So What About Cortona Resources?

Hopefully you guys saw my post a week or so back where I shared the summary of past Cortona announcements. Analysing this information forms a large part of my background research into a stock before making an investment decision.

If you did read that you may be wondering what happened and if I bought stock. Well, the answer is no. I do believe the share price has the potential to increase, maybe even by 100%, but as you know this portfolio is about uncovering 10 baggers. The potential of CRC to increase by substantially more than that you then come down to future drill results, increase in production (unplanned at this stage) or an increase in the price of gold (IN MY OPINION ONLY – DO YOUR OWN RESEARCH). And although I think all those things can happen, we don’t know if they will and therefore cannot build them into our valuation model.

This contrasts to a company like Kentor Gold where we have a stated policy of developing 3 mines in 3 years and roughly know what level of production we are aiming for. The other thing that put me off CRC is that its NPV (as quoted by management presentations) is $82m at 8%. Firstly, I prefer using a higher discount rate (I use 12% at Andash and 10% for Kentors Aussie Assets) and secondly CRC’s market cap is already $32m odd million and they still need to raise funds.

This is what I posted on Hotcopper:

“Even in the company presentation released today management is quoting a NPV of $82m. (I.e that should be the theoretical value of the company on the basis of their one and only project)

The company currently has 221m shares on issue and as per my post above will prob look to raise approximately $15m ($5 for cap-ex shortfall, $10 for op-ex and exploration).

So say they issue 1 new share for every 3 existing (largely to institutions with a small retail component). This would equate to an extra 73.6m shares. I will be generous and say that they raise at 15cents (i.e. approx current SP).

This would bring in $11,050,000 so a little less than what I think they need (but I'll be generous again).

They also need to give Molly Mines $4m shares at the time of development funding. So i.e. on the same terms above. This equates to another 26.6m shares.

So after all this CRC will have:

221m from existing shares

73.6m shares from the CR

26.6m shares for Molly

TOTAL: 321.2 million shares.

So even if I am generous and use a MC of $100m then that would equate to a share price of 0.311c

At NPV ($82m) only 0.25c

So yes the SP can and probably will go up and I am not trying to say it is a bad project or company, but to generate really strong gains (multiples of hundred, ALA NST) you need to be convinced that A. mine life will be extended and B. production will be expanded.”

Clearly showing that are additional shares have been issued that a target price of 25 – 31 cents is appropriate.

There was also a concern with posters saying that the company would average 50,000 ounces per year when the LOM production is only 248,900 over 6 years. I posted this on Share Scene which accurately summarises my thoughts:

“Hi Guys,

Yesterday I posted a series of questions that required further investigation. As a result I have decided to start a new thread where I can share my answers.

Problem One:

Total production over LOM was stated as 248,900 oz.

Average production p.a. was stated as 50,000 oz. 50,000 oz x 6 (LOM) = 300,000 which is greater than the total amount of production/known reserves.

Furthermore, using the production figures also equated to:

I have Year 1 as 270,000 tpa @ 5.1 g/t Avg / 31.1034768 (troy ounce) = 44,271 oz x
recovery rate of 95.7% = 42,367oz

Years 2,3,4,5,6 = 333,000 tpa @ 5.1 g/t Avg / 31.1034768 (troy ounce) = 54,109 oz x recovery rate of 95.7% = 51,782

Total Year 1 = 42,367
Total (Yr 2-6) = 258,910
TOTAL = 301,277

Obviously there is a discrepancy somewhere.

The Answer:

I believe the average of 50k oz has been taken from the figures on page 2 of the feasibility that says the annual range will be between 36,000 oz and 65,000 oz.

36 + 65 = 101/ 2 = 50.5 avg

However, to stay within the total production (LOM) of 248,900. I have plugged in the following figures:

Year 1 = 35k oz
Year 2-6 = 42,780 oz
TOTAL = 248,900

This also allows my own DFC to match CRC's figures for NPV, Net margin, etc. As a result I know the figures stated above must be what CRC is using in their feaso (give or take a few oz).

Obviously this means that the average production rate will not be 50k BASED ON THE FEASO only.

It is however important to note that the processing capacity of 330,000 tpa, grade of 5.12 and recovery of 95.70% would allow for 51,986 oz to be mined each year.

Therefore the plant has the capacity to achieve 50k oz if additional resources are identified.”

In summary:

I believe it was incorrect to say avg production will be 50k oz, when in fact it will 41,483 (248,900/6). You must remember than the DFS is based on the known resources/reserves at the time, not what could be found in the future.

However has luck would have it 50k is actually achievable given the plant’s capacity and if additional reserves can be identified.”

Finally, if CRC come out and say they have plans to lift production to 75k oz in one year or two then it would be a whole different ball game. But at the moment there is not enough potential upside relative to the risk taken to include it in the portfolio.

As always please do your own research and do not take anything I say as financial advice. Please also note that I am not saying management or the Company are bad. CRC could be a very good investment for some. It does just not fit the criteria I set for my portfolio.