EDV vs. SMF Some interesting analysis on SMF:-
https://seekingalpha.com/article/1958181-semafo-transforming-into-a-low-cost-producer-but-increasingly-overvalued
I am inclined to agree with the author, in that SMF management seem to be overpromising on the LOM economics of their Mana project; even though they have a proven 5-year track-record of achieving production guidance, their aim to bring AISC/oz down from $1,025 to $580/oz over 2 years seems a little far-fetched to me. (See page 14 of their Dec 2013 presentation)
https://www.semafo.com/pdfdb/presentation/19en.pdf
By contrast, EDV management (I believe) prefer to underpromise somewhat, and as we have seen, they have brought in projects ahead of schedule, under budget, and materially exceeded production guidance. Their cost reduction program seems to be moving in the right direction - they look set to achieve AISC/oz targets towards the lower end (<$1,086) of their 2013 guidance of $1055-$1155, and are targeting $1,000 AISC/oz going forward, which I believe is realistic given that Agbaou adds approx 30% to current production at an AISC/oz of $800. (315koz @ AISC $1,086 (Tabakoto, Nzema, Youga) + 100koz (Agbaou) @ AISC $800 = 415koz @ weighted average AISC $1,017)
In the scenario that both companies meet production and cost guidance, then we can see that SMF is roughly twice as profitable per ounce as EDV at $1,250 gold; SMF projectd LOM AISC/oz $765 vs. EDV AISC $1,017 (as per above calc.), gives SMF all-in margin/oz of $485, and EDV all-in margin/oz $233.
EDV production is more than twice that of SMF, so all other things being equal, both companies should generate similar total profits at $1,250 gold.
EDV has roughly 100% more gold in the ground than SMF, but let's not forget that they are depleting their reserves roughly twice as fast. Both have similar current projected mine life (~10 years) based on current reserves. I would expect SMF to have a higher valuation per ounce in the ground (EV/oz), as their costs are lower, so every ounce they produce is projected to be more profitable than EDV's.
Both are located in 'risky' W. Africa, but EDV has significantly LESS country-specific risk (EDV have diversified operations over 4 jurisdictions (Mali, Ghana, Cote D'ivoire, Burkina Faso) whilst SMF operates exclusively in Burkina Faso), and significantly less project-specific risk (4 producing mines at EDV vs. only 1 at SMF).
EDV has a greater financial risk ($200m net debt vs. SMF $80m net cash), as well as greater operating and financial leverage.
At a fixed gold price of $1,250/oz, I would expect the companies to have roughly equivalent Enterprise Values (Mkt Cap + Net Debt).
SMF Enterprise Value = $920,000,000 ($1bn mkt cap - $80m net cash)
EDV Enterprise Value = $475,000,000 ($275m mkt cap + $200m net debt)
SMF Book Value (Total Equity Dec 2012) = $585m
EDV Book Value (Total Equity Dec 2012) = $1.05bn
I am prepared to assume that the EDV BV is inflated (to a degree) as a result of their acquisition of Avion Gold for a consideration of $389m in 2012, so let's write that asset down to zero.
EDV 'adjusted' Book Value (Total Equity Dec 2012 LESS Avion acquisition) = $661m
SMF EV/BV = 1.57
EDV EV/BV (adjusted) = 0.72
There does seem to be a serious disconnect here...anyone care to comment?
The obvious play here would seem to me to be a pair-trade strategy (Short SMF, Long EDV) with some type of protective insurance (gold put option) overlay to mitigate the gold-price risk. In this case if the gold price goes down, you would lose on the pair (i.e. EDV falls by more than SMF), but you cover your losses on the short exposure to gold (long put insurance), whereas if gold prices rise, you would expect to win on the pair (EDV (greater financial and operating leverage) to SIGNIFICANTLY outperform SMF) , and sacrifice your gold insurance premium (cost of put = fixed). In a static gold price environment, I would hope to see the valuation gap between the two companies narrow over time (i.e. EDV outperform SMF) enough to cover the cost of the put premium.
In conclusion, EDV looks significantly undervalued relative to SMF on a like-for-like basis, but then SMF is perhaps significantly overvalued (as per Seeking Alpha link). My explanation of the valuation disconnect (EDV vs. SMF) - the market is still discounting a lower gold price environment going forward.
I prefer EDV and am long.