There were few major surprises in the interim earnings result of Kingsgate Consolidated ((KCN)), as underlying earnings of $33.8 million were only slightly below market expectations due primarily to higher costs during the period.
What was more of a surprise was the announcement of an equity raising, Kingsgate seeking to raise $70 million from institutional investors via an issue of shares at $7.10 each. Proceeds will be used to fund expansion and development of growth projects and to pay down some debt.
The issue itself surprised RBS Australia, as the broker notes the announcement of a 10c per share dividend means a payout of $15 million, which is 20% of the funds to be raised. This makes the raising appear a discretionary move rather than a necessity, especially as the upcoming debt maturity of $40 million could be met from cash flows and bullion on hand.
BA Merrill Lynch has also questioned the move, as development of Kingsgate’s silver development from 2013 will likely require more than US$500 million. This implies either further debt or equity will need to be raised, or Kingsgate will consider a potential listing of its 51% stake in the Chatree project.
A potential Thai IPO for Chatree, the need for final approval for an expansion of the project and feasibility studies at Nueva and Bowdens mean management at Kingsgate has a lot going on in the view of Citi.
While all of these are potential positive catalysts assuming successful outcomes, Citi cautions there remains potential for time slippages in relation to the above projects and this makes Kingsgate a higher risk play at present.
Previously RBS had factored in a 10% premium to valuation for Kingsgate given expectations of production growth and positive earnings momentum. But with a capital raising at an 8% discount to the previous closing price this premium is no longer justified, so RBS has adjusted its model.
Minor changes to earnings estimates and the removal of the previous valuation premium mean RBS’s price target for Kingsgate falls to $7.11 from $7.85. Others in the market have reacted in a similar fashion, as BA-ML’s target has also fallen to $7.30 from $8.75. The consensus price target for Kingsgate according to the FNArena database now stands at $7.44, down from $8.97 prior to the result.
With price targets lower value in Kingsgate is also being brought into question. Citi now sees better value elsewhere via the likes of Perseus Mining ((PRU)), Regis Resources ((RLL)) or Medusa Mining ((MML)) and so have downgraded Kingsgate to Sell from Neutral.
RBS has followed suit and downgraded to Hold from Buy to reflect both weaker cash flows and capex concerns in relation to development projects. As with Citi there is better value elsewhere in the view of RBS, the broker preferring Alacer Gold ((AQG)) for mid-cap exposure. BA-ML has also downgraded to Underperform f