Sunday, May 2, 2010

Prepaid gold sales - detailed analysis

If I was Century`s finance guy, I would make a case (similar to below) and push the auditors hard to ensure that the break-even prepaid gold price is at least $1,144 per ounce for accounting purposes. Based on the analysis, I see no reasons for a NET extraordinary loss being booked in Century`s Income Statement in the 5 year period if the gold price averages out to $1,144 (on a weighted average basis) - although there may need to be entries in some years and clawbacks in other years.

It is my view that Century shareholders` PE ratio (and ultimately share price) does not need to be lowered from this prepaid arrangement, up to a gold price to $1,144.

prepaid gold sales = 61,183 ounces

There are costs associated with any type of debt deal, be it traditional debt or prepaid debt. We received a heavily discounted upfront price for our 61,183 ounces - $33M (plus we may receive $88 per oz in the future, as a gold price participation component). However, we save in other areas, such as interest payments, underwriting fees, finder`s fees and warrants.

Value components of the deal had it been a traditional debt deal:

1) upfront cash = $33.0M


2) gold price participation @ $88 per oz = $5.4M


3) interest payments @ 10% annual rate = $11.6M ($3.3M yr1, $3.0M yr2, $2.6M yr3, $1.8M yr4, $.9M yr5)

Keeping it simple for this exercise - no discount factors, no npv calcs, etc. Fyi, in addition to Luna Gold`s prepaid gold sale arrangement in 2009, they also did a traditional debt deal of $15M. Their traditional debt facility bears interest at LIBOR plus 7.5%.


4) underwriting fee (3%) + finder`s fee (6%), conservatively on the $33M only = $3.0M

Fyi, Union Securities was charging these rates for the Chinese traditional debt deal in 2009, had that deal done through for Century.


5) additional finder`s fee of 10M warrants (Century`s conservative average future share price of $2.00 over the next 5 years less $.30 warrant exercise price, equates to $1.70) = $17.0M

The $2.00 is extremely conservative relative to Century`s future expected ramped up and organic growth expectations and also to market caps for Century`s mid-tier peers.

Fyi, Union Securities was scheduled to receive 10M Century warrants had the Chinese traditional debt deal gone through.

By not having to burn (dilute) 10M warrants/shares as part of the debt deal, Century can now do a PP at anytime in the future with those 10M shares @ a $2.00 share price and raise significant cash.


Calculation:

$33M + $5.4M + $11.6M + $3.0M + $17M = $70.0M

$70.0M / 61,183 = $1,144 adjusted gold price value of the deal for accounting purposes (in my view)

Let`s hope that Century`s management do a good job in the upcoming years in protecting the Net Profit line for Century shareholders.

1 comment:

production05 said...

I have one more note.

In the Jan`09 bankable DD report it was identified that Century had about $70M in carried forward tax credits they could use against Corporate Income Tax calculations. I don`t see why they wouldn`t have those anymore. They are usually good for a number of years into the future.

I glanced at Century`s Q3`09 Income Statement. Century booked $5.5M in Net Profit for the first 9 months of 2009, yet I see no Corporate Income Tax payments for the entire 9 month period. This would suggest that a bit of the tax credit amount was applied in eliminating Corporate Income taxes in 2009 (first 9 months).

This bodes well for once we reach commercial production in Q1 2011 (when we start booking Lamaque into the Income Statement - Lamaque will be capitalized into the balance sheet until commercial production is achieved) and crank up the operating profits. There should still be a good 50M (+) in tax credits at that stage. The tax credits will allow more dollars to flow to the Net Profit line.