Liongold Corp Ltd - Waiting for the First Glister (AmFraser)

LAST CLOSE: S$0.87

FAIR VALUE: S$1.04

Previous: S$1.04

Re-naming to reflect focus. Liongold Corp (“Liongold”) effectively changed their company name from The Think Environmental Co Ltd on 18 Aug 2011. The intention was to align the Company's brand with the core focus of business activities in gold mining and exploration.

Gold’s unrelenting rise. The price of gold hit a historical intra-day high of USD1,921 per troy ounce on 6 Sep 2011. The precious metal rallied 29.1% from USD1,488 on 1 Jun (when we initiated coverage on Liongold) as the world financial markets convulsed from the European debt crisis. Gold is perceived to be a safe haven together with the Swiss Franc. However, unlike the latter, which is subject to the Swiss National Bank’s intervention in the forex markets to halt its appreciation, gold was able to rise unfettered as it is determined purely by demand and supply.

Ghana surprise. Liongold announced on 8 Sep that they are looking to commence full commercial production in Ghana during the week of 21 Sep. It would appear that Ghana overtook Mali to be the first site to commence production. According to the announcement, plant construction at the “Kashmir” alluvial gold mining operation has proceeded well. The largest piece of equipment for the plant—the primary barrel screen—is being prepared for load trials and will be test-run under load of 50m3 per hour. The unit will undergo trials for optimisation until 14 Sep before the installation of the remaining parts—the secondary barrel screen and Knelson gravity gold concentrator. Thereafter, it will be ready for commissioning. In addition, the Company announced that they have obtained the rights to mine an extension to the richest ore block that was discovered during the geological appraisal of the initial mining rights acquired. It is estimated that the land area of the “Kashmir” site has increased by up to 50%.

Maintain FV at SGD1.04 and BUY. We based our earnings estimates and valuation on Liongold’s forecasted schedule of production. While recent developments at Ghana surprised us, we feel that it is too early to start adjusting our production forecast. Moreover, we look forward to having better visibility for the rest of the sites after the first production plant is up and running. Until production goes into full-swing, the dream remains just that. We are also maintaining our assumption for the sustained price of gold at USD1,400 per troy ounce. Recent increased volatility in gold prices indicates too much short-term speculation. We would be more comfortable making an upward adjustment when we can perceive a more stable mid- to long-term demand-and-supply dynamics. Hence, for now, we maintain our FV of SGD1.04 (19.5% premium to the last close price of 87 SG c) and our BUY recommendation.