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It is not often that I comment on broker’s notes as most are pretty worthless. Normally I post comment if I disagree violently or agree strongly. Which brings me to the VSA Resources note out today on Russian gold producer Highland Gold (LSE:HGM). The problem with gold is that it is usually found in dodgy places, Africa or Russia. Neither is exactly East Surrey in terms of political stability. VSA engaged in this debate. It writes:
Production Growth in a Relatively Stable Jurisdiction Russian Risk – Worth Taking
UK equity funds seeking gold exposure have a choice between African or Russian-based companies. We see value in numerous African gold companies, and recognise that it is a diverse continent with its own set of risk characteristics. Relatively, however, we think Russia is looking increasingly attractive, particularly in terms of fiscal and political stability.
HGM – Good Quality Diverse Asset Base
Highland Gold has an enterprise value of £330m but its assets have the potential to underpin at least a £500m company. It has three mines, 11Moz in Resources and some well-located exploration licences. Growth could be achieved organically and/or via prudent acquisitions.
Potential for Additional Acquisitions
The USGS estimates that Russia hosts the third-largest unexploited gold reserves in the world, demonstrating the potential for growth in the industry. HGM’s balance sheet has enabled it to be acquisitive, and in May it bought the Klen Project in Chukotka. Looking forward, further acquisitiveness could depend on how soon, or if, it develops its large Taseevskoye and Unkurtash projects, but at least being cash generative provides strategic flexibility.
Production Growth – New Era for HGM
Consistent production growth has not been a feature of HGM’s history, with YoY decreases between 2003 and 2007. However, since then, production and EBITDA have shown a better trend and we are forecasting production growth for at least the next two years. Thereafter, it will depend on delivering new mines such as Klen, Lyubov, Taseevskoye and Unkurtash.
Valuation and Recommendation
Our valuation is based on DCF calculations for the three operating mines: Mnogovershinnoye, Novoshirokinskoye and Belaya Gora, and we recently initiated on the stock with a BUY recommendation and a 175p target price.
Ends
Tom Winnifrith writes for ten UK and US investment band political websites. Links to all his work can be found on his own website TomWinnifrith.com
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