UK investors may shortly have a new way to gain exposure to emerging opportunities in the gold space in South Korea.
Southern Gold (ASX:SAU) is considering a standard listing on the main board of the London stock exchange with a view to tapping into a deeper pool of liquidity, and perhaps also of boosting the rating.
“We’ll get a better valuation in London,” says managing director Simon Mitchell.
He can state this with confidence because Southern Gold’s partner on two South Korean assets is Bluebird Merchant Ventures (LON:BMV), which has been listed in London for a few years now, and which is currently worth nearly £5.5mln.
The market capitalisation of Southern Gold, by contrast, rings in at A$8.4mln, or £4.7mln, even though it has a much broader portfolio of assets.
“Bluebird has earned into our Gubong project, and at Kochang they’re earning in,” explains Mitchell. “And based on these two assets they have a market capitalisation somewhat higher than ours, even though we have more assets in Korea, and we have near-term production in Australia.”
So what’s up with the Australian market, that seems to discount the valuation of Southern Gold so much? After all, Bluebird’s rating isn’t overly punchy itself.
One explanation Mitchell offers is size.
With the gold price roaring away in Aussie dollar terms, some gold mining companies are much in demand, but investors are still being very selective.
“In the Australian gold space the mid-cap producers are hot,” says Mitchell, “but the juniors are still struggling.”
To some extent too, South Korea is a bit of an unknown quantity to the mining investment community, although there is a strong history of mining there. In London, the ratings are currently more generous and Bluebird has blazed a story-telling trail in terms of getting South Korea understood in the investment community.
The crucial message, both from Southern Gold and from Bluebird, is that there will be cash flow from the South Korean assets within two years.
Initially, says Mitchell, this will be “modest in scale and in build.”
But, he adds, there are some first class epithermal gold targets in South-West Korea, many of which were looked over by Ivanhoe, before all Ivanhoe eyes were irresistibly drawn to Mongolia.
Under the expert guidance of Doug Kirwin, Southern Gold’s senior geologist, Mitchell believes the company has the capacity to deliver some major new discoveries.
“Doug’s found several world-class deposits,” says Mitchell. He was with the Ivanhoe team in South Korea.
Now, the thinking is that the geology of the south west of Korea shows considerable parallels to the geology in the south west of Japan, where there are some world class epithermal deposits.
In particular, says Mitchell, the South Korean targets are analogous to the ultra high grade Hishikari mine, which has showed an average grade of over 40 grams per tonne over the life of the mine.
Of particular interest to Southern Gold are the 3.8 kilometre Beopseongpo target, the multiple vein system at Deokon, and the Weolyu gold silver and germanium project, all in the south west or central part of the country, and all 100%-owned by Southern Gold.
In support of exploration on these major targets will be upcoming cashflow from the joint ventured mines of Gubong and Kochang to the north and north-east respectively, with feasibility studies on both due out shortly.
In addition, there should soon be a contribution too from Southern Gold’s Cannon mine in Western Australia.
This project already has a track record of small-scale production and cash generation, although it’s currently on hiatus as it transitions to underground mining.
At the moment the underground resource is still fairly small, but it’s not been drilled extensively and Mitchell says he expects mineralisation to keep on going down as the company mines towards it.
“We’re quietly confident, subject to drilling that this thing will keep going,” he says.
As it stands the mining costs are reckoned likely to ring in at around US$800 per ounce, so the margins on offer ought to be substantial.
Clearly, Southern Gold will need to undergo a substantial capital raising exercise if it ever wants to develop one of its major South Korean epithermal projects. But for the time being, it looks attractive enough as a play on South Korean exploration and small-scale development, supported by upcoming cash flow to keep the lights on from Australia.
That’s just the sort of model that London investors have traditionally appreciated, so expect the UK welcome to be warm.