Delta may yet have its day
That kind of pessimism is actually a help to the likes of Delta Gold, the share price of which has declined 14.7% since our last review in issue 46 (Accumulate - $2.25). It's helping to make it cheaper to buy other, low-cost gold mining operations. On 1 March the company announced a friendly scrip-based merger with Ross Mining. Delta is to issue one share for every 4.5 Ross shares, a move that will vault Delta to fourth place among Australia's largest gold producers, and may help reverse negative sentiment towards this well-managed outfit.
Guadalcanal offensive
Ross is a much smaller company than Delta - it's presently capitalised at less than $90m as against Delta's $400m. Which would explain why investors haven't responded to the news with much excitement - at least with Acacia, whom Delta tried to takeover last year before losing out to Anglogold of South Africa, a much larger company. In fact it was bigger than Delta itself. There is also scepticism about the problems Ross may bring to Delta.
That's because Ross' main asset is the Gold Ridge gold mine in the Solomon Islands. This mine will add 1.7 million ounces of reserves, and expected production of around 150,000 ounces a year (as against Delta's 600,000) for at least a decade. Not only that, production costs will be well under A$300 an ounce (quite cheap by industry standards), but as usual there's a catch - this time it's political problems. The mine, on the island of Guadalcanal, has been the scene of clashes between ethnic groups over who really are the traditional owners of the Gold Ridge land. This has been a source of legal problems for Ross.
Strong support
But it isn't fazing Delta, which planned to look for gold opportunities in the Solomon Islands anyway. Gold Ridge is a significant project with strong support from the Solomon government, which has brought in former Fijian PM Sitiveni Rabuka to mediate on the ethnic tensions, and increased police presence at the mine.
Meantime, a merged Delta/Ross can look forward to 750,000 a year in gold production at under A$300 an ounce in 2000/2001, which should provide for a healthy bottom line once the merger is consummated. More importantly, the company will have a not-insignificant 4.4 million ounces in reserves and 13.1 million ounces in resources that can be leveraged to make other acquisitions should gold show signs of life any time soon.
With Central Banks apparently having stopped making gold a whipping boy, and demand remaining above available supply, all that stops a sustained upswing in the mysterious yellow metal now is that lack of major monetary instability. If that were to happen, Delta would be a big beneficiary. The recent share price slide isn't enough for us to change our ACCUMULATE recommendation and we recommend BUYING below $1.50.