Transalta Renewables moves forward,down under (Austarlia)

Transalta Renewables (RNW) is a Canadian utility with a major project in Australia which is where the koala in the caption lives;this project is in the area called South Hedland,The project will be finished in mid-2017.Until then it is a drain on it's capital.The return on equity will be substantial but it is a rather large investment.They have spent $224 million and have another $87 million planned for the remainder of 2016.This will be done with debt as their payout ratio is now around the 100% mark.That aside earnings and comparable EBITDA will be ahead for 2016.This indicates that the assets handed down from Transalta have been a nice mix of profitable assets.RNW goes on to say that "performance is tracking towards the upper end of guidance for 2016".

What Do the Numbers Say?

Both Qtrade (an independent broker) and Yahoo Finance put their estimate of earnings at around $.56 to $.60 per share.But that figure is out of date as the new figures put the best estimate of annual EBITDA at around $300 million based on the 9 month earnings.EBITDA (comparable EBITDA) is according to this blog the best estimate of earnings and earnings per share (e.p.s).So using these numbers this blog predicts e.p.s. of about $1.35 per share.This is a substantial increase over 2015 and without any revenues from South Hedland yet.

Conclusion

It is possible that Transalta Renewables is being a little too optimistic when it gives guidance of $300 million EBITDA for the year.Yahoo Finance forecasts only around $200 million.But RNW shows comparable EBITDA of  $200 million for 9 months so it is more likely that Yahoo is low here.This blog cannot see e.p.s. of less than $.80 for 2016;this means that earnings will increase by at least 33%.The third quarter is not a hugely important milestone for RNW but 2016 as a whole is.It is a transitional year as 2017 will start to bring in earnings from it's Australian assets.It does have some revenues from a natural gas pipeline in Australia now but South Hedland is much bigger.In other words, 2017 will be the first year that RNW has significant earnings from assets not downloaded from Transalta,it's parent.This blog believes,by the way, that Transalta may download more assets in 2017 as it still needs cash as has a significant amount of assets.Also the transfer of shares that comes with a download ensures that Transalta keeps a significant percentage of Transalta Renewables.On top of that we will soon see who has forecasted more accurately - RNW or the financial websites.              use Workathon for financial analysis of utilities

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Newmarket Gold to Kirkland Lake Gold- Lets' dance first

On October13,2016 both Kirkland Lake Gold and Newmarket Gold came out with their quarterly report.Both showed improvement over the previous quarter.Newmarket (NMI) showed production of 56,000 ounces for the quarter and 175,000 ounces for the year to date.Kirkland Lake (KLG) showed production of 77,300 ounces and 208,000 for 3 and 9 months.Both have robust cash balances and improving grades of gold being mined.But in a press release in September Kirkland Lake wants to merge with Newmarket Gold.On the surface this seems to make little sense as there appear to be few synergies here.Most of Kirkland Lake's assets are in Northern Ontario and most of Newmarket's assets are in Australia.But there is a common interest these two share- the huge Fosterville mine assets.

Increased Production

The Fosterville mine showed production this quarter of 37,000 ounces which is 1% below the last quarter.This has allowed 9 month production of only 175,000 ounces for Newmarket Gold and 2016 guidance of only 225,000 to 235,000 ounces.This is a very slight increase over 2015.But in 2015 and 2016 Newmarket has found much more ore at the Fosterville site.Recently they found a new discovery at the Lower Phoenix Gold System in the west lode and in the Eagle Fault System.No new assessment of the size of the deposit has been given but this blog has estimated that the total deposit may be as high as 4 to 5 million ounces with all extensions counted.But production from the mine has not gone above 37,000 ounces for a quarter or 160,000 ounces for a year.This is the problem and Kirkland Lake has seen it and made their bid.

Kirkland Lake Gold looks good

At first blush this looks like a good takeover.Kirkland Lake has offered $2 billion and will get 57% of the new merged company.NMI shareholders will get $5.28 a share for shares now trading at about $3.75 a share.But will shareholders get the maximum value for their shares?There can be no doubt that NMI management is not getting sufficient production from the Fosterville mine and new management might help here.But there are no apparent synergies between the two companies.Can shareholder value be maximized by allowing KLG to take a minority position with their approval?The problem is that NMI at this point does not know how much additional gold is in the extensions from both the Fosterville and the Cosmo mine.So how can NMI management put a true value on Newmarket Gold?It is very difficult at this time according to this blog.

Other Options

Don't get me wrong; I know that this is a "bona fide" offer but NMI has other options as discussed in my post on Blogdaleupsome of September30,2016 see details of options for NMI.Newmarket Gold could approve of a minority position by Kirkland Lake Gold and start to work more diligently to increase it's production at both mines.One possibility is to put a second mine entrance to the large Fosterville mine and increase production.If legal problems exist with the old owner of the Victoria State mines then resurrect Crocodile Gold and put all assets not formerly owned by Aurico Gold into Crocodile Gold and Newmarket would own 100% .However first NMI management must deal with a pretty good offer from Kirkland Lake.This blog notes that no date has been yet set to give approval to the KLG  offer.Maybe there will be no shareholder vote if enough substantial changes can be made in the NMI operation.                 use Workathon for the valuation of resource stocks