The other week I provided my thoughts on the Burnakura Gold Project that Kentor Gold plans to have up and running by mid 2012. Today I will be summarising my notes and research on the Gabanintha project which is located only a short drive from Burnakura.
The Gabanintha Copper-Gold Project is located 45 km south-east of Meekatharra in Western Australia. The project was acquired as part of Kentor Gold’s acquisition of Jinka Minerals and covers 90km2 (including the abandoned workings of Gabanintha Gold Mine).
The mine originally operated between 1987 and 1991. During this time it produced 180,000 oz of gold, including 157,800 oz (1.52 Mt @ 3.23 g/t) which was open pit mined by Dominion Mining Limited. In addition further exploration was carried out by Reward between 2004 and 2008 with further mineralisation located at the Yagahong, Canterbury and Tumblegum prospects. The most recent mining activity by Dominion focused on the gold mineralisation, however copper was identified in the Terrells Pit and Kentor Gold plan on drilling this area in the future.
Given this projects close proximity to the Burnakura mine Kentor Gold plans to undertake a feasibility to study the possibility of adding flotation capacity to the Burnakura treatment plant. This would allow the processing of the copper-gold concentrate from the Gabanintha ore.
Since the acquisition Kentor Gold has defined a resource of 203,000 oz of gold at an average grade of 1.4 g/t (using a 0.5 g/t cut off) and 450,000 tonnes of copper at 0.5%. The gold resource includes a high grade component of 1.3 Mt at 2.9 g/t for 121,000 oz.
To arrive at a value for Gabanintha I completed a Discount Cash Flow analysis and ran some back of the envelope figures to arrive at a value. I also reviewed some research by Intersuisse which supported my analysis. However for the purpose of simplicity and to be conservative in my analysis I have valued Gabanintha based on an in ground value of the resource.
To do this I have applied an average value of $50 per oz of gold in the ground. A report by Edison Investment Research suggests that this value is fair, if not undervalued, based on their research into the market capitalisation of gold stocks listed in Australia, Canada and London.
For the Copper component I have also relied on an in ground value. Copper is currently around US$9,000 per tonne, however to take account of global market uncertainty I have discounted this to $7,500 per tonne. I have then taken 2% of this or $150 per tonne for the in ground value calculation. By way of comparison the $50 in ground value per ounce of gold equates to 2.7% with gold at $1,850/oz.
Therefore my calculations for Gabanintha are as follows:
Gold component: 203,000 ounces with an in ground value of $50 per ounce = $10,150,000
Copper component of 2,250 tonnes (450,000t @ 0.5%) with an in ground value of $150 per tonne = $337,500
Total Value: $10,487,500
This is a significantly more conservative value than if I applied the same discount cash flow analysis outlined in the Intersuisse report. I do believe that the value to be obtained from Gabanintha will be significantly higher than the $10.487m above. I will however utilise this conservative approach for now and update my research once Kentor Gold gets closer to production. My research to date is all about providing a base case valuation for Kentor Gold.
Once I finish my write up you will see that the sum of parts (individual projects) amounts to more than the current market capitalisation (fully diluted) in my opinion only. This provides some downside protection and highlights that even when valued in an extremely conservative way there should be future upside to the current share price. As the projects (Burnakua, Gabanintha and Jervois) move closer to production there will be a move by the market to value each project on its future cash flows. This will allow for a corresponding increase in the share price and therefore meets my main investment criteria of offering “multi-bagger” potential (all in my opinion only, Do your own research).
In summary the value of Burnakura and Gabanintha (the only projects I have written about to date) is as follows:
Burnakura High Grade Operations (DCF valuation): $45.8 million
Burnakura Heap Leach Operations (DCF valuation): $33.9 million
Gabanintha Gold-Copper Project (in ground valuation): $10.5 million
Conservative Cash Figure: $35 million
Total: $125.2 million
Obviously these calculations are based on the company achieving specific operational and production milestones. There is obviously project, financing, commodity price and exchange rate risk involved. With all my research I try and put forward a conservative stance, however please do you own research and consult a financial advisor before making any investment decision.
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