DROOY, HGMCY & GOLD ESTIMATED EPS
(and stock price projections)We are now near the end of the March 2002 quarter, and in three or four weeks we will see earnings' reports come in from our favorite Gold Mining Companies.
We know that gold has firmed-up during this quarter, and so we expect better earnings' results than in the December 2001 quarter. How much better earnings can we expect? Investors can position themselves better, if they can anticipate the earnings' reports results ahead of time, allowing them to make their moves ahead of the pack.
Income statements look complicated, especially to the average investor - and they are full of variables. We can, however, separate these variables, apply our knowns and make reasonable assumptions on our unknowns. We will also break the statement down into unit revenue and costs. The unit being per ounce of gold.
We are going to look at three companies and attempt to project anticipated earnings for the March 2002 quarter. They are Durban Roodeport Deep (DROOY), Harmony Gold (HGMCY) and Gold Fields (GOLD).
DROOY and GOLD have taken recent actions that will effect this quarter earnings.
DROOY: During this quarter they sold 60% of their Crown Gold Recoveries to Khumo Bathong Holdings (KBH) for R105.5 million, and sold them 4.8 million shares of stock for R68.0 million. The revenue from this is intended to be used to help clear their hedge book. (at the current randgold price this should clear about 50,000 oz. of forward selling). This revenue will also improve their Balance Sheet, and as a one-time entry into their income statement. Even though the revenue is a one-time entry into the Income Statement, the process of clearing up the hedge book brings them that much closer to realizing the full benefit of rising gold prices, and thus will be a long term benefit to the bottom-line.
GOLD: During the December 2001 quarter, Gold Fields added the Australian mines St. Ives and Agnew to their stables. However, they only benefited from the gold production of these two mines for the month of December. These two mines produced 68,000 ounces during December. A full quarter of production should add 136,000 ounces above the last quarter's total production of 984,000 ounces. Almost a 14% increase!
HGMCY: Although Harmony has been active during the quarter with acquisitions, I don't feel like it has been finalized enough to determine the impact, if any, on the March quarter. Those of you that feel comfortable with projecting the effects can easily include your own assumptions in my format.
DROOY, HGMCY & GOLD are South African gold mining companies. Many investors tend to key into the U.S. Dollar price of gold, and make judgments and projections based on this. This can be a grievous mistake when the Rand is rapidly depreciating against the Dollar! It is the Rand Gold price and the Rand/Dollar exchange rate that primarily determines these companies' earnings. If you don't believe this, then look into their December Quarterly Reports. All three companies attributed their stellar earnings to the Rand Gold price and the depreciating Rand. In the December quarter the Dollar price of gold averaged $278/oz, which was only one dollar more than the average during the September quarter ($277/oz). A one dollar per ounce increase did not bring about a doubling and tripling of earnings! The average Rand Gold price for the December quarter increased approximately 24% over the September quarter average.
IMPORTANT: I do all of my analysis on the RAND side of the Income Statement, not on the U.S.$ side. I then convert the Rand EPS into Dollar EPS with the average exchange rate of the quarter.
I convert the prior Income Statements into Revenue and Costs per ounce. I do this because I keep a daily log of the Rand Gold price and the Rand/Dollar exchange rate. As the quarter progresses, I have a good idea of revenue changes and I know that cash costs, in Rands, are close to unchanged until the next labor contract.
Let's examine the December Quarter. Remember we will be looking only on the Rand side of the Income Statements.
From my daily log the Average Rand Gold price of gold was about 2850 R/oz. The exchange rate averaged 10.3 R/$
DROOY produced 269,069 ounces at an average revenue of 2512 R/oz (88% of my log avg.) I assume this short fall was due to their forward selling hedge book. HGMCY produced 594,272 ounces at an average revenue of 2750 R/oz (96% of my log avg.) GOLD produced 984,000 ounces at an average revenue of 2900 R/oz ( 102% of my log avg.)
CASH OPERATING COSTS
DROOY: 1885 R/oz
GOLD: 1809 R/oz
DROOY: -322 R/oz
HGMCY: -72 R/oz
GOLD: -193 R/oz
MARCH 2002 QUARTER ESTIMATES
From my daily log, the avg. price of gold was 3340 R/oz and the exchange rate was 11.53 R/$
- 270,000 ounces produced (basically unchanged)
- Revenue of 2840 R/oz (85% of my quarter log avg. of 3340 R/oz). I assumed a larger drag of the hedge book
- Cash operating costs of 1900 R/oz. (1885 in Dec.)
- Misc. expenses of -322 R/oz (same as Dec. qtr.)
- Revenue from KBH transactions of 644 R/oz.
- 165 million shares. (158 million in Dec, + 5 million to KBH, +2 million for rounding)
EPS ESTIMATE: March 2002 quarter
Revenue 2840 R/oz
Cash operating costs -1900 R/oz
Operating profit 940 R/oz
Misc. expenses -322 R/oz
KBH Revenue 644 R/oz
Pre tax profit 1262 R/oz
After tax profit 946 R/oz
946 R/oz x 0.27 million oz / 165 million shares = 1.548 Rands
1.548 EPS Rands / 11.53 R/$ = $0.134 ( vs. $0.034 in Dec)
Without the KBH revenue the pretax profit would be 618 R/oz.
The after tax profit would be 463.5 R/oz
The EPS in Rands would be 0.759 Rands
The EPS in Dollars would be $0.066
DROOY estimated share value at 15 PE
With KBH revenue
$0.134 EPS x 15 PE x 4 Qtrs. = $8.04
w/o KBH revenue
$0.066 EPS x 15 PE x 4 Qtrs. = $3.96
- 620,000 ounces produced (594,272 in Dec. qtr., 616,038 in Sept. qtr.)
- Revenue of 3200 R/oz (96% of my avg. log of 3340)
- Cash operating costs of 2000 R/oz (1986 in Dec.)
- Misc. expenses of -72 R/oz (same as Dec)
- 150 million shares (149.1 million in Dec.)
EPS ESTIMATE: March 2002 quarter
Revenue 3200 R/oz
Cash Operating Costs -2000 R/oz
Operating profit 1200 R/oz
Misc. expenses -72 R/oz
Pre tax profit 1128 R/oz
After tax profit 846 R/oz
846 R/oz x 0.62 million oz / 150 million shares = 3.4968 Rands
3.4969 Rands / 11.53 R/$ = $0.303 ( vs. $0.20 in Dec.)
HGMCY estimated share value at 15 PE
$0.303 EPS x 15 PE x 4 Qtrs. = $18.18
- 1,120,000 ounces produced ( 984,000 in Dec.)
- Revenue of 3400 R/oz ( 102% of my avg. log of 3340)
- Cash operating costs of 1825 R/oz ( 1809 in Dec.)
- Misc. expenses of - 193 R/oz (same as Dec.)
- 465 million shares
EPS ESTIMATE: March 2002 quarter
Revenue 3400 R/oz
Cash operating costs -1825 R/oz
Operating profit 1575 R/oz
Misc. expenses -193 R/oz
Pre tax profit 1382 R/oz
After tax profit 1037 R/oz
1037 R/oz x 1.12 million oz / 465 million shares = 2.4977 Rands
2.4977 EPS Rands / 11.53 R/$ = $0.217 ( vs. $0.15 in Dec)
GOLD estimated share value at 15 PE
$0.217 EPS x 15 PE x 4 Qtrs. = $13.02
HEADLINE CASH OPERATING COSTS
DROOY 1900 R/oz / 11.53 R/$ = $165/oz ($186/oz in Dec. Qtr.)
HGMCY 2000 R/oz / 11.53 R/$ = $174/oz ($196/oz in Dec. Qtr.)
GOLD 1825 R/oz / 11.53 R/$ = $ 158/oz ($174.5/oz in Dec Qtr)
Price Projection Summary
- DROOY estimated share value at 15 PE is $8.04 (with KBH)
- HGMCY estimated share value at 15 PE is $18.18
- GOLD estimated share value at 15 PE is $13:02
Editor's Note: An assigned P/E of 15 is indeed reasonable vis-à-vis Barrick Gold's 101 P/E.
THE ESTIMATES AND PROJECTIONS ARE BASED ON
MANY ASSUMPTIONS. SOME MAY OR MAY NOT BE VALID.
March 28, 2002
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