Gold explorer Soon Mining Ltd (ASX:SMG) seeks to raise $5m in its Initial Public Ofeering (IPO) next month.
Positioned to notch up its third consecutive year of decline, the price of gold is hovering more than 40 per cent below its 2011 high. The contraction has had a cataclysmic impact on the shares of gold mining companies, with popular indices such as the ‘HUI’ more than 80 per cent lighter than their bull market peak. So how has the industry responded?
Despite the price contractions, annual world gold mine output has continued to rise. After posting a sixth consecutive increase during 2014, output remains 20 per cent higher than pre financial crisis levels when the prevailing gold price was US$900/oz. Hence if the cure to gold’s current bear market is a supply response, the mining collective faces further work ahead. However with equity prices in the sector already having suffered such massive declines, could the coming listing of Soon Mining provide a contrarian opportunity?
The minerals exploration company is principally focused on Ghana, Africa’s second largest gold producing nation. Its principal asset is the Kwahu Gold Project, which covers 83km2, incorporating a mining license and certified mineral resources. The mining license has a tenure extending until 2027, whilst the resource consists of an alluvial gold deposit in the order of 150,000ounces, classified as indicated.
Proceeds from Soon Mining’s float are scheduled to facilitate development of a small scale mining and processing operation incorporating the existing resource. The planned ten year operation has potential to generate in the order of 10,000 ounces per annum, with more scalable exploration targets within the license likely to attract surplus cash flow.
Principal risks surround the small scale nature of Soon Mining’s development plan and present state of gold equities. Valuations in the industry are depressed and economics associated with development of the Kwahu alluvial deposit is uncertain. The long dated nature of the Company’s mining concession and presence of mineralisation are attractive qualities, however execution risks associated with small scale mining developments may challenge interest for the Initial Public Offer.
Company: Soon Mining Ltd
ASX Code: SMG
Shares on Offer: 25million
Listing Price: $0.20
Market Capitalisation: $30million
Listing Date: October 16th
Author: Tim Morris
Sep 28, 2015
Having studied Commerce and Science at the University of New South Wales, Tim began his career in an analytical capacity with Wise-owl. Tim has conducted over 500 corporate valuations and appraisals, specialising in pre revenue assets and emerging markets. For the last five years, his Equity Capital Market insights have been featured as part of a weekly column in The Australian and regularly features on Sky News, CNBC, ABC and Bloomberg TV.