Codan: finding gold?

Codan was originally a manufacturer of high frequency radio products for the Royal Flying Doctor Service. In life and death situations in remote areas, the reliability of its radios saved lives. In fact, in 1980 the United Nations used Codan’s technology for the humanitarian relief effort in Uganda.

But the business never really, err, took off. Codan listed in 2003 but with communications technology in places like Sub-Saharan Africa improving rapidly, the outdated Communications division began to shrink. Revenue fell from $118m in 2005 to $66m in 2012.

A change was called for and in 2007 Codan moved into manufacturing high margin, low volume products. The strategy was acquisition-based, and not entirely successful. Provideo was acquired in 2002 and sold in 2010; Talia Sound and Video was purchased in 2005 and divested in 2010.

But the biggest acquisition of the lot was Minelab at a staggering $70.5m in February 2008. The timing was impeccable: five months before the Global Financial Crisis, Codan increased its gearing to 108%. But Minelab survived and prospered. This division now contributes 67% of revenue and 91% of earnings before interest and tax. Talk about transformative.

Opaque industry

If you’re wondering what happened, the answer lies with artisanal African miners. Artisanal mining is subsistence based and small-scale; grab a shovel and a pan and off you go. But a lot of Africans appear to do it. Estimates of workers involved range from 12 to 20 million. Together, they contribute roughly 12% of total annual gold production.

But recently, many Africans have ditched the old tools in favour of the new, such as the detectors provided by Minelab.

Take a look at the Minelab website and you’ll get a feel for the company’s impact on hobby and artisanal miners. Airline companies usually offer a handful of languages on their website. Minelab offers seven; English, French, Russian, Arabic, Spanish, Portuguese and Chinese. And there are many testimonials from satisfied customers from as far afield as Arizona, Botswana, Northern Territory and Mali.

Mohamed Khalif is a typical example. He lives with his family in Moyale, Kenya and purchased a Minelab GPX 5000. Two weeks latter he happened across 550 grams of gold. As Mohamed says, ‘We just couldn't believe that it could be so easy to use and find so much gold with a GPX 5000, even my father is using the detector to find gold’. Let’s hope Mohamed is charging his old man a decent rental.

Mamady of Keniaba of Mali under the headline ‘Our lives completely changed’ says, ‘I have been looking for gold in the fields for many years and have never been lucky to find such a large nugget. This nugget weighs 1.2kgs and was easily found with my GPX 5000. I would recommend that anybody who is serious about finding gold in Mali should buy a Minelab like I did.’

Sala of Western Australia even uploaded a Youtube video of the half kilo nugget he found with a hired GPX 5000. If Codan’s Minlab website is to be believed, and one should not take these things at face value, it offers a clearly superior product. Miners are finding gold with Minelab technology that they wouldn’t with other machines.

Better technology

Accompanied by a picture of a tiny gold nugget far smaller than your smallest finger, this is how ‘Lunk’ of Arizona puts it: ‘I wouldn't believe it if I hadn't seen it with my own eyes, but the Minelab GPX 5000’s FINE GOLD timing has finally bridged the gap between VLF and pulse induction. At a depth of two inches, this sub-grain gold nugget gave a clear and obvious signal response as I worked an old patch near Quartzsite, Arizona this afternoon that has been hammered by countless VLF operators since the 1980s.’

It’s hard to believe that Codan could sell so many Minelab detectors to dirt poor Africans unless the technology actually worked, especially as the GPX 5000 costs between A$6,000 to A$7,000. That the company manages to sell any at all in a country like Sudan (population 53m, average annual income US$490) is simply flabbergasting. But it’s doing a lot better than that.

Since its entry into the Sudanese market in 2010, Minelab sales rocketed from $45m in 2009 to $107m the following year. Similar incredible growth occurred after the company entered Guinea and Mali in the first half of this year. With further expansion targeting Nigeria (pop. 177m), the most populous country in the continent, and Democratic Republic of Congo (pop. 75m), the growth prospects look astonishing, and realistic.

Codan has spent many years focusing on countries with highly mineralised soils where gold is more likely to be found (Minelab’s gold detectors can detect gold even in the presence of other minerals such as iron) and has established an extensive and respected African distribution network.

Margins are equally impressive. The GPX 5000 is three times more expensive than rival products, which explains why Minelab’s operating margin, currently at around 38%, allows the company to produce plenty of cash and reinvest in new technology, all while paying a small dividend (of 11.5 cents in the past 12 months, amounting to a fully franked yield of 3.8%).

And how much does one have to pay for a business with incredible growth prospects selling high margin products, with a (short) track record of successful international expansion? Try a forecast price-earnings ratio of 10.

Yes, you heard that right. Ten. Even if you assumed every other part of Codan apart from Minelab was worth absolutely nothing, the PER rises to a mere 11.

Unknown unknowns

So why aren’t we recommending it? Because we don’t know how ordinary Sudanese folk can afford to spend $6,000 on a machine; because when we asked the company this question they couldn’t answer it either; and we have no idea whether the users of Minelab machines are finding heaps of gold or people are being sold a pipe dream.

What we do know is that Codan is selling Minelab machines to distributors in Africa who pay up front for them. But after that, who knows?

We’re hoping that you do. If you have any information on Minelab machines, their uses and customers, please leave a comment in the section below or email us at info@intelligentinvestor.com.au. Your confidentiality is assured.

Without answers to these questions, buying this business now would be similar to those African miners speculating on finding gold. For us, it’s not worth the risk. We’ll continue to follow it, but until we find more useful information that confirms the facts about the technology and its customers, this is a stock to AVOID.