There are still considerable risks to the gold miner’s investment case
Thursday 28 Feb 2019 Author: Daniel Coatsworth

Shares in gold producer Acacia Mining (ACA) have shot up over the past week to hit 256.6p thanks to market anticipation it could resolve a long-standing problem in Tanzania.

Several analysts say investors shouldn’t rush to buy following the rally as the stock is starting to look fully valued.

Tanzania imposed a ban in March 2017 on exports of gold/copper concentrate which impacted around half of Acacia’s combined production at its Bulyanhulu and Buzwagi mines. That led Acacia to close Bulyanhulu and change the set-up at Buzwagi to solely produce doré (rough, unrefined gold).

Barrick Gold, which owns 63.9% of Acacia, last week detailed a proposal to settle Acacia’s disputes with the Tanzanian government, including a $300m payment to resolve tax claims in the country.

Investment bank Berenberg believes Acacia could pay the $300m in tranches over a five year period. It estimates the miner has a stockpile of concentrate with a contained metal value of $260m, the proceeds of which could help fund the government settlement and restart Bulyanhulu.

Uncertainty over future tax treatment would suggest Acacia still has negative issues to stomach.

‘The Tanzanian government is taking a hard-line approach on VAT,’ says Berenberg. ‘Mining used to be an exempt industry, meaning that companies paid VAT and then claimed a cash rebate, or used the VAT receivable to offset corporate tax. Since July 2017, the government has stated that producers of unfinished goods will not be  entitled to VAT rebates. The government now classes doré as an unfinished good.’

Acacia argues that doré should be classified as a finished good and has submitted claims for $76m of VAT accruals. Failure to get the VAT rebates on future production means it will incur an additional $4m cost per month while it is operating Buzwagi and its North Mara mines, rising by $2m once Bulyanhulu restarts and Buzwagi closes in 2020.

‘The failure to be able to recoup future VAT payments results in a 95p drop in our net asset value, which singlehandedly wipes out the investment case,’ says Berenberg.

Stockbroker Numis has a ‘hold’ rating and says the shares are worth 1.2 times net asset value which equates to 250p per share – the stock currently trades at 230.5p. It believes Acacia’s assets don’t fit into Barrick’s longer term plan and so the latter may get rid of its shareholding.

Barrick recently merged with former FTSE 100 miner Randgold Resources and earlier this week launched a hostile $18bn all-share offer for Newmont Mining. Newmont itself is trying to buy Canadian miner Goldcorp.

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