Acacia Mining now a 'binary investment', figures Investec

With shares in Acacia Mining down by more than a third since Tanzania's accusation that the company is grossly underreporting the value of its gold exports, Investec said the company was more of a "binary investment" as it "may not be dealing with a rational administration".

After an investigation of containers held at Dar Es Salaam port by a presidential committee, the FTSE 250 gold miner, which is 63.9%-owned by Toronto-based Barrick Gold, was accused of reporting only a tenth of the true gold content.

The committee claimed to have found gold content of 7.8 tonnes, or 250,000 ounces, which compared to the 26,000oz declared by the company and the 254,552 oz produced in the calendar year of 2016.

"We had expected the concentrate ban to be resolved, anticipating perhaps some penalty in the form of increased tax prepayments," said Investec on Tuesday, keeping its 'hold' rating and setting a 'binary' target price outcome of 512p or 235p.

"However, given the implausible assertions being propagated by the Tanzanian government, it now appears that Acacia may not be dealing with a rational administration and that there may not in fact be an equitable resolution to come.

"Unless some resolution is reached, Acacia now faces the prospect of a protracted and costly legal battle in international courts."

The fall in the share price might arguably reflects an appropriate risk adjustment, analyst Hunter Hillcoat wrote, were it not for the improbability of the government’s assertion.

If Acacia decides to close its Bulyanhulu and Buzwagi mines to focus on its one remaining mine in the country and emerging production from Kenya, his valuation for the shares crashes to 235p as 2018-19 earnings per share forecasts would reduce by more than half, but if the situation is resolved the base case of 512p offers plenty of upside.

"Our sense is that Acacia is now more of a binary investment – it is either worth what it was before this situation, or it is worth the cash that it has in its (non-Tanzanian) banks. We cannot recommend investment in Acacia until the Tanzanian authorities provide some comfort that companies can operate there under predefined agreements."