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Like most AIM (and in this case also Toronto) listed smaller gold companies the share price of Cluff Gold (LSE:CLF) has taken a beating of late – falling by almost 50% to 55p. While many of its peers may have to raise extra cash – hence their share price collapse – Cluff has already completed a placing (at 85p) and is thus fully funded to bring a portfolio of exploration and development projects onstream. Moreover it is already producing and generating cash. On fundamentals it is cheap. But the recent bid by Endeavour for Avion shows that Cluff is also pretty much in play as a bid target. This is a win.win for investors.
Let’s start with Endeavour. I quote here research out this morning from a leading London broker:
“In early August Endeavour Mining announced its offer for Avion Gold Corp at a healthy premium of 70% above the 20 volume weighted average price of Avion’s shares. Endeavour has also agreed to provide Avion with a $20m bridging loan to enable the junior to carry out a mill capacity expansion, a recent thorn in the side of Avion that is related to the recent weakness in its share price. The objectives of Endeavour are clear: it is bolting on producing ounces at a price of $588 per reserve ounce.
Of particular note are comments that outgoing Executive Director Mark Connolly made while presenting at the Diggers & Dealers conference at the same time the acquisition announcement was made. Mark said that Endeavour would actively pursue two other Canadian listed companies once it had completed the acquisition of Avion. Extrapolating the main drivers behind the Avion acquisition, Cluff could be another good fit for a larger Endeavour Mining company in that Cluff has producing assets, a good near-term development project as well as plentiful resource growth potential.”
Enough said. You will note that Endeavour paid for Avion not what the market priced Avion at but some reflection of its true worth. For companies like Endeavour drilling in the City is pretty attractive right now.
What is Cluff worth? This morning we had news of some fairly decent drill grades from its Yaoure prospect in the Ivory Coast. The Company expects to announce an increase to the current 292koz gold resource by the year end. Early metallurgical test work suggests that gold is free and relatively easy to recover. The grades today included:
7.05m at 3.15g/t gold from 106.78m
9.14m at 4.28g/t gold from 91.42m
6.17m at 9.06g/t gold from 421.67m
6.51m at 9.39g/t gold from 40.92m
Yaoure is but a small part of the exploration portfolio but since it is close to water and infrastructure it would be cheap to develop. Of more interest is the much larger Baomahun prospect where we will get news soon with the publication of its feasibility study. This could well add 135,000 oz a year to output.
Cluff already produces gold (on a cash margin of c$750 oz) from Kalsaka and this should deliver 60,000 to 70,000 oz this year. It is EBITDA positive on a quarterly basis. And if it can incorporate the recently purchased Sega prospect into the Kalsaka processing plant output will rise sharply as will the cash margin.
At 55p Cluff is valued at c£86 million. This is a company that in two of three years from Kalsaka, Sega and Baomahun could be producing 200,000 – 250,000 oz on a cash margin ( at current gold prices) of $800 ( call it £500). And it is fully funded. And it has additional exploration upside. You can do your own maths but on fundamentals this is very cheap indeed. On an operating cashflow multiple of even 3 and allowing nothing for exploration upside you are looking at a target price of well over 200p per share.
Gold stocks are not loved. But with its balance sheet and producer status Cluff limits the downside risk. The upside (even without a bid) is clear.
Oh shucks. I was just thinking about a top up but now Winnifroth’s gone and tipped it. At least it’s not IC – 100% guarantee of impending disaster.
Ron
What a wag you are. Such a shame that you cannot take responsibility for your own investment decisions. You are after all clearly an expert who never gets it wrong.
Best wishes
Tom Winnifrith
Oh, I do get it wrong, and I do have responsibility, but I’ve learned a few things about warning signs. Of course, CLF may yet be taken out for £2 and if they are I’ll be able to afford a haircut.
Good luck to you and yours, where are you, Albania? I wonder if they let you swim across to Corfu these days.
Tom
If small caps gold shares (of which I have several) are such good value, why then are the larger gold stocks not hoovering them up? You have stated several times that becasue of the fundamentals of such stocks there would be drilling in the City (ok I’ve mixed this up ith oil stocks but you know what I mean,) I was hopeful that there would be more bid activity here(?)
Dear Ron
If you think I am bound to be wrong go short. It is your call. I think we both know that would be an error. Don’t we. Some of my t1ps go down. Others up. Look at 12 year record on t1ps.com and it really is not bad at all.
My location – as per blog http://www.TomWinnifrith.com I left Albania quite a while back ( visited Butrint – worth going) and now in Greece. Heading back to UK soon. As for swimming, I dunno? Hoxha was not keen on Albanians doing that but I think new regime might let you try. Personally I used the ferry ( 23 Euro) – a very pleasant trip
Martin – as per piece, Endeavour has just started hoovering up. I expect more action but as to when. Who knows?
Thanks for feedback both of you
Tom Winnifrith
Do you think Conroy will be taken over, I read somewhere you liked them?
G