Emerald Resources bucks weakening gold trend as it eyes acquisition opportunities

If Emerald Resources (ASX: EMR) was producing gold in any country other than Cambodia it would be attracting much greater investor attention thanks to its low costs, high-class management and the backing of a specialist gold fund ready to finance takeover activity.

Cambodia, however, is the home of Emerald’s first mine and the key to that comment can be found in the word first because the company has a plan to grow via acquisition, almost certainly with the financial support of Canada’s gold leader, Sprott Private Resource Lending.

Emerald swims against the tide

A glimpse of Emerald’s future, now that it has achieved nameplate output at its Okvau mine, is evident in the way its shares have outperformed the broader gold sector of the ASX over the past month.

While the ASX gold index has fallen by 10% since late August with a weakening gold price, Emerald’s shares have risen by 17% from A$0.83 to A$0.97.

Emerald going up while other gold stocks are going down also shows that some investors are prepared to shrug off the risks associate with Cambodia, a country with little experience of mining and no commercial gold production until Okvau poured its first gold in July.

Profits from Okvau, which is on target to yield at least 100,000 ounces of gold a year, promise to be strong because costs are low with early indications that the mine will deliver between 25,000-and-30,000oz a quarter at a cash cost between US$720-and-US$780/oz.

In theory, given that gold is hanging on to a price around US$1736/oz Emerald’s annual gross profit before tax and other charges will be around US$100 million (A$140 million), handy for a stock valued at A$497 million.

The people behind Emerald

But the real key to Emerald is not a starter project in Cambodia, it’s the people behind the company, their track record, and the presence of Sprott as a high-quality financial backer with the connections to package mining deals

Emerald’s chairman, Simon Lee, is probably not well known to younger investors but he has an enviable track record of making fat profits for anyone who followed him into his last goldmining phase more than 30 years ago, leading success stories such as Great Victoria Gold, Samantha Gold and Equigold.

Lee has assembled a high-class management team at Emerald recruiting a number of executives who once had close connections to one of Australia’s bigger goldminers, Regis Resources (ASX: RRL).

Morgan Hart, a former chief operating officer of Regis and Equigold is chief executive officer of Emerald and one of its biggest shareholders with an 8.13% stake. Mick Evans, a former chief development officer at Regis, is an executive director of Emerald, while Bernie Cleary, Emerald’s operations manager is a former general manager of the Rosemount and Garden Well mines of Regis.

In a way, Emerald has an over-qualified board and management team of the sort you would normally associate with a bigger business such as the A$1.5 billion Regis, and that might be another clue to the expansion plans brewing inside Emerald which might almost be called Regis Lite.

Merger and acquisition strategy

Growth via mergers and acquisitions (M&A) has been high on Emerald’s business objectives since Lee and Hart took control of the company, enticing Sprott to join the party, but only after the Canadian financier had conducted a painfully slow due diligence inquiry which looked closely at the risks associated with doing business in Cambodia, a country lacking a mining culture.

By mid-2019, Sprott was ready to help fund Okvau with a US$60 million project development loan, accompanied by a US$100 million “acquisition and development facility” designed to help “deliver a pipeline of assets to utilise Emerald’s experienced development team”.

Around the same time Sprott signed up as a financier to Emerald an early but failed expansion move was made with an attempt to acquire another emerging goldminer, Capricorn Metals (ASX: CMM).

With Okvau having reached full production and the process plant operating at 10% above its definitive feasibility target, the time is getting closer for Emerald to make its next move, especially as it is getting stronger financially while the rest of the gold sector weakens which should mean that target prices are falling.

Hart said in a statement last week in which he announced Okvau had reached full production that he looked forward to positive cash flows “providing the opportunity to grow the company through exploration and acquisition”.

Lee followed in his chairman’s letter in the company’s annual report sent to shareholders last week in which he said: “Our goal is to become a multi-asset gold producer and we continue to assess viable global gold projects to accompany the Okvau gold mine.”

Cambodia might be a country without a history of goldmining and Okvau might be its first mine, but the profit potential of Okvau is undoubted as are the growth ambitions of Emerald and its over-qualified management team supported by a well-connected financial friend in Sprott.