The other day I came across a company, Castlemaine Goldfields (ASX: CGT) who acquired a project off Lihir Gold in March 2010. I have not made any investment in the company but thought I would share my notes on the initial announcement.
5 March 2010 – Acquisition of Ballart Gold Project
Summary:
· Sale of Ballart Project in Victoria for $4.5 million in cash
· Additional 2.5% royalty interest in future production, capped at $50m.
· The sale is conditional on CGT shareholders approving the issue of new equity to raise a minimum of $20m.
· CGT is also announcing its intentions to raise between $20 and $40 in new equity by way of placement to institutions and sophisticated investors.
Highlights:
· Identified priority drilling targets accessible from existing underground development at depths of 400 – 500m, with the closet target some 160 m away.
· Valuable tangible assets being acquired including existing gold mine with 18 km of underground development, a fully commissioned mill, reverse osmosis plant, state of the art laboratory, supporting infrastructure, plant and equipment, real property, store’s inventory and all licence areas.
General Notes:
· CGT is aiming to identify sufficient resources to recommence development and production, targeting a 50,000 oz per annum operation.
· CGT also assumed rehabilitation bonds of $4.1 m.
· CGT is seeking to raise up to $40m through the issue of 1,000m shares at $0.04/share.
· CGT intends to use the proceeds to:
o Complete the announced purchase of the Ballarat Gold Project
o Provide funds for the assumption of rehabilitation bon obligations.
o Conduct drilling and development on high priority targets at the Ballarat Gold Project.
o Accelerate drilling at Castlemaine to delineate additional resources to underpin proposed mine development.
o For general working capital purposes
· The Ballarat Gold Project includes the current mining licences and extensive exploration ground.
· In 2009 production at the Ballarat Gold Project was 105kt at 4.3g/t to produce 13,414 oz.
· In December there was a stope failure resulting in only 50t being mined at a grad of 5.0 g/t.
· Assets include a 600 ktpa processing plant.
· Mining from the South and Central zones failed to deliver the targeted gold production.
Resources:
· Currently 450kt of mineralised reef including 260kt @ 8g/t for 68oz in Lower Llanberris alone.
· Near Development Exploration Target: Approximately 950 kt @ 8 g/t for 200 -400 koz focused on the northern compartments where geological and mining conditions are favourable.
Since then I have undertaken additional research into the company and have decided to hold off investing at this point in time. The reasons for this decision are:
1. Mining gold in Victoria provides a number of challenges given the geological nature of the area. I will be honest and admit that I do not understand the full technical nature of this, however, the company admits that mining in this region is not as easy as other areas.
2. The company does not yet have a JORC statement for the ore body. This is due to the nuggetty nature of the deposit. Once they have a number of months production under their belt they do anticipate being able to release a JORC statement.
3. Without the JORC statement it is hard to value the company because you do not know how many years of mine life the project has.
4. As this is the company’s first production project I await confirmation that they can actually achieve their projected targets. I know that I normally buy in prior to production (for example with my investment in KGL), however, given the challenges noted above I believe from a risk/reward point of view it is best to wait and see with this one.
5. Further research needs to be taken into the company, its management team and future prospects. Based on one 50,000 oz project I don’t think the company will meet my requirement of “5 - 10 x multi-bagger potential”. However they do have a number of nearby projects which could lift them to a production rate of over 100,000 oz which would certainly be more appealing.
6. General market sentiment is still extremely bearish, so even if company specific fundamentals improve it may be possible to buy in at the same price a couple of months down the track.
Obviously the above is not all my research on the company and there is certainly a lot more reading to do. I have also run a few rough calculations including:
Production: | 200,000tpa |
Grade: | 7.5 |
Oz Produced: | 48,231.51 |
Gold Price: | 1,500 |
Income: | $ 72,347,267 |
Cost Per Oz: | $750 |
Total Costs: | $ 36,173,633.44 |
Gross Profit: | $ 36,173,633.44 |
Less: | |
State Royalties* | $ 904,340.84 |
LGL Royalties | $ 904,340.84 |
Tax | $ 10,309,485.53 |
Net Profit: | $ 24,055,466.24 |
*Need to confirm Victorian state royalty rate.
Based on a Net Profit in excess of $24m there could be a re-rating in the share price if we get a confirmed mine life in excess of 5 yrs+. At the moment through it is hard to value the company on a PE of more than 3 x given the unknown quantity of the deposit (there is no point running a DCF on one or two years of production). This valuation would largely put them in line with their current market cap.
As always this post is provided for entertainment purposes and is not intended as financial advice. Please do your own research and consult a licenced financial advisor before making any investment or trading decision.
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