cost of sales includes everything and is akin to AISC. Most gold producers give you cash cost which will look more impressive and publish a profit per ounce figure that is a bit misleading. I will post the equivalent cash cost in red for comparison to other stocks.

2013 Cost of sales net silver = $1,471/oz gold

2013 Average price sold = $1,402/oz gold

2013 P/L per ounce = -$69

2014 Cost of sales net silver = $853/oz gold

2013 Average price sold = $1256/oz gold

2013 P/L per ounce = $403

2015 (1^st half) Cost of sales net silver = $712/oz gold (cash cost $489)

2015 (1^st half) Average price sold = $1,192

2015 (1^st half) P/L per ounce = $480

I would say its nailed on the 2^nd half profit per ounce will be over $450 comfortably, likely much more.

Fag packet 2nd half numbers (completely my musings)
Q3 Refined Au 9,548 oz so double that up for easiness sake (although they producing more every month seemingly) = 19,096oz produced in H2.
Finger in air average oz sold = $1,130
Finger in air cost of sales = $650 (cash cost of around $410)
P/L oz = $480
Gross Profit = $9,166,080



Fag packet 2015
Gross profit H1 + ?H2 = $16,367,080
Oher expenses from H1 x2 = $8,122,000 (2nd half expenses likely to be lower due to rouble)
Profit before Tax = $8,245,080

Broker Forecast

The current broker forecast is…

2015 Net profit > $10mill

2015 EPS = $0.09 (6p)
My working above are probably too cautious but good to see its in the same ball park

2016 Net profit > $18mill

2016 EPS = $0.16 (10.54p)
The rouble continues to fall away dramatically

Valuation Models (stockopedia)

Discounted cashflow = 97.1p

Graham Formula = 129.76p

Relative to Sector = 46.72p

Tangible book value = 47.06p

Metrics (stockopedia)

PE Ratio (f) – 1.48 (industry median 9.02)

PEG ratio (f) – 0.034 (IM 0.49)

EPS growth (f) – 81.1% (IM 11.5%)

Price to book value – 0.33 (IM 0.69)

Price to tang. Book – 0.33 (IM 1.07)

Price to FCF – 2.37 (IM 6.26)

Price to sales – 0.54 (IM 1.16)

EV to EBITDA – 1.92 (IM 5.06)

ROC – 9.23% (IM -9.23%)

Return on Equity – 5.56% (IM -13.3%)

Operating Margin – 19.5% (IM -5%)

A pretty spectacular, sector beating set of metrics!

Shareholders

UFG Asset Management – 55.03%

AngloGold Ashanti Ltd – 31.17%

Firebird Funds – 2.52%

Directors – 0.4% (not great)

FF is less than 13%

Negatives (trying to stop the conformation bias)

Clearly as the macro economic factors have helped TSG they could equally swing and shaft them. If the Rouble and oil does a phoenix from the flames their cost of sales would be screwed again. If spot gold does a nose dive their revenue will get hit.

It is a mine so anything could happen. China could invade, it could collapse, flood etc. Russia could do something dodgy with the price of electricity or the availability of it or water to the mine. The gov could change the vat/tax rules or steal it. Key management or workers could leave, the BoD don’t own too many shares after all.

There is significant dilution of the gold from mining to the processor. The actual gold grade from the JORC is about 20g/tonne but currently they only get about 7-8g/tonne to the processor. Something they state they are working on. Clearly any meaningful increase in this would be nice. But why is it so poor?

There is net debt on the balance sheet. From the last interims “borrowings reduced from $26.1 million at 31 December 2014 to $20.8 million, reflecting further repayments of the project finance facilities provided by Sberbank to the Company's subsidiary ZAO Trevozhnoye Zarevo (TZ) for the development of Asacha and the Company's repayment of loan facilities provided by its major shareholders. On 20 March 2015, in addition to the $300,000 repayment due to Sberbank on that date, TZ prepaid $2.2 million, which had been scheduled to be repaid in 2018. On 25 March 2015 and 27 March 2015 TZ made further prepayments of $800,000 and $900,000, respectively due on 20 June 2015 and 20 December 2015. No further repayments of the facilities are due in 2015, but, as discussed below, TZ made a further prepayment of $1.0 million in August 2015”

They are paying down the debt and will be able to accelerate it if the cash flow turns out as planned.

The sector is unloved so just because value exists that doesn’t mean it will be realised any time soon.

Russia is similarly unloved so just because value exists that doesn’t mean it will be realised any time soon.

Comms with the company

Q – Why the low SP?

A - We think that many AIM share prices can be affected by low liquidity (TSG’s theoretical free float is 13.4%, in practice we consider it to be significantly less than that). In TSG’s case, our sole operating asset is in Russia. There appears to be general negative sentiment towards both Russia-related and gold mine stocks. As reported in our regulatory announcements, for several years we have been seeking to increase the grade of ore delivered to the plant and have not, so far, achieved the sustained improvement (through reduced mining dilution) which we believe the mine should be able to deliver. On a more positive note, since the second half of 2014, our operating results have benefited from the weaker Russian rouble, which has more than offset the impact of a lower (in US$ terms) gold price.

Overall

Despite this being a miner and in Russia, it does offer incredible value compared to most gold producers. If the current set of global FX and commodity prices stay in the same ball park for the foreseeable future, TSG will be a cash cow. It simply must re-rate at some point and probably make early investors a fantastic return. The fact is the rouble is tanking badly and the trend is most certainly down. Currently the cash cost per ounce must be sitting around $400. The broker forecast for this year looks nailed on and for next year conservative. I think this has at least a bag in it.

Disclaimer

Clearly dont just buy based on my recommendation or anyone elses. Do your own reseach. Pick an entry you are happy with, pick a target exit you think is achiveable. This share may go up and down quite a bit before the target catalyst. The target catalyst may not be as good as hope resulting in an AIM sell off with decent losses if your entry is wrong