BMO takes a fresh look at single asset miners

BMO Capital Markets research team is shaking things up heading into the New Year.

In a report entitled “All Your Eggs in One Basket”, research analyst Brian Quast picks up coverage on a host of single asset gold producers and downgrades a host of others.

The analyst’s top picks are the most battered of stocks that not long ago enjoyed a more exalted market status.

SanGold (SGR-T) comes in as the top pick as the stock “has simply been beaten up too much”, Quast writes. He expects a rebound sometime over the next year and a half.

“On the other end of the spectrum, Allied Nevada (ANV-T) is initiated with an underperform rating, not due to any lack of quality, but simply due to what appears to be market over-infatuation,” the report continues.

Also suffering under a bearish viewpoint are Aurizon (ARZ-T) and Lakeshore Gold (LSG-T), which were downgraded one notch to underperform.

“After taking into account many financial metrics, political risk, management’s ability to meet production guidance, M&A potential, and many other factors, it seems that Allied Nevada, Aurizon and Lakeshore are at unsustainable valuations compared to other single asset producing peers,” the report reads.

Quast takes a slightly more favourable view of Kirkland Lake Gold (KGI-T), Rio Alto Mining (RIO-T) and Brigus Gold (BRD-T), all of which will now be covered and are being initiated with a market perform rating.

Kirkland Lake Gold and Brigus both fit the beaten-up mould as operational issues at their key assets have lead to languishing stock prices. Despite the picture for the companies improving, however, Quast still doesn’t believe they are yet compelling enough to earn a market outperform rating.

As for Rio Alto, the stock is a bit of a victim of its own success, according to Quast, who argues that its recent strong performance has it at a valuation level that doesn’t leave enough room for upside.

Moving over to the group of downgrades, BMO cut Lake Shore Gold’s target price to $0.75 from $1.20 based on the fact that the NPV calculated by Quast declined on reduced confidence in gold grades going forward and the fact that the company won’t expand beyond 3,000 tonnes per day until it can raise the capital to do so. The new valuation means Lake Shore is trading at a premium to its peers.

Aurizon Mines was downgraded and had its target price reduced to $3.75 from $4.40 as Quast sees limited upside over the next year due to a limit on hoist capacity brought on by a deepening of its shaft.

“Normalized mining and production rates appear unlikely to be realized before the end of 2013,” he writes.

Alamos Gold (AGI- T) was also downgraded, but rather than falling to underperform, the company’s stock went down to market perform from outperform and saw its target price cut to $21.50 from $25.00. That reduction came after Quast and his team lowered target multiples to be in line with other single asset producers.

The single asset producers theme is also prevalent in the report.

Quast points out that if an investor bought all of the single asset companies covered by BMO they would have outperformed all but one of the senior producers.

Given the current situation of tight capital markets and a risk-off approach, this may seem strange as seniors should have better access to capital, the best management teams and offer increased diversification relative to single asset producers.

But over the course of the last few years it has been the seniors that have suffered the most, with Kinross Gold (K-T, KGC-N), GoldFields (GFI-N) and AngloGold Ashanti (AU-N) all struggling from either acquisition fever or labour issues.

Not so with smaller, single minded producers.

“A single asset brings a singular focus,” Quast writes. ” Put another way, ten companies with ten management and operations teams still outperform one large company with ten mines, on average.”

The report does not, however, ignore the fact that risks that effect all miners have a more dramatic effect on single asset producers, as a lack of diversification may make it more difficult for a single asset company to slog through tough times.

Other differences between market reactions to seniors versus single asset companies include the fact that both exploration and operational updates are more important for single asset producers. That, in turn, means that a successful investment in a single asset producer requires more operational diligence on the part of the investor than would be necessary for a senior gold producer.