14:32 07Aug09 RTRS-FUND VIEW-Baker Steel sees value in mid-cap gold miners
* Baker Steel fund sees value in mid-cap gold miners
* Says mid-tier miners have better profitability prospects
* Sees more merger & acquisition activity in the sector
By Atul Prakash
LONDON, Aug 7 (Reuters) - UK-based Baker Steel Capital Managers has increased its exposure to medium-sized gold miners and says such companies are much better placed to offer a cheaper exposure to strong gold prices than industry majors.
"We like those companies which are offering investors the most attractively-priced entry into gold production exposure because in a higher price environment that will directly lead to profitability," said Trevor Steel, managing partner of the firm, which manages about $600 million.
"At the moment, that tends to be in the mid-cap companies, where many of them remain on very low price-earnings ratios and price-cash flow ratios. Many of them are well below 10 times earnings," he said, adding many larger gold miners were trading on 15 to 20 times earnings, and some much higher.
Steel said a good example of a mid-tier miner offering value was Resolute Mining , which plans to produce 330,000 ounces of gold in 2009 from mines in Australia, East Africa and Mali and has a market capitalisation of about $200 million.
By comparison, Randgold Resources has slightly more production with about 450,000 ounces of gold, but is valued by the market at more than $5 billion, he said.
"That gap is way too wide. Resolute is much cheaper than Randgold despite both companies having core producing assets in Mali, West Africa. Such market discrepancies are a legacy of the upheaval in equities markets last year and much inefficiency remains for investors to profit from."
He said another interesting stock was Moto Goldmines , which has one of the world's largest undeveloped deposits.
"Although Moto's current published resource is around 20 million ounces, many share our view that the deposit will yield up to double that amount of gold with further evaluation," he said.
"There are very few new large gold discoveries being made and when you have a project like Moto, you see a lot of competition to acquire those assets."
Randgold and Red Back Mining had shown interest in acquiring Moto, but Red Back said this week it would not pursue a bid after Moto backed an offer from Randgold.
Steel said Red Back had declined to match Randgold's offer but still had time to try to trump it, given the offer still has to be approved by shareholders.
"We believe that the Randgold bid is unattractive at the current price as it doesn't fairly reflect the true potential of Moto's assets," he said. His fund has a 4 percent stake in Moto.
Steel said there was likely to be an increase in merger and acquisition activity as quality assets are scarce, and with the profitability of gold companies better than for some years, there is more cash around to spend on acquisitions.
Costs have fallen between 5 and 10 percent in recent months due to lower oil prices, but gold prices remain strong. Spot gold was at $961 on Friday, 30 percent higher from its level about nine months ago.
The firm invested about $75 million to refinance a dozen gold miners in the first six months of this year.
"A few months ago, these companies were desperate for funds and there were only a few sources (of money)," Steel said, adding Archipelago and Norseman were examples of timely and profitable refinancings undertaken by the fund.
"Our portfolios are still pregnant with value as a result of cheap purchases we were able to make," said Steel. The firm's Genus Dynamic Gold Fund is up 270 percent since its launch in April 2003. It has gained 72 percent so far this year, against a fall of 49 percent in 2008.
Steel said opportunities in private resources companies were arising again as the gap between the valuations of listed and private firms was widening with a recovery in stock markets. Its Genus Capital Fund is looking at a number of private deals. (Editing by David Holmes) ((firstname.lastname@example.org; +44 20 7542 6189; Reuters Messaging: email@example.com))
Keywords: FINANCIAL FUND/BAKERSTEEL
Friday, 07 August 2009 14:32:57RTRS