Bigger is better -- Directors say vote for the Scheme Proposal.
The last time that we reviewed Sino was in FAT-MIN-190. In that review we considered the financial strength of Eldorado Gold and that company’s growth profile. Eldorado has a spread of assets in Europe and Brazil. We concluded that the friendly bid/merger was in the best interests of Sino’s shareholders.
In the Scheme Booklet, Jake Klein, MD of Sino Gold says the merger with Eldorado is an exciting opportunity for its shareholders. Putting the two companies together creates a new intermediate size gold producer that is in a strong financial position. All the gold production from both companies is unhedged so that full value can be gained from a rising gold price.
The proposed merger does not seem to have had significant impact on the company’s share price which has closely tracked the ASX Gold Index. Out of interest, we note that both the ASX Gold Index and the share price of Sino have strongly outperformed the price of gold expressed in Australian dollars.
Fat Prophets initially recommended buying Sino Gold around $3.66 in March (Fat Mining 18). Our last review of this stock was during September (Fat Mining 190).
The first milestone in the merger has been achieved. The Supreme Court of NSW has made an order for the convening of the meetings of Sino Gold shareholders and option-holders to vote on the schemes of arrangement.
The Directors of Sino Gold have given their unanimous approval for the takeover by Eldorado Gold. In the absence of a superior proposal, shareholders are encouraged to vote in favour of the Schemes.
Independent Expert Grant Samuel has estimated the underlying value of Sino Gold, including a premium for control to lie between $A5.98 and $A6.76 per Sino share. Grant Samuel says that the recent trading range of Eldorado has been C$11.50 to C$12.50. On this basis the valuation of each Sino share rises to between $A6.66 and $A7.24. However, Eldorado is now trading at around C$14.00 per share and Sino at $7.20.
As a reminder to Members the offer from Eldorado is 0.55 Eldorado shares for each Sino Gold Share. At current prices this is equivalent to $A7.82 per Sino Share. At the current time, Sino’s share price is not fully valuing Eldorado’s offer.
Eldorado has put forward an Option Proposal, whereby all the Sino Gold options on issue will be cancelled under an option scheme in exchange for Eldorado shares.
Eldorado is seeking to have its shares listed on the ASX through Chess Depository Interests or CDIs. If this happens, Sino Gold shareholders will be able to choose between accepting Eldorado CDIs or Eldorado shares either listed on the Toronto or New York Stock Exchanges.
For retail shareholders that choose not to become Eldorado shareholders, there is a ‘Sale Facility’ whereby the Eldorado shares that they would have received will be sold on market. The net proceeds will be converted to AUD. There is no guarantee of a particular price because the price of Eldorado shares will fluctuate with the market.
Other risks to consider are exchange rate movements and the liquidity of the CDI’s if they are listed on the ASX. These are not expected to be as liquid as holding Eldorado shares listed on the TSX or NYSE.
It is important to note that a shareholder that elects to participate in the Sale Facility, must complete and return a valid Sale Election Form for a Scheme to the Sino Gold Scheme Registry. This document must be received by 5.00pm on the Record Date (currently Friday, 11 December 2009).
The Scheme Meetings are scheduled to be held at the Hilton Sydney Hotel, Level 2, Function Room 3, 488 George Street, Sydney, Australia on Wednesday, 2 December 2009, from 10am.
Fat Prophets recommends that all Members vote in favour of the Schemes.
The results of each Scheme Meeting will be available shortly after the meetings on Wednesday, 2 December 2009. Even if the Schemes are approved the Schemes are subject to Second Court Hearing which is currently scheduled for Friday, 4 December, 2009. The Record Date is currently Friday, 11 December, 2009, so there will be a window of opportunity for Members to dispose of their shareholdings on the ASX. Otherwise, at 5pm on the Record Date, any shares held by Members will be transferred to Eldorado Pacific.
Benefits of the Merger:
1) The Combined Group will have a market capitalisation of around US$6bn.
2) The financial strength of the Group is vastly improved with net cash of US$78m.
3) Total gold production increases to between 535,000 oz and 550,000 oz.
4) Cash operating costs are forecast at US$340/oz, which is below average.
5) Sino shareholders get exposure to projects in Turkey, Greece and Brazil.
6) There is an existing pipeline of new projects.
7) Targeted gold production in 2011 is 850,000 oz from six gold mines.
8) A larger market capitalisation increases market appeal.
Key Points from the September 2009 Quarterly Report.
- Grant Samuel concluded that the schemes are fair and reasonable.
- The merger with Eldorado creates a premier intermediate gold company.
1) Jinfeng produced 42,988 oz at a cash cost of US$404/oz.
2) Jinfeng is now operating at 1.5Mtpa.
3) Head grade of 4.1g/t lower than budget.
4) More lower grade open pit ore was milled than scheduled.
5) Overall recoveries rose to a record 85.4%.
6) Ore from underground is ramping-up.
White Mountain Mine:
1) Operations have been suspended since 10 August, 2009.
2) The mine produced 5,037 oz at a cash cost of US$455/oz.
3) A major problem is very high sulphur content.
4) The sulphur problem dropped gold recovery to 67.7%.
5) Development of the underground mine resumed in September.
6) The operation is poised for restart.
1) Construction on-track to be completed in 2010.
2) The Environmental Impact Assessment has been approved.
3) 11 of 13 sub-permits received for Project Permit approval.
4) Mineralisation extended and parallel lodes intercepted.
5) Regional rock-chip sampling has outlined 8 mineralised zones.
6) Assays up to 5 g/t gold obtained.
7) Ownership of EL53 increased to 90%.
8) Drilling will begin after transfer of EL53.
Consensus forecasts for Sino show that the stock is fully valued. The stock is trading on a PER of 41X for 2009 and 24X for 2010. Cash flow multiples are high, 34X for 2009 and 17X for 2010.
Sino Gold built a good gold business in China and will benefit from the merger with Eldorado. Eldorado has projects in Turkey, Greece and Brazil, and has a very strong balance sheet.
A conclusion to the merger is close at hand and well timed for Aussie shareholders to exit at a good price. We recommend Members to realise their gains and exit the stock.
Accordingly, Sino Gold will no longer be held in the Fat Prophets European Mining and Resource Portfolio.
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