CLSA Antam (ANTM IJ) – Cibaliung acquisition looks good at first, but…

Antam (ANTM IJ), comment from Olie – Cibaliung acquisition looks good at first, but…

The plan to acquire Cibaliung. ANTM announced the plan to acquire Cibaliung gold project from ARC exploration (ARC). Note that ANTM has been a minority partner, with 5% stake in the project. Should the deal is completed, expected within 4-6 months, this would be the first successful acquisition for ANTM. *needs various approval to finalise deal

What about Cibaliung. Key parameters:life of mine of 6 years, with ore production rate of 220,000 tonnes per annum. Annual gold production could reach around 2.2t(70,000oz), and average life of mine cash operating costs of about US$US320/oz. Therefore, once Cibaliung is in production, it could boost Antam gold production by 80% to around 5t per annum.

At first, it looks like a good deal. We believe the sale was forced by the creditor, ANZ, after ARC was unable to secure enough funding to continue developing. Antam would therefore takeover the loan, amounting US$65m, and would pay virtually nothing for the equity. EV/reserves would be valued at around US$150/oz, quite reasonable.

There are some caveats though. 1) There is no production and Antam would need to spend additional capex. 2) We understand that ARC has been trying to sell Cibaliung project for quite some time without much success. As also stated in Antam press release, Cibaliung has had significant cost over runs for years. 3) In fact, Antam had little confidence on Cibaliung in the past, as the company decided to dilute its equity portion in Cibaliung, down from 25% to currently only 5%.

Not sure if it is a gold play. Antam is considered by some as the only so-called gold play in Indonesia, with 30% of revenue comes from gold. We disagree:

1) Gold contribution to revenue has increased over time simply because nickel price collapsed. 2) The rising gold contribution to revenue does not come from production. Antam has been doing some gold trading, as its total gold production has been flat at around 2.8m tonnes for quite some time while sales volume doubled YoY to 9.8t in 2008. Note that there is very thin margin in gold trading. 3) Operating costs have doubled in the past 3 years. Therefore the spike in gold price would not be able to help much and the company is at risk of booking operating loss. Still a SELL