Kingsgate Consolidated

We’ve been critical of Kingsgate’s diversification. The company operates the sensational Chatree mine in Thailand, but has recently made acquisitions in Chile, New South Wales and South Australia. Chatree remains the most important asset; a six million ounce resource; it should be able to produce 200,000 ounces of gold annually at a cost of less than $600 an ounce. Although low grade, gold is mined in a series of open pits that can be easily expanded according to the gold price. Chatree, therefore, offers upside from higher gold prices without the risk of high production costs.

The future of Kingsgate, however, is tied to new assets as much as it is to Chatree. The Chilean and New South Wales mines will need additional capital and it’s too early to comment on their success (or otherwise). But the Challenger mine in South Australia remains a concern. Cash costs, at over $950 an ounce, are too high. As Kingsgate accesses deeper ore, costs will deteriorate unless grades improve. There hasn’t been enough evidence of higher grades yet.

There are still reasons to consider buying Kingsgate; Chatree remains a fine mine and the company is arguably a takeover target now. Regulatory battles in Thailand, however, limit our enthusiasm. Thai authorities insist that Kingsgate has broken local environmental laws, although the company has denied it. The government is also threatening new regulation although it’s hard to determine how serious it is.

Our calculations suggest Chatree is worth between $4-$6 per share (depending on the discount rate). Around $4, the stock may be worth revisiting. For now, with the share price down 17% since 11 Apr 12 (Under Review – $6.06), it’s in the too hard basket. We’re opting to SELL and CEASE COVERAGE.