The Speculator

Scotgold has tapped into a rich funding vein after striking a deal with specialist merchant bank RMB Resources.

PORTFOLIO POINT: Scotgold investors have plenty to smile about after a funding deal with RMB Resources to fast-track its Scottish gold project.

Shares in our portfolio stock Scotgold (SGZ) scored a 20% lift in price last week ahead of this week’s announcement of a funding deal with RMB Resources to advance its Cononish gold project in Scotland.

RMB Resources (RMB) is the global resources merchant banking business of the FirstRand group, one of the largest financial services groups in South Africa. It focuses on providing equity, quasi-equity and debt financing to small and mid-size mining and exploration companies.

Scotgold, which has a dual listing in Australia and on London’s AIM-board, confirmed RBM would provide a £1.18 million (A$1.8 million) financing facility to take the Cononish project through to its final development decision.

The funds will be used mainly for infill drilling to de-risk the project by bringing more of the inferred resource into the measured category. This will improve confidence in that part of the resource to be mined in the early years of the mine, thereby enhancing the debt capacity of the project.

The news saw Scotgold’s share price lift from a week’s low last week of 5.6c to 7c on a week’s turnover of 376,000 shares, although the share price is still well short of its 12-month high of 11c.

At 7c, Scotgold’s 197 million shares carry a market capitalisation of $13.8 million with around $400,000 remaining cash in hand.

Its Cononish project is contained within 3,200 square kilometres of granted leases and exploration licences covering the highly prospective Dalradian terrain across Scotland’s south-west Grampians.

The current resource for the project, estimated in accordance JORC (Joint Ore Reserves Committee) code, stands at 163,000oz of gold and 596,000oz of silver in the measured, indicated and inferred categories (using a 3.5gm/tonne gold cut-off).

Planning approval for development of an underground mine at Cononish has been granted. As reported in this column on April 27, Australian Mining Consultants (UK) Ltd completed a development study which demonstrated that the project was commercially attractive with a cash operating cost of around US$575/oz.

Project offers robust returns

The study suggested “robust project economics” using a conservative base-case gold price of $US1100/oz, with $A35.7 million pre-tax cash flow over the life of the mine, a pre-tax internal rate of return (IRR) of 24.8% and a net present value (NPV) of $A16.2 million.

But with a gold price of $US1,655/oz (at the time of releasing the late April report), the development study projected a pre-tax cash flow over the life of the mine of $A100.7 million, a pre-tax IRR of 62.5%, a NTV of $A61.9 million and payback after 18 months from the start of production.

The volatile gold price has slipped since then, of course, but at the time of writing stood comfortably above $US1,600/oz. That leaves a wide margin for a positive cash flow over predicted operating costs of $A575/oz in both gold price scenarios.

Many other targets remain to be tested beyond the planned initial mine.

The financing facility is a convertible note structured as a secured corporate loan with share options for RMB to acquire Scotgold shares at a cost equal to the value of the loan if all the options are exercised. The strike price for the RMB options is £0.045.

Scotgold has mandated RMB to arrange a gold pre-payment facility to fund development of the Cononish project. Scotgold has also agreed to mandate LN Metals International Ltd to market the gold-in-pyrite concentrate which will be produced at Cononish to end customers.

LN Metals is a London-based global physical merchant and agent operating in the non-ferrous and minor metals markets and has an advisory business that delivers specialist services to the junior and mid-tier sector. LN Metals is 47% owned by RMB Australia Holdings Ltd.

The planned infill drilling program is expected to be completed by October, 2012. Results of an initial eight holes are awaited with a further nine-hole program to start soon. The company expects an updated resource estimate before the end of the year, with a final production decision due in January, 2013, and a start on development of the project in March.

ASIC queries GoConnect goodwill valuations

The Australian Securities and Investments Commission has queried the value of goodwill generated and recorded in the December half-year accounts of internet entertainment company GoConnect (GCN).

The goodwill, amounting to $4.3 million, was the result of the acquisition of assets of PWL Entertainment Ltd and Cashmere Media Pty Ltd in July 2010.

Resolution of the dispute is likely to end up before the Administration Appeals Tribunal (AAT). As a result of the uncertainty, GoConnect shares fell from a high last week of 2.9c to 1.9c yesterday.

In a report to the ASX yesterday (July 3), GoConnect explained the goodwill represented the value of intellectual properties related to the content, associates rights and licences of the two music businesses acquired. The properties were applied towards the founding of GCN’s IPTV network uctv.fm and, as the company declared, “are of substantial value” to the enterprise.

The company continued: “To date, more than $80 million of attributed securities in value, as previously reported to the ASX, in Priority One Network Group Ltd and First Mongolian Investment Holdings Ltd, are being distributed to qualifying GCN shareholders in return for GCN providing for the use of the intellectual properties and the uctv.fm network to the Priority One and First Mongolian partnerships.”

GCN stated the company relied on “Fair Value less Costs to Sell” as well as “Value in Use” impairment testing in Accounting Standard AASB 136 to support its asset and goodwill balance sheet values.

Under Accounting Standard AASB 136, GCN insists a company can rely on Fair Value less Costs to Sell and/or Value in Use to test and support its asset an goodwill values.

“Having applied both these tests, GNC believes it is in compliance with AASB 136,” the company claims.

ASIC reviewed the company’s financial statements and decided that the company’s goodwill should be written off entirely and, failing that, ASIC would make a determination against the company prohibiting it from raising additional capital without the use of a prospectus until June 24, 2013.

GoConnect will now appeal to the AAT against ASIC’s decision, but has also assured both ASIC and shareholders it has no plan for additional capital raising with or without the issue of a prospectus. The company adds it has a sufficient credit facility in place and expects revenues to be generated from a number of existing business units including a major wi-fi media platform that will be activated within the next four weeks.

This uncertainty is likely to impinge on GCN’s share price for some time until the appeal is resolved, and unfortunately The Speculator holds 250,000 shares.

-The Speculator portfolio, as at July 4
Company
Code
No of shares
Bought
Purchase price
Current price
Current value
Image Resources
IMA*
15,000
31/12/2010*
0.362 av
$0.285
$4,275
Viralytics
VLA
19,995
20/12/2011
$0.308
$0.280
$5,599
Robust Resources
ROL
6,000
31/12/2010*
$1.49 av
$0.850
$5,100
Scotgold Resources
SGZ
27,500
31/12/2010*
5.5 av
$0.069
$1,898
GoConnect Ltd
GCN
250,000
31/12/2010*
0.034 av
$0.019
$4,750
Minemakers
MAK
20,000
25/01/2011*
0.425 av
$0.150
$3,000
Platsearch
PTS
20,000
8/02/2011*
$0.130
$0.070
$1,400
Broken Hill Prospecting
BPL
30,000
22/02/2011*
$0.132
$0.105
$3,150
Austpac Resources
APG
40,000
2/03/2011*
$0.060
$0.029
$1,160
Potash West
PWN
11,050
30/03/2011*
$0.200
$0.220
$2,431
Cortona Resources
CRC
25,000
13/04/2011*
0.146 av
$0.087
$2,175
Golden Gate Petroleum
GGP
408,500
20/04/2011*
0.0145 av
$0.013
$5,311
TNT Mines
TNT
4,440
22/07/2011*
$0.000
$0.250
$1,110
Quickstep Holdings
QHL
20,000
23/11/2011*
$0.185
$0.155
$3,100
Orpheus Energy
OEG
19,250
17/08/2011*
0.164 av
$0.120
$2,310
Black Mountain Resources
BMZ
10,000
17/04/2012
$0.300
$0.240
$2,400
Gullewa
GUL
40,000
22/05/2012
$0.063
0.082
$3,280
 
Total value of portfolio
$52,448
Cash at bank
-$7,530
Total
$44,918
 
Portfolio change since January 3, 2012 (started with $50,000)
-10.16%
All Ordinaries change since January 3, 2012 (then 4155.22)
0.27%
 
*Shares held from previous year, carried at their December 30, 2011 closing price.

David Haselhurst writes a monthly column for Money magazine. Please note that he is not able to provide personal replies to emails.