Trans Siberian Gold
an undiscovered value play
William R. Thomson
12 December 2003
If ever there was evidence
that underwriters make a difference in how a company is viewed
in the markets, then Trans Siberian Gold (TSG.L) is perfect evidence.
TSG is a British company that
has been active prospecting for gold in three areas of Russia
and has found significant quantities. It listed on London's Alternative
Investment Market on 25 November at GBP 1.50 (approximately USD
2.50) a share. The company sold 10.7 million shares to raise
GBP 16 million (USD 27 million) and now has 28.8 million shares
outstanding (approximately 30 million fully diluted).
Since listing Trans Siberian
Gold has sunk back to GBP 1.23 where it represents, in our opinion,
very significant value on both an absolute basis and by comparison
with its competitors. At these prices, its total market capitalization
is a mere GBP 41 million or $70 million.
Why has it fallen? The company
was originally going to raise GBP 10 million but saw the chance
to raise more and provide itself with certainty about financing
its future projects. That made sense for the company but probably
exhausted demand for the shares in the short term. Coupled with
that the underwriters were neophytes in the mining game in promoting
the shares. The firm's public relations company finally made
a very positive announcement
on 8 December and it is important that analysts and newsletter
writers follow the shares. In the interim, a very real opportunity
exists.
Asacha
Trans Siberian Gold has identified over 3 million ounces of high
grade gold in two important sites: the first at Kamchatka in
eastern Siberia and the second at Verduga in central Siberia.
The company believes there can be a significant expansion of
these reserves announced in the coming months.
The first mine to come on stream
is the shallow Asacha mine in Kamchatka where 100,000 ounces
a year should start to be mined starting 2004. With gold at $400
and ounce and total costs estimated at $250 an ounce that would
equate to USD 15 million before tax, say USD 0.40 after tax.
At present the Asacha mine only has a six years life but that
should be extended as development proceeds. Asacha alone more
than justifies the present price of the shares.
Verduga
The more significant mine is Verduga where over 2.5 million ounces
have been identified already, to western geologist standards.
Verduga should come on stream by 2005 and produce upwards of
180,000 ounces annually. The company estimates that the total
costs to extract Verduga's gold will about USD 250 an ounce.
Verduga could therefore be
adding USD 0.60 a share to TSG's bottom line by 2006 for a total
earnings of $1 per share.
What is a 40
cents of earning in a year's time and a dollar in a little over
two year's time worth? In today's market we would argue a lot
more than the current market price of GBP 1.30 or $ 2.20. At
present prices the company is selling at one times 2005 revenues
and 0.33 times possible 2006 revenues.
We can we take Peter Hambro Mining (POG.L) as a comparison.
Peter Hambro
Mining, which is also a British company with Russian gold interests,
has about 50 million shares outstanding at a price of GBP 4.20
for a total market capitalization of about GBP 210 million more
than 5 times TSG's. But it will only produce about 100,000 ounces
this year. So POG.L is
1-2 years ahead of TSG but is directly comparable. It is selling
for 6 times 2003 revenues. It would seem that TSG should have
the capability to appreciate about 5 times as Asacha comes onstream.
That could then act as the base for a further lift as Verduga
comes on stream. The potential is therefore there for a 5-10
bagger, albeit with Russian political risk, and the normal development
risks intrinsic to gold mining.
It is instructive to see how
POG has performed since its IPO in May 2002. It came at GBP 1.40
and fell over the next 6 months to GBP 0.80 before appreciating
5 fold as production came onstream and gold appreciated.
At current prices, we feel
strongly that TSG is a buy. We believe that the newly-listed
company will become more sensitive to the need to keep the investing
world abreast of developments in this interesting play.
Others seem to agree with this
assessment. Well known shareholders include Jean-Marie Evillard's
Soc Gen Gold Fund and the Zulauf Fund, managed by Felix Zulauf
of Zurich.
Trans Siberian Gold [TSG.L,
as noted] is listed on London AIM market, and can be bought through
any US or UK broker.
Website: Trans
Siberian Gold
William R. Thomson
wrthomson@btconnect.com
December 2003
Disclaimer:
Mr. Thomson is not a registered investment adviser and has not
been paid for this article. He has taken this information from
sources he believes reliable but no guarantees are given or implied.
He owns shares in the company.
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321gold Inc Miami USA
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