Gold has been among the worst-performing asset classes in recent years but Indonesia's Rajawali group hopes equity investors will view the initial public offering of its gold mining operations as an opportunity to invest at the bottom of a new up-cycle.

Roadshows for the Rp3.5 trillion to Rp4.6 trillion ($295 million to $379 million) PT Archi Indonesia IPO began on Thursday and will continue through to November 25 when the deal is scheduled to price. Allocations will take place on December 11 after a domestic offering running from December 8 to 9.

Listing on the Jakarta Stock Exchange is scheduled for December 15.

The Rajawali group is offering 1.879 million shares in Archi Indonesia at a price range of Rp1,895 to Rp2,445 per share, according to a term sheet seen by FinanceAsia. The public freefloat will constitute 47.5% of the company's enlarged share capital, with primary shares accounting for 40.4% and secondary shares 0.7%

This means Archi Indonesia will have a market capitalisation of $621 million to $797 million. The company was formerly listed on London's secondary AIM market as Archipelago Resources but was taken private last September on a valuation of $533 million.

At that point, its assets did not include the copper and gold Wonogiri mine in Central Java. Funds from the IPO are being used to increase its stake in the asset from 15.75% to 70.74%.

Sources close to the deal say the Rajawali group chose to switch the listing to Jakarta because it wants the company to be closer to domestic institutions. A second consideration is Asian retail investors' marked cultural preference for gold assets compared with their Western counterparts.

Pitched high

The group is being marketed on a 2015 EV/Ebitda range 6.3 to 8 times. In the global listed gold miner rankings this places Archi Indonesia between 14 to 22 out of a possible 53 on a consensus earnings basis.

At the top end of the targeted valuation range Archi Indonesia would rank on a par with US-listed AuRico Gold, which is currently trading at 8.1 times 2015 EV/Ebitda and has a similar profile to Archi, albeit on a slightly larger scale. It has a current market capitalisation of $887 million and largely operates in Mexico.

At the bottom end, it would rank alongside America's New Gold Inc, which is trading at 6.1 times and has a market capitalisation of $1.9 billion.

                                                    

There are no direct listed comparables in Indonesia itself. But investors may look at Freeport-McMoRan, which derives about 8% of its global revenues from gold sales, just over 90% of which come from Indonesia. It is currently trading at 5.7 times 2015 EV/Ebitda.

Further afield there are several listed gold mining companies in Hong Kong and China, including Shandong Gold, Zhongjin Gold and Zhaojin Gold. These tend to trade at higher multiples than similarly sized companies in Australia and span a 2015 EV/Ebidta range of 8.7 to 10.6 times. 

Shinier outlook?

The biggest consideration for general investors will be whether the gold cycle is turning. For sector specialists it will also come down to the company's balance sheet strength.

Gold is currently trading around the $1,160/oz level, near its lowest level in four years. Between December 2008 and June 2011 prices in the precious metal rose 70% to a high of $1,900. During the global financial crisis, gold was initially seen as a safe-haven asset and a potential hedge against the inflationary consequences of quantitative easing.

However, in 2013 prices fell 28% and so far this year gold is down another 5%. Analysts say sentiment is currently being hit by a series of deflationary economic readings, the strengthening US dollar and some technical selling.

The key is whether the rout is now done or whether gold prices face a second leg down that takes them back to the $700 levels they last saw towards the end of 2008.

Chinese investors have also pulled back from gold, partly as a result of the government's anti-corruption drive. After supplanting the Indians as the world's biggest buyers for the first time in 2013, they fell back to second place again during the third quarter of this year, according to figures from the World Gold Council. 

Year-on-year Chinese purchases fell 37% during the third quarter. However, bankers believe Asian demand will return in the fourth quarter as seasonal buying kicks in.  

The World Gold Council also recently estimated that Chinese demand will rise by 20% over the next three years.

As one banker said, "Over the long-term, this stock is partly a play on rising per-capita incomes in Asia. The growing middle class are the world's most avid buyers of gold for a whole host of cultural reasons."

For specialist mining funds, balance sheet quality is one of the key determinants for buying during a weak market. Companies with defensive balance sheets tend to be favoured, compared with companies on a strong growth trajectory in a rising market.

Prior to the IPO, Archi Indonesia had $280 million of debt on its balance sheet. Based on the current IPO price range that equates to a debt-to-market capitalisation ratio of 45% to 35%. This is higher than comparables such AuRico Gold and New Gold, which currently maintain ratios of 27% and 24%, respectively - in line with the industry's 26% average.

However, Archi is using the majority of funds from the IPO to pay down debt, which will take it closer to these levels. 

Low-cost producer

Like many Indonesian gold miners Archi benefits from extremely low production costs, which make it much more able to withstand lower gold prices than its comparables. Its current cash cost per troy ounce stands at $674. This compares with $791 per ounce for AuRico Gold.

Major mining companies, including the world's largest Barrick Gold, currently average a cash cost of $597 per troy ounce, compared with $778 for mid-market miners and $787.8 for junior miners.

Archi Indonesia's cash cost is expected to remain stable over the next year because savings at its main mine will be offset by production from a new project. At its Toka Tandung mine, costs per ounce are expected to drop to the $600 level next year thanks to a big reduction in the company's electricity costs.

However, the cash cost per ounce at its new Wonogiri mine is expected to come in around the $900 level initially. This mine will account for between 10% to 20% of production output over the 2016 and 2017 financial years.

For 2014, Archi is forecasting annual production of 149,800 ounces of gold-equivalent, rising to 150,300 in 2015 before climbing steeply to 276,000 in 2016 and 296,800 in 2017. 

AuRico Gold is forecasting 2014 production of 228,000 ounces of gold-equivalent.

As of June 30, the company reported confirmed gold reserves of 1.3 million ounces and a known resource of 2.7 million ounces. In terms of grade, this currently stands at 0.53 grammes per tonne. 

Joint global coordinator for its IPO are Bank of America Merrill Lynch, CIMB and Standard Chartered with domestic lead managers comprising CIMB, Danareksa Sekuritas, Mandiri Sekuritas and Valbury.