TRY 4.17% 12.5¢ troy resources limited

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    Cashed-Up Gold Producer Troy Resources Has Been Kissing A Lot Of Frogs Lately


    By Our Man in Oz



    Wise investors, like wise parents, try to avoid tossing the baby out with the bathwater. But that seems to be pretty much what seems to have happened with one of Australia’s better-run small miners, Troy Resources. Over the past year, as Troy’s share price has sunk from a peak of A$3.99 to recent trades at around A$1.02 the company’s financial position has actually got stronger, not weaker. Sure, gold production at its one-time flagship mine near Sandstone in central Western Australia has declined as closure looms, but that declining production has been replaced by a new gold mine in Brazil. And waiting in the wings is the possible start up of a small, but highly profitable iron ore mine. If that’s not enough to encourage a closer look at Troy, there’s the rather attractive pile of loot in the company treasury which, at the last counting, amounted to A$60 million, or about A86 cents for every share on issue.
    The English translation of this situation is that everything in the Troy portfolio - profitable goldmines, an emerging iron ore mine, exploration tenements, and a spare gold processing plant in storage, which might become a very useful item of leverage at a time when funding mine start-ups has become a lot harder - is all valued by the market at roughly A20 cents a share, or around A$20 million. Minesite’s Man in Oz might be a little naive but he’s actually tempted to pop around to Macquarie Bank to see whether there’s an idle A$71 million (Troy’s current market capitalisation) gathering dust in a desk drawer, which might be deployed on a promise to pay back A$60 million by 5pm.

    Day-dreams aside, the Troy situation is quite remarkable. Not because it is one of many mining and exploration companies trading at levels close to the value of its cash in the bank, but because it is a dividend paying mining company with a 21 year record of successful business and a management team which has delivered five mines over the past 10 years, producing more than 400,000 ounces of gold at an average cash cost of US$210 per ounce. The new Brazilian mine, Andorinhas, will continue strongly in that tradition. It has a targeted output of 50,000 ounces a year at a cash cost of around US$300 per ounce. The iron ore mine which might follow, or which might be sold in return for another cash injection into the company, would return Troy to the status of a two-mine business, one with a sharp eye on costs and a reputation for rewarding shareholders.

    If there is an explanation for the trashing of Troy it lies in (a) the general market dislike for any company defined as a small miner, (b) its status as a company in transition between mining projects, or (c) the recent retirement from the chairmanship of Troy’s founder and driving force, John Jones. The first two factors are general. The third is unique to Troy, a company which arguably developed a stronger following in the UK than Australia. The big block of British shareholders on the Troy share register came in largely due to the tireless communications efforts of Henry Clive as resident company cheer-leader, backed up by flying visits from Jones, with the duo doing an excellent job in keeping the market informed, and the share price up.

    British investors in particular will be delighted to know that Henry remains very much part of Troy’s heritage. There’s a delightful cartoon of the man in the Troy boardroom, dressed in the way Aussies picture all upper-crust Poms, complete with top hat and tails – not that Henry was averse to mixing it with the masses in and around Kalgoorlie. Apart from the pleasure of seeing Henry preserved in working kit, the purpose of Minesite’s visit to the boardroom was to hear from the new man in charge of Troy, Paul Benson, about how the company is performing in trying times. Unsurprisingly, Benson is not amused with the share price, but he is pleased with the way Troy is positioning itself to take advantage of opportunities for the acquisition of gold assets as they emerge.

    “Let’s say we’ve been kissing a lot of frogs lately,” Benson told Minesite. “We can see a number of doors opening because we have the cash in reserve and we want to grow the gold business.” That comment leads naturally on to a question about the iron ore discovery and receives the somewhat ambiguous answer that it could well be sold to local Brazilian investors, or to iron ore customers. Either option could well turn out to be preferable to entering a sector which might be short of raw material today, but which could quickly be filled in with surplus material from the big Brazilian exporters should overseas markets dry up.

    “We definitely see ourselves as a gold company first and foremost,” Benson said. “The issue at the moment is that with Sandstone running down, and Sertao [in Brazil] closed we are about to become a one mine gold producer with an annual output of around 50,000 ounces. Ideally, we think a gold producer should be in the 100,000 to 250,000 ounce range, which is where we want to get to.”

    Streamlining Troy is likely to lead to a number of other changes. A Mongolian exploration play is effectively on care and maintenance, and the board is like to be scaled back, with the retirement of Benson’s short-term predecessor, Tommy McKeith, imminent. It wouldn’t even surprise if the trimming sees Troy reconsider the expense of its Toronto Stock Exchange listing, a listing only taken early this year back when the company still held a big investment in Comaplex Minerals. The sale of that stake in July was the major contributor to Troy’s current cash nest egg – a nest egg which would be a lot smaller today if Troy hadn’t made its exit at C$6.51, as it did. Subsequently the value of Comaplex shares has dropped significantly to a current price of around C$2.50.

    Benson’s view of the outlook for Troy was best expressed in a letter he sent to shareholders three weeks ago in which he lamented the falling share price and pointed out the strong cash backing of the company. “By any measure, I believe that the market is significantly undervaluing Troy,” Benson wrote. “In these turbulent times the flight to liquidity and cash is impacting most markets but it is important for all shareholders to realise Troy is almost uniquely positioned to continue business as usual and is superbly positioned to take advantage of opportunities that no doubt will surface over coming months” – sentiments reinforced personally to Minesite when we caught up with Benson this week.

 
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