Acacia's Delta blues

Like Normandy, Delta is after 'straw hats in winter' - buying cheap gold assets thanks to the poor gold price. Delta founder and Chairman Peter Vanderspuy, while not as active as his Normandy counterpart, has also been something of a deal-maker in the past, amongst other things seeding several gold floats with Delta capital and creating Zimbabwe Platinum Mines (reviewed in issue 35) from Delta investments in that country. Even if the proposed marriage of Delta and Acacia doesn't work out, it indicates Delta's management is willing to make constructive use of the low gold price.

Not so bleak an outlook

What enables Delta to think about shopping for another company now? For one thing, business isn't too bad at present. During 1998/99 the company's gold output was up a creditable 20%, so on 2 September, when Delta turned in its 1998/99 annual result, it was able to report sales 18% higher at $203m, and net profit after tax but before abnormal items up 15.2% to $48.5m. It even paid out a massive 20 cent fully franked dividend, compared to 6 cents last year.

Also, during the year Delta started a new mine, generally deleterious to cash costs, but was able to maintain cash costs at a low 14% or $A199 an ounce. The end of the year saw the company with $62m in cash and gearing at a very comfortable 29.8%, so acquiring another gold miner seems well within reach. Paying with scrip would be an even better option, given that Delta's share price has beaten the ASX's Gold Index by 40.4% from July 1998 to August 1999.

Acacia, on the other hand, isn't so hot. On 27 August, when it reported its result for the six months ended 30 June 1999, it told a dolorous tale of sales down 52% to $131.6m and net profit after tax and before abnormal items at $23.5m, as against $42.2m last year. Half-yearly output was down 11.1% and cash costs were 30% higher at $A334 an ounce (compared to Delta's A$199).

Not running fast enough

So while Acacia has rejected Delta's offer as not providing an adequate enough premium to make it worthwhile, the burden of proof is on Acacia. Its share price has also beaten the Gold Index since June 1998 but only by 22.4%, although still close to where it was at the time of our review in issue 27 (Accumulate - $2.22). Acacia shareholders, battered by several bad years for gold, may be enticed to go with the faster and more entrepreneurial Delta.

Most takeovers see the offerer end up paying more than it originally offered, and we suspect this bid will be no exception, so we recommend subscribers HOLD their Acacia shares. Even though Delta has barely moved since our last look at the company in issue 27 (Accumulate - $2.27), our ACCUMULATE recommendation stands.