Kentor Gold - HeliTEM Survey of Gabanintha Gold-Copper Project

Yesterday Kentor Gold released the results of a HeliTEM Survey of the Gabanintha Gold-Copper project. As a result of the feedback received from this survey Kentor will proceed with a exploration drilling program.

Modelling of the targets will commence this month and will provide Kentor with estimates of size and orientation to help direct follow-up drilling. The proposed drilling with Gabanintha will form part of Kentors overall 20,000m RC program across their Burnakura and Gabanthina projects.

In is also important to note that this regional exploration is in addition to the drilling planned to increase the upgrade the existing Gabanintha inferred resource which currently stands at 203,000 oz of gold.

Overall it was a positive announcement, but certainly not enough to exit the market by any stretch of the imagination. We all eagerly await news on Andash and the Jevois upgrade.

Link to announcement.

KGL: Company Insight - Significance of Outstanding Drilling Results

Yesterday Kentor Gold released an announcement on the significance of the Jervois drilling program through the use of a Company Insight interview. As an investor I really appreciate it when companies use this type of channel to provide additional information to the market. They typically provide a more general overview of the company’s operations and help clarify management’s thoughts and opinions on events that are likely to shape the company’s progress.

The first key bit of information focused on Jervois and the potential for an increase in the JORC resource estimate. We already knew this was on the cards but it today’s announcement stated that “recent drilling has confirmed that the mineralised structure is still continuing strongly at 450 metres below the surface”. The future potential of Jervois cannot be underestimated in my opinion with the Managing Director, Simon Milroy, stating “I believe that we are at the early stages of understanding a large mineralised system with the clear potential to be a major base and precious metals mine.”

Additional drilling results from Reward, Green Parrot, Bellbird and Bellbird north can also be expected in the near term. This should help maintain the current rate of news flow, something that I view as very positive and a significant contributor towards underpinning the share price in the short term.

The most exciting news for Kentor (at least in the short term) is skill the development at Burnakura. Today’s announcement has clarified the company’s previous guidance of completing the refurbishment of the existing plant and small expansion by  mid-2012 to June 2012. The announcement then goes on to outline an additional three phases of expansion. From this we can see that the heap leach operations are going to proceed (underlining my base case valuation of KGL), that there “will be an expansion to 500,00 tpa” by installing a second ball mill and that they are considering treating gold and copper-gold ore from Gabanintha at Burnakura.

As soon as we receive further guidance on the 500,000 tpa upgrade (in regard to timeframe and cost) I will update my discounted cash flow analysis to incorporate this. It stands without reason that a doubling of plant capacity from 250,000 tpa to 500,000 tpa has the potential to increase the value of the Burnakura operations and Kentor Gold by a significant margin.

Finally the most important line in my opinion is “we are planning to have three mines in operation with gold and copper production from Burnakura and Jervois in Australia and at Andash in the Kyrgyz Republic. Not only does this underline the future potential of the company (from zero to three mines in three years), but it talks positively about the Andash project. As I have mentioned in my previous posts if management had any major concern about Andash I do not believe they would refer to it in such a positive manner. It is my opinion that Andash is a greater than 50% chance of going ahead, however for the purpose of my valuation I will still attribute this project with a zero value.

Link to the announcement.

Kentor Gold: Analysis on Gabanintha Copper-Gold Project

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.