Any company hit by a 98 per cent share price fall will struggle to regain lost ground but in the case of Kingsgate Consolidated there are signs of a revival as the once high-flying gold miner reinvents itself as a silver miner, with a big insurance claim as its second-best asset.

For much of its life Kingsgate was a success story on the Australian stock exchange thanks to its prolific Chatree goldmine in Thailand, enjoying a share-price ride from $2.37 in late 2008 to $12.15 just two years later.

Since that peak it’s been a long downhill slide as the stock collapsed back to a low of just 19c in May last year after the Thai government ordered the closure of Chatree.

Capping off a horror run for Kingsgate’s management was an attack by activist shareholders last year who demanded a wholesale boardroom overhaul.

Piece-by-piece, Kingsgate is fixing its problems, starting with the withdrawal of the activists led by a British company called Metal Tiger which has sold its small stake in Kingsgate and abandoned its attempted coup.

Kingsgate Consolidated (ASX:KCN) shares over the past year.
Kingsgate Consolidated (ASX:KCN) shares over the past year.

The future of Chatree, while still unknown, could emerge as a financial windfall for Kingsgate as it pursues the Thai government for compensation under the terms of the Australia-Thailand free trade agreement, and under the terms of its political risk insurance.

Although it’s easy to dismiss as an unlikely event, the insurance claim might prove to be a winner.

There is a recent example of a mining company receiving a handsome payout from its insurers with Mt Gibson Iron able to get back into business at its Koolan Island mine in WA thanks in part to an insurance settlement after the mine was flooded.

But the real key to the emergence of a business — which could easily be called New Kingsgate — is the Nueva Esperanza silver and gold project in Chile.

A pre-feasibility study has already pointed to Nueva Esperanza being a relatively low-cost, and handily profitable development at its potential annual start-up size of 135,000 ounces of gold equivalent (a mix of gold and silver, but mainly silver) for the first five years — plus a life-of-mine average production of 91,000oz of gold equivalent.

The cash cost per ounce of output of has been estimated at $US633 and the all-in sustaining cost at $US840/oz, well below the current gold price of $US1328/oz.

Located in a country with a rich mining history the Nueva Esperanza project is in the final stages of a full feasibility study due for completion in next few months with most essential services secured, including water, power and transport.

While Kingsgate moves closer to developing a new mine there are also indications of movement on Chatree, either through a settlement with the Thai government, or with the company’s political risk insurers.

It’s perhaps going too far to say that Kingsgate’s future is the brightest it has been for some time with hints of further improvement which is why the share price has started moving higher.

From last year’s low of 19c Kingsgate is now trading around 40c and the stock has started to win friends in the broking community, including the Perth-based firm of Patersons which rates Kingsgate as its “best stock idea” in the mining sector.

Broker valuations always need to be taken with a grain of salt, but Patersons’ $1.23 estimate for Kingsgate’s share price over the next 12 months is so far above the ruling market that the rationale behind an implied 200 per cent share price increase demands a closer look.

Patersons’ view is that Kingsgate is “an emerging silver story” with the moth-balled Chatree mine having the potential to “deliver further upside”, which leads to a valuation argument which the broker reckons is “compelling” even if no value is assigned to Chatree.

“Kingsgate has a number of short-term catalysts which should see renewed interest in the stock, including mediation with the Chatree insurers in March, and release of the Nueva Esperanza feasibility study in the current half-year,” Patersons said.

“Our estimates on Nueva see a low-cost silver/gold play of size producing around 5 million ounces of silver annually, or around 90,000 ounces of gold-equivalent.

“Add to this the significant discount to our valuation (zero value attributed to Chatree) and exit from the share register of key short-term seller Metal Tiger, and we feel this company is positioned to perfection for sector outperformance.”

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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