Brazil Gold Bar Allure Puts Beadell in Play: Real M&A

A remote mine in northern Brazil is set to produce gold so cheaply that its Australian owner Beadell Resources Ltd. could prove irresistible to a buyer.

Three months after pouring its first gold bar at the Tucano mine in Amapa, Beadell predicts the mine this year will become Brazil’s third-largest producer of the metal. With the benefits of low taxes and labor expenses, the Perth-based company plans to churn out bullion for 32 percent less than the average cost among peers worldwide, according to data compiled by Bloomberg.

The low costs are so appealing that Beadell could fetch 20 percent more than its A$623 million ($650 million) market value in a sale, said Hartleys Ltd. The mine, expected to yield about 200,000 ounces of gold in 2013, may attract bids for Beadell from AngloGold Ashanti Ltd. and Kinross Gold Corp., which both have operations in Brazil, according to Ord Minnett Ltd.

Beadell’s production target “attracts the attention of some very, very serious players, when you get into that kind of territory,” James Wilson, an analyst at RBS Morgans Ltd. in Perth, said in a telephone interview. “It’s a very good target.”

Beadell’s stock surged 19 percent on March 8, and then the Australian Financial Review reported that there was speculation a takeover bid from North America was imminent. The company said later the same day it wasn’t aware of such an offer.

The shares climbed 8.3 percent to 91 cents in Sydney today, the most in two weeks. The benchmark S&P/ASX 200 Index rose 0.2 percent.

Australian Explorer

“We haven’t had any specific approaches,” Chief Financial Officer Gregory Barrett said March 20 in an interview in Hong Kong. “But we’re a pragmatic board. If companies approach us and put an offer on the table that we think is reasonable to take to shareholders, we’ll take it to them.”

Named after Australian explorer Leonard Beadell, the company also owns the Tropicana East deposit in Western Australia, where an exploration campaign is planned for the second quarter of this year. Beadell’s biggest asset is Tucano, which covers 2,500 square kilometers (1,554 square miles) in a Brazilian state mostly comprising unexplored Amazon rainforest.

In addition to gold, Tucano holds iron ore, which Beadell has agreed to sell to the nearby Anglo Ferrous Amapa Mineracao Ltda. Beadell will sell iron-ore concentrate, as well as the iron ore in the gold pit.

That will generate revenue from what would otherwise partly be mining waste, Andrew Shearer, an analyst at PhillipCapital in Melbourne, said by phone.

Cash Costs

“You’re not only getting the cost benefit, you are getting some revenue,” Shearer said. Tucano’s low costs, production forecasts and its 5.1 million-ounce resource “would make Beadell an attractive target,” he said.

Business conditions are also working in Beadell’s favor. In a stock exchange filing on March 20, Beadell said it’s paying a corporate tax rate of 15.75 percent in Brazil. That’s almost half the company tax rate in Australia.

Beadell said it’s also benefiting from labor costs in Brazil, where average personal income in January was about $906. That compares with an average monthly wage of $6,310 in Australia, according to the latest data from the government. About 40 percent of the gold industry’s costs are tied to labor, Greg Robinson, chief executive officer of Newcrest Mining Ltd., Australia’s largest gold producer, said at a March 20 briefing in Hong Kong.

After accounting for the iron ore-related income, Beadell expects to produce gold at Tucano for a cash cost of as little as $450 an ounce, said CFO Barrett. That’s 32 percent lower than the $657 average in 2012 at 17 peers including Newmont Mining Corp., the world’s second-biggest producer, according to data compiled by Bloomberg.

AngloGold, Kinross

Tucano’s scale and production costs will make Beadell appealing to companies including AngloGold Ashanti and Toronto-based Kinross, said David Brennan, an analyst at Ord Minnett. He has a stock-price target of A$1.53 a share for Beadell, valuing it at A$1.14 billion, or 83 percent more than its market value yesterday. Beadell shares have already gained 32 percent inthe last year.

“It looks quite cheap if its earnings per share come out as we think,” Brennan, who is based in Sydney, said in a phone interview. “In that sense, it’s attractive to larger gold producers.”

With analysts expecting Beadell to report adjusted earnings of A$144 million, or 19 cents a share, this year, the stock is trading at just 4.4 times that forecast, estimates compiled by Bloomberg show. That’s cheaper than 96 percent of the world’s precious-metals mining companies with a market value of more than $500 million, the data show.

Acquisition Spending

AngloGold Ashanti, with $892 million in cash as of December, said last year it was discussing potential acquisitions, and smaller mines with large growth prospects held particular interest. In Brazil, the Johannesburg-based company produced 388,000 ounces of gold last year at its biggest mine, AngloGold Ashanti Mineracao, for total cash costs of $696 an ounce.

Kinross, with $1.98 billion in cash, owns the Paracuta open pit mine in Brazil. The company has spent $9.4 billion on 13 acquisitions in the past five years, according to data compiled by Bloomberg. Paracuta produced about 457,000 ounces of gold in 2012 at a cost of $881 an ounce, data on Kinross’s website show.

Louie Diaz, a spokesman for Kinross, declined to comment on whether the company would be interested in acquiring Beadell. Stewart Bailey, a spokesman for AngloGold Ashanti, didn’t respond to a phone message or e-mail seeking comment.

Recently, gold producers have been more likely to reduce the value of their gold assets than acquire new ones. Barrick Gold Corp., the world’s largest producer, on Feb. 14 announced a $3 billion writedown on a Zambian mine it bought in 2011. Kinross announced the same month a $3.09 billion writedown at the Tasiast gold project, an African mine acquired in 2010.

Gold Bulls

Investors have become weary of operational setbacks and soured takeovers. The FTSE Gold Mines Index, which tracks the performance of 27 companies worldwide focused on gold mining, has lost 25 percent in the past year. Gold itself has dropped

2.2 percent, and fetched $1,615 an ounce yesterday.

Still, as central banks boost the supply of money in the world’s largest economies, gold will resume a bull market that’s run since 2001, HSBC Holdings Plc said.

“Accommodative monetary policy has been a mainstay of the gold rally, and until that policy changes, we believe the bull market will remain intact,” HSBC analyst James Steel wrote in a March 18 report. “We remain bullish.”

‘Attractive Asset’

Gold prices will average $1,740 an ounce in 2013, $1,750 the following year and $1,600 in 2015, according to the median of analyst estimates compiled by Bloomberg.

With the Tucano mine in Brazil, where the risk of doing business is lower than in many African countries where gold is also mined, Beadell may draw bids that are 20 percent higher than its market value, Trent Barnett, a Perth-based analyst at Hartleys, said by phone.

“At that level, the buyer, who presumably thought gold prices would remain strong, would be getting a pretty good deal,” he said. “It’s an attractive asset given the low production cost, a potential mine life of 12 years, and the potential of finding more gold.”