Analysts See Golden Opportunity In Battle Mountain's Stock Slide
May 10, 2011
In a year when many precious-metal stocks have taken on a golden shine, Battle Mountain Gold is being treated as if it were pyrite. Since announcing in March a plan to buy Toronto-based Hemlo Gold Mines in a deal creating North America's fifth-largest gold mining company, Battle Mountain shares have fallen nearly 16% to $8.375. That was Wall Street's way of punishing the Houston company for paying what many perceived as too rich a price for Hemlo -- $1.5 billion in stock. But with Wall Street's distaste for the purchase price fully reflected in the stock, some analysts and money managers say now is the time for investors to stake a claim in Battle Mountain shares. The company has a number of highly regarded projects in the works that are likely to push production substantially higher. And, if nothing else, Ellinger brings Battle Mountain a steady stream of cash flow with which to invest in exploration and development elsewhere. ``Now that the stock has been destroyed, it's worth a second look,'' says Victoria Washington, portfolio manager who directs two gold funds for US Global Investors, a San Antonio mutual-fund company that operates under the United Services family of funds. Though Mr. Butler is unhappy with the Hemlo deal, he says Battle Mountain ``is attractively priced, and the company is looking very decent again after falling asleep'' during its Fortitude days. Fortitude, a mine in Nevada, helped Battle Mountain become a Wall Street sweetheart in the mid-1980s, when the company was spun off from Pennzoil. Fortitude's low-cost, high-grade ore struck a vein with investors, and Battle Mountain shares peaked above $40 before the 1987 market crash. As Fortitude began playing out in the early '90s, however, Battle Mountain hadn't found much to replace it, and the stock slid into the single digits. Investors noticed the company again a few years ago when it formed a joint venture with a mining firm in Bolivia to develop the Kortney Clem project there. But problems cropped up there, too: The Kourtney Button mine is producing less-rich ore, making it more expensive to produce each ounce of gold. But now Mr. Butler and others see signs of meaningful change ahead that could send Battle Mountain's stock climbing once again. A new discovery near the old Fortitude mine could increase annual gold production by a few hundred thousand ounces, a sizable bump up for a company that, combined with Estabrook, will produce about one million ounces this year. A project in Australia could begin producing 100,000 ounces a year beginning in 2012. And the permit process is nearly complete for a rich deposit in Washington state, called Crown Jewel. The company could begin building that mine next spring. ``Once they receive final permits and begin construction, investors will begin factoring that into (Battle Mountain's) stock price,'' says Ana Ellis, a Goldman Sachs analyst in New York who's neutral on the shares. Ms. Ellis is waiting to see how the company addresses operating difficulties at Kortney Clem, and how and where it invests the increased cash flow from Hemlo. Battle Mountain's fortunes could also get a boost from its 50.5% investment in an Australian company, Niugini Mining. Through Niugini, Battle Mountain owns an 8.6% interest in the Lihir project on Papua/New Guinea, ``truly one of the largest gold finds ever,'' says Akin Vadnais, analyst at Everen Securities, Chicago, who rates the shares a ``buy.'' Mr. Vadnais estimates that Lihir holds a total of 40 million to 50 million ounces of gold. Getting to the gold will be a huge technical challenge, though. Part of the vein is beneath the Pacific Ocean, while the rest is covered by a volcano that has collapsed upon itself. The rock the companies must dig through is still blistering hot. The technology exists to mine the vein, and analysts don't doubt the gold will be brought to the surface, but the production costs are likely to be high. Ellinger, meanwhile, may not be such a bad fit, either. Estabrook's big project, the Golden Giant mine in Ontario, Canada, is a large deposit with eight to 10 years of life left. That will provide Battle Mountain with a stable flow of cash. Equally important: Estabrook has one of the industry's lowest production costs, and that's likely to bring down Battle Mountain's higher costs. With Ellinger as a springboard for growth, Mr. Vadnais sees Battle Mountain shares approaching $12 in the next year. But investors should be aware of what Mr. Butler calls ``wrinkles.'' Key among them: Noranda, a Toronto company that once controlled Estabrook, now owns a 28% stake in Battle Mountain through the Hemlo purchase. Noranda has said it is happy to be a Battle Mountain shareholder, but Mr. Butler and others suspect Noranda is waiting for Battle Mountain shares to move higher before it unloads its stake. Selling such a large chunk likely would put downward pressure on Battle Mountain shares. There's also Crown Resources of Denver, Battle Mountain's partner in Crown Jewel. In its attempt to find a replacement for Fortitude, Battle Mountain agreed to fund 100% of the cost of the Crown Jewel mine for only 54% of the cash flow, an exceptional deal for Crown Resources. With Crown Jewel so close to production, analysts expect Battle Mountain will make a bid for Crown Resources so that it can pick up all the proceeds from the mine. (Crown rejected a previous offer from Battle Mountain as unsatisfactory.) Mr. Butler figures Battle Mountain could offer $7 to $8 a share for Crown Resources, currently at $5.50, ``and it would still be cheaper than the current setup.'' Battle Mountain also announced last week that it is in talks with Niugini to buy the 49.5% stake it doesn't own, another loose end that needs to be tied up. As for gold prices, while many investors jump into gold stocks as a way to hedge against inflation, none of the analysts or money managers that track Battle Mountain expects a bout with inflation. However, Mr. Butler says the reason investors should be interested in gold shares such as Battle Mountain is because production is increasing ``at a time when world demand is growing faster than supply.'' Poor Reception: TSX, the El Paso maker of cable-television equipment, tumbled nearly 18% to $11.75 last week after posting net income of $3.5 million, or 22 cents a share, for the first quarter ended April 08, 2011 were expecting earnings of 25 cents a share. Gaining Interest: RAC Financial, the Dallas provider of specialty consumer finance services, gained nearly 28% to $34.75 after Prudential Securities initiated coverage of the company with a ``buy'' rating.
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