16-Sep-2011
RHG, NORTON GOLD FIELDS
A beacon in a sea of sharemarket volatility
ASX Code RHG, NGF
Amid all this volatility there is a shining beacon delivering strong returns. Not surprisingly (from this column's perspective) it's a small cap, and one we have mentioned before – the re-named Rams Home Loan Book, RHG.

At 53c, RHG's stock price has almost doubled in the past year, and it has delivered a 79c dividend with 34c worth of franking credits, paid in early June. But wait, there's more. It is currently due to pay out a 10c fully franked dividend that gives the stock a dividend yield of 18 per cent, which is as high as 27 per cent, if you include the franking credits. The ex-dividend date is this time next week (23 September) and the payment date is 14 October.

The stock has a market cap of $165 million, yet it produced a net profit for the year to June 30, 2011 of $74 million. This profit will fall as its loan book runs down, but it is forecast to produce a profit of 15c a share in the current financial year, and 11c a year the following. Long-term shareholder Geoff Wilson of Wilson Asset Management reckons this will translate to dividends of 8c and 6c respectively, and that the book probably has about five years to run.

To top this off, its current cash level is in the region of 34c a share, which is 65 per cent of its current share price, and net tangible assets in the region of 45.5c a share.

Another shareholder is Karl Siegling, whose fund Cadence Capital owns over 13 per cent in the mortgage book. Siegling says RHG is worth as much as 70c a share. To get to this valuation you would have to discount the prospective cash the company should pay out, plus include franking credits.

In any case, it appears the big risk to RHG is if the residential property market falls completely out of bed, or you get a massive amount of defaults – to the point where it is not covered by insurance.

The founder and chairman John Kinghorn is stepping down from the board. He won't be sad though, after parachuting off with $44 million having sold his stake cum-dividend in early May.

For the rest of us, it appears that there is still value to be wrestled out of RHG's book.

The Chinese to the rescue at Norton Gold Fields

Some argue that Australians should give more credit to the Chinese for saving their bacon, and those that must be doing so right now are Norton Gold Field shareholders and its managing director, Willie “Andre” Labuschagne (although he's a South African).

When this column looked at the miner with operations near Kalgoorlie in April this year it was one of Australia's biggest gold producers, yet its shares were trading at 15c and its market cap was $100 million. What was getting Labuschagne and the shareholders hot and bothered was the $85 million of debt Norton was lumbered with – a legacy of a $140 million hedge facility it had with the failed investment bank, Lehman Brothers.

Most pressing was that Norton (ASX code NGF) had to pay $30 million to Merrill Lynch by 4 September in order to avoid punitive charges and interest rates.

Enter the Dragon. In late July Zijin Mining Group provided the company with $27.7 million. For its troubles it owns just under 17 per cent of Norton, having been issued shares at 20c a pop.

Fast forward to today, and Norton's stock has climbed about 45 per cent from April and now trades at 21c. The group has reduced its debt facility with Merrill Lynch to $51 million, which the group should be able to fund.

In the end though, the big value here is in what's in the ground, which is why the Chinese have come to the rescue. One invested fund manager reckons the stock is worth north of 60c. What underpins this is the 5.9 million ounces of gold that Norton believes lies in its 1050 square kilometres exploration area.

As we said in April, there is big value to be unlocked here. Based on its enterprise value (net debt plus equity), Norton trades at $36 for every ounce of gold, in terms of resource, on its books. This compares to the average for Australian gold producers of $135 an ounce.

The Chinese could be on to something.

SOURCE: FAIRFAX

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