A final play for Dioro
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This Australian stock report, authored by in house equity analysts under the supervision of Fat Prophets CIO Angus Geddes, was originally released to our private members only. We have unlocked this legacy equity research report to provide the public with a transparent, historical view of Fat Prophets’ original fundamental and technical analysis.
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Dioro Exploration spent much of last year in the thick of a takeover tussle. As Members may recall, Avoca and Ramelius each made a play for the company. Avoca’s efforts won it 44.85% of the company, with options over a further 3.2%, while Ramelius succeeded in securing 36.4%. It appears we are now in the endgame, with both Avoca and Ramelius increasing their offers and declaring them final.
Ramelius was the first to declare its offer final, doing so just before Christmas, on 18 December 2009. It is not allowable under takeover law to revise an offer once it’s made final. Avoca has taken advantage of this by trumping Ramelius with an offer of its own, although it is not yet open to acceptance.
Under the terms of the new deal, Avoca has offered Dioro shareholders $0.65 in cash and 0.325 Avoca shares for each Dioro share. Based on Avoca’s current share price of around $1.96, the latest offer values Dioro at around $1.29. This compares to around $0.83 for our previously recommended Avoca offer and $1.25 for Ramelius’ all-scrip offer.
We viewed Avoca’s previous offer as preferential and recommended that Members take the opportunity to transfer their Dioro stock to that of Avoca last year. In hindsight, it would obviously have been preferable to sit with Dioro and take advantage of the subsequently revised offers.
At the time though, we did not expect the takeover battle to heat up in the way that it has. We have long supported Dioro, primarily due to the Frog’s Leg asset and their extensive exploration tenements. However, the current deals raise the question in our mind as to whether Avoca is stretching its offer a little further than is justified.
As we highlighted in previous notes, a combined Avoca-Dioro would create an ASX 200 WA-focused gold producer with three gold mining operations in close proximity and a combined resource base of approximately 4 million ounces. While this is an attractive prospect, let’s not forget that Dioro holds only a 49% interest in Frog’s Leg. The miner’s JV partner La Mancha Resources calls the shots at the project through their 51% stake.
“…we do have some misgivings with regards to Avoca’s possibly over-exuberant pursuit of Dioro. Nevertheless, Avoca’s successful development of Trident and our view that Avoca will extract greater value from Dioro’s assets than current management outweighs our concerns.”
A minority stake is of course less valuable than a majority holding. Given the enthusiasm with which Avoca is pursuing Dioro though, we can only surmise that management feels there is a good chance of eventually securing full control. This is certainly possible.
La Mancha has a large number of exploration projects around the world, which capital from the sale of Frog’s Leg could accelerate. If Avoca gets control of Dioro, then Avoca will have the pre-emptive right to the whole of Frog’s Leg should La Mancha be a seller.
We recently spoke with an Avoca director who reiterated that Avoca really liked the Frog’s Leg mine. Avoca believes that it would be a better manager of the asset than La Mancha Resources. Avoca also believes the project’s exploration potential is under-exploited.
Managing Director Rohan Williams’ performance to date gives us no reason to question management’s judgement. The production ramp-up of the company’s Trident development is coming along very well indeed. Trident produced 50,952 ounces of gold in the three months to December 2009. This represents the third successive quarter with production over 50,000 ounces and takes the company’s first half production to 101,536 ounces.
The Trident processing plant continues to operate at an efficient level, with average plant recovery rates an encouraging 97% through the quarter.
The plant processed 300,030 tonnes of ore at a reasonable grade of 5.3 grams per tonne. The actual grade of the mined ore was in fact a little higher at 6.2 grams per tonne. This was due to the processing of 52,193 tonnes of stockpiled low-grade ore during the period.
In terms of the full year outlook, Avoca remains on track to produce more than 190,000 ounces of gold at a cash cost of $452 per ounce.
From a charting perspective, since breaking out from a descending triangle in early November 2009, Avoca reached a high of $2.26 in early December 2009.
Avoca has since retraced these gains, finding support at the short-term uptrend line of $1.715. Encouragingly, momentum has now switched to the upside, as shown by the series of higher lows and higher highs.
As evident on the daily chart, should prices break above the key psychological barrier of $2.00, we would anticipate an accelerated boost of upward momentum, with an initial target of $2.26 (the December 3 2009 high), followed by $2.40.
In summary, we do have some misgivings with regards to Avoca’s possibly over-exuberant pursuit of Dioro. Nevertheless, Avoca’s successful development of Trident and our view that Avoca will extract greater value from Dioro’s assets than current management outweighs our concerns.
Avoca will remain held in the Fat Prophets Portfolio.
