Re: KGL - Kentor Gold
Its always the dilemma for junior explorers wanting to make the transition to producer.
Too many times we have seen companies embark on highly dilutive capital raisings at discounted prices to provide funding. Over the years I have seen many promising projects either end up not proceeding or proceeding with massive dilution where existing shareholders miss out on major upside.
How will KGL fund the $96M capital requirement to build the Andash plant?
Well, obviously no bank on this planet is going to 100% debt fund a project in the Kyrgyz Republic despite the payback period of less than one year.
So, it's been mentioned more than once that it will be a mixture of debt and equity. 50/50 debt/equity split has also been mentioned. That's seems fine so long as the $48M equity component is structured to MINIMISE dilution rather than maximise it.
Personally, I always like to see a component whereby a convertible note/s is/are used with a conversion price HIGHER than the prevailing share price. Isn't that better than raising capital at a DISCOUNT to the prevailing price?
To issue convertible notes repayable years down the track at higher prices than the current share price is normally only achieved when the project economics are extremely robust. That's the only way to attract instos/brokers with firepower to the story. They need to see the upside and it has to be significant. Normally a nice multiple of the current price.
I also like to see some sort of shareholder equity component that gives current shareholders a crack at some cheap shares via a rights issue or SPP (rights issue is fairer as it's done on a proportional holding basis).
The future for the share price of KGL is not only linked to the success or otherwise of the Andash project but just as important is how the debt/equity funding is structured.
Time will tell if dilution is minimised. I have faith in this company's management and I like the fact that some strong brokers are already supporting the stock.
The project economics are very robust and the exploration upside is also significant. One thing the uprising has provided that is positive is asset prices are very cheap. It's opened up many avenues for KGL within the Kyrgyz Republic. Aktash is one example of a very good asset picked up by KGL for a song. It will provide even higher grade ore for the Andash processing plant which will add extra years of mine life to the project and increase the NPV even further. I'm confident there will be others.
The following is the table for NPV of the Andash Zone 1 project for readers' reference.
http://www.asx.com.au/asxpdf/20100719/pdf/31rd0py3tn4rfx.pdf
Page 16 has the NPV table.
At current gold/copper prices, the NPV is $US220M or 38c per share.
Significantly, the NPV increases by 56% by adding an additional 6M tonnes of ore over two years. That's significant because that's what the recent Aktash acquisition will provide.
We are then looking at a NPV of US$312M which values KGL's 90% stake at US$281M or AUD$300M (52c per KGL).