Sand Spring Advisors LLC
Hedger in Play?
September 22, 2002
by, Barclay T. Leib
Placer Dome (PDG) is not our favorite gold mining company. In the 2nd quarter of 2002, PDG produced a full 10% less gold than it did in the same quarter of 2001. The company has thus embarked on the acquisition trail to grow its production capacity -- currently in pursuit of small Australian miner AurionGold. The company is an active forward hedger, and largely because of this, PDG stock has performed poorly despite recent investor interest in the gold mining sector. Placer management currently pooh-poohs the notion of any gold price manipulation by the global central banking community.
But is this a company's management really working to maximize shareholder value? Or would Placer assets be better served (valued) under a more forward thinking group of senior executives with a different attitude toward production hedging?
Placer does own 44 million ounces of proven and probable reserves, and with 330 million shares outstanding at $10.35 a share, its $3.4 billion market cap effectively values these reserves at only $77 per ounce. This is well under the market cap per proven and probable reserves for other major producers such as Anglogold, Newmont, and American Barrick. Of the major gold producers, only Harmony and Freeport currently carry lower valuations using this metric (an obvious reflection in FCX's case, at least, of FCX's country-risk exposure to Indonesia).
So we wonder if someday Placer Dome could itself become a takeover play? From some quarters there has already been rumors of such. PDG trades at just 2x its book value compared to non-hedging companies such as Goldcorp (GG) that trade at 6x book value but that have far fewer reserves and a much higher implied market cap valuation on proven and probable reserves (approximately $311 per ounce in Goldcorp's case!). Goldcorp not only has no net hedges on, but it recently has gone so far as to actually buy gold in the open market with its excess cash. Might it not be better for a company such as Goldcorp to buy reserves in the ground at $77 an ounce rather than outright bullion at $320?
If PDG were to be taken over, the Fibonacci bands below suggest that $15.48 might be a logical zone to see this company put out of its misery. For someone seeking value within a hot gold sector, maybe Placer -- despite its decidedly unoriginal and unexciting management -- deserves at least a bit of attention.
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