Acacia Mining: Get A $1B Discount Thanks To Government ... - Seeking Alpha

Introduction

In just two days, Acacia Mining (OTC:ABGLF) (OTC:ABGLY) lost $1B of its market capitalization after its issues with the Tanzanian government are continuing. In this article, I will explain A) why this fall in the share price is overdone and B) why the claims of government of Tanzania simply can't be right.

Source: stockcharts.com

Acacia Mining is also trading in London with ACA as its ticker symbol. Trading is more liquid there (definitely in the past three days), with approximately 1 million shares per day being traded.

So what happened?

A few months ago, Tanzania suspended the export of gold-bearing concentrate, claiming irregularities in the export process. Acacia Mining is the largest gold mining company in Tanzania, and approximately 1/3rd of its total gold production is being shipped in concentrate rather than doré bars, so it became immediately clear Acacia would be hit pretty hard.

Source: company presentation

The share price remained volatile, but both the company and I thought this would be a temporary issue, and the government and the company would solve any issues that might have led to the export ban. Months went by without any further update, and meanwhile the Tanzanian president ordered a "task force" to investigate the concentrate that was shipped by Acacia Mining.

I originally thought this was a good idea, as this would solve any misunderstandings.

The findings of the presidential committee are absolutely ridiculous

But I was wrong. Two days ago, the presidential committee released its findings, and two elements of the reports were extremely damaging for Acacia Mining.

Source: company presentation

First of all, the committee accused Acacia of understating the gold value in the concentrate. Acacia reported it was exporting 0.9 tonnes of gold in the concentrate, but the presidential committee claims the total amount of gold in the export containers is 7.8 tonnes. Indeed, almost 9 times more!

On top of that, the committee has found some zinc, titanium and iron in the shipments, and whilst this very likely is true, it doesn't matter because all these additional elements have no additional value. Most smelters won't pay for these "by-products," and Acacia Mining will already be happy when the smelters don't penalize them for having these additional elements in the concentrate.

So this immediately rebuffs one of the elements of the presidential committee: Acacia didn't declare the zinc, iron and other low-grade stuff in the concentrate, simply because it doesn't represent any revenue, ergo, no royalties can be paid on something which doesn't generate revenue.

That's half of the issue. The other half is the claimed amount of gold in the shipping containers.

I have to admit my jaw dropped half-open when I saw the committee's accusations, and it took me about 15 minutes to stop laughing and wipe the tears out of my eyes.

Not only would 7.8 tonnes of gold in just 277 containers be ridiculously high, it would also mean the two mines that produce concentrate would be producing almost 10 times more than the official production results.

Whilst I was writing this article, Acacia Mining released a new press release confirming my calculations and conclusions. The press release is written in a passive-aggressive tone, and I'd like to highlight some particularly amusing parts.

The Committee's findings imply that Bulyanhulu and Buzwagi each produce more than 1.5 million ounces of gold per year. This would mean they are the two largest gold producers in the world; that Acacia is the world's third largest gold producer; and that Acacia produces more gold from just three mines than companies like AngloGold Ashanti produce from 19 mines, Goldcorp from 11 mines, and Kinross from their 9 mines.

And

If the Committee's findings were accurate, and Buzwagi produces and sells ten times more gold than it declares, Acacia would be extending mining at Buzwagi for many years. The reality is that Buzwagi is a low grade mine and is running out of commercially viable gold.

Both statements are absolutely correct, and Buzwagi would be closed by the end of this year anyway, as Acacia Mining was unable to find 2g+ material needed to keep the mine running. If the presidential committee would be right, Buzwagi would have an average grade of 20 g/t.

The same thing is valid for Bulyanhulu. Does anyone seriously think these two mines (Buzwagi and Bulyanhulu) produced 250,000 ounces of gold in just one month? And keep in mind the concentrate represents just HALF of the total production at these mines.

Is there a hidden agenda?

There are two different ways to "explain" this mess-up.

One scenario is that this is a deliberate action by the government of Tanzania, by arm-wrestling its gold producers into accepting a new tax deal on exporting mineralized concentrate. This actually was my first guess back in March when the issues came to surface but as we're now almost three months later and Tanzania hasn't hinted at a tax increase at all, this scenario is now less likely.

So without blaming the government of Tanzania, I think this is just a screw-up from some people who are unfamiliar with how gold mining and exporting concentrate works. I think this is just a terrible misunderstanding with horrible consequences.

But fortunately it's a misunderstanding which could easily be resolved. Both the Tanzanian government and Acacia could appoint neutral third parties to re-test the concentrate and figure out what the REAL average gold grade is. This would take 2-3 weeks (if the assay results would be rushed through the labs), and provide a clear result about who's right and who's wrong. One of both parties might lose their face (my bet would be the government being wrong), but I'm sure both Acacia and the government will be able to work around that.

What will Acacia Mining do if this situation persists? What's the impact on Barrick Gold?

But okay. As long as the export ban remains in place, Acacia will have to face the consequences and take the appropriate actions.

Acacia Mining operates three mines in Tanzania: Bulyanhulu, Buzwagi and North Mara. Of these three mines, Mara North is the only mine that produces "pure" doré, and doesn't work with concentrates. This means this mine will be completely unaffected by the concentrate export ban.

Bulyanhulu and Buzwagi both produce a mix of doré and concentrate in an approximate 50/50 ratio. Of these mines, Buzwagi was scheduled to cease mining operations by the end of this year anyway, where after only stockpiled material would be processed. Thus, it would be easy for Acacia to just suspend mining, and restart it after the issue has been solved.

Bulyanhulu is a different story. Even though the total gold production is divided into a 50/50 doré/concentrate ratio, I'm uncertain the doré production would be sufficient to keep the mine operating at the current pace as long as the company isn't allowed to export its concentrate. Should the current issue persist and the export ban remain in place, I would expect Bulyanhulu to be closed by the end of this year. Not only will this be necessary to protect Acacia's cash position, it will also increase the pressure on the Tanzanian government as hundreds of employees will become unemployed.

Source: company presentation

Finally, the North Mara mine is producing doré (and no concentrate) and would be completely unaffected by the export ban. And this will put Acacia Mining in a strong negotiation position. Even if it would have to shut down the two other mines, the North Mara mine is profitable enough to keep the company going. Just to back it up with evidence: in 2016, North Mara produced 378,000 ounces of gold at an AISC of US$733/oz. So the net margin at the current gold price would be $500/oz, resulting in a free cash flow of in excess of $150M. Not bad for a company with a current market cap of less than $1.5B.

Barrick Gold (NYSE:ABX) will also be affected, as it still is Acacia's largest shareholder (Acacia was originally called African Barrick, and was used to spin out Barrick's African assets). As Barrick also is the majority shareholder, it has to consolidate Acacia's production and cost results. Barrick's 63.9% equity interest in Acacia Mining means it would impact Barrick's consolidated gold production by approximately 6%. That's surprising as Acacia accounts for 10% of its guidance.

This would mean cutting 1/3rd of the production would only reduce Barrick's output by 3-4%, but it does look like Barrick is using the worst case scenario and anticipates the temporary closure of the two concentrate producing mines - that's the only way they could come up with a 6% impact.

Investment thesis

I won't be pointing fingers, but I think this is just a huge misunderstanding. There's absolutely no way Acacia Mining has understated its export values by a factor of 10. There literally is a zero percent chance of that being the reason. My guess would be someone made the wrong calculation, and everything will get back to normal within 3-12 months.

I have bought Acacia Mining on the open market today, for the simple reason that even if it would have to shut down the two concentrate-producing mines, the third producing mine would have a large enough impact on Acacia Mining to remain free cash flow positive and even attractive. I see the current drop in its share price as a "blessing in disguise" and a once-in-a-lifetime opportunity - if the Tanzanian government isn't committing "foul play."

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Disclosure: I am/we are long ABGLF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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