Acacia remains a 'buy' for HSBC but target price slashed

HSBC cut its target price for Acacia Mining by 47% but kept its 'buy' recommendation in place as the months-long spat with the Tanzanian government still hangs over the company.

The bank pointed out that Acacia looked in a good place before it was slapped with a ban on the gold concentrate exports that make up around 30% of production volumes and then saw Tanzania pass legislation to increase taxes and royalties on mining companies and hit the company with a $190bn tax bill.

FTSE 250-listed Acacia has absorbed significant cash resources in working capital since March and has now signalled it will mothball the Bulyanhulu mine at the end of the third quarter to preserve liquidity and the viability of the other operations until a resolution to the current impasse can be reached.

Although the risk was acknowledged that the Tanzania situation could deteriorate yet further, HSBC's analysts switched from a discounted cash flow to a sum-of-the-party valuation method in line with its broader regional precious metals and mining overage, which includes a weighting to earnings based multiples and a 50% weighting to DCF.

"Our base case estimates assume a resolution of the concentrate ban is reached in 4Q17 – we adjust for higher royalties and assume all mines are in a corporate tax paying position from FY17e.

Country risk premium was upped to 10% and five-year trailing earnings multiples excluding Bulyanhulu and adjust for 16% government ownership, which resulted in a target price of 285p per share, implying more than 50% upside from the 180p price at the time of writing but down from 540p before.

"While an investment in Acacia is not for the faint-hearted, we believe there remains substantial value in the company on a risk-adjusted basis and rate the stock 'buy'."