On 30 June 2009 Kentor Gold announced that they had secured the option to Purchase an 80% stake in the Andash Gold-Copper Project in the Kyrgyz Republic.
The project was considered “development ready” with the feasibility study, environmental and social impact assessment completed, mining licenced issued and mining and construction fleet purchased. The mine was projected to produce approximately 60,000 oz of gold per annum and 5,000 tonnes of copper. The JORC compliant resource estimate stood at 680,000 oz of gold and 77,000 tonnes of copper.
The cost of acquiring the 80% stake in the Andash project was broken down as follows:
· US$10,000,000 to purchase the stake in the mining project.
· US$5,000,000 to purchase the fleet of mining and construction equipment.
The major benefit of the Andash project is its low mine costs. Total cash costs per ounce stand at US$29/oz Au after Copper credits and royalties (as per they July 2010 investor presentation) and can theoretically go negative depending on the price of Copper.
Now I have analysed the Andash project using my own DCF model, however given the uncertainty of the project I am assigning it zero value when arriving at a combined value for Kentor Gold.
However, should the project proceed there is the potential for significant upside in my opinion. The July 2010 presentation stated the base case NPV was US$130 million based on a Gold price of US$1,000 and Copper at US$2.75/lb. At a price of US$1,300/oz gold and US$3.50/lb Copper the project would have an NPV of $241 million as the below table shows. Obviously current prices (gold and copper) are higher than this with the NPV easily north of $350 million.
The summary of all Kentor Gold projects is now therefore 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
Jervois Base Metals Project (in ground valuation): $23.3 million
Andash Gold-Copper Project: $0
Conservative Cash Figure: $35 million
Total: $148.5 million
This equates to a base case scenario of 13.2 cents per share on a fully diluted basis. It is important to note that this is the lowest value I could assign to Kentor Gold and totally ignores the increase in value that will flow from Gabanintha, Jervois and Andash coming online. It also ignores future upside from an increase in the resource estimates for each project and the potential of Burnakura to fund future project (i.e. limited risk of dilution).
The reason why I conducted my research this way is because it highlights that even when taking an extremely conservative approach Kentor Gold represents good value in my opinion. If/When it moves closer to production at Burnakura, Gabanintha, Jervois and Andash then we will see a significant re-rating of each project that is more in line with the NPV of each project. As per the Intersussie report and my previous commentary this could represent a share price of 48 cents plus.
As always the above information is not advice or a recommendation to make any investment. You should conduct your own research and consult a licence financial advisor before making any investment or trading decision.
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