Company Profile
Andean Resources is focused on the exploration and development of gold projects in Patagonia, Argentina. The Company's major project is its 100% owned Cerro Negro epithermal gold deposit which was acquired from MIM Limited in January 2004. The project, which is located in the southern Argentinean province of Santa Cruz, is at an elevation of approx 800m above sea level. Andean Resources is embarking on it's third drill season with a 17,000m expansion and infill drill program currently underway.
Event
In a note entitled “More Encouraging Results at Eureka West” Walker explains the reasons behind his Outperform rating and $2.25 target.
Takeaways From The Event
On March 25th/08 Andean reported assay results from the latest fifteen drill holes of the current Phase 4 drill program at its 100% owned Cerro Negro project in Southern Argentina. Commenting on the results Walker writes “Step out drilling at Eureka has shown that Au-Ag mineralization continues to 250m west of the current resource boundary. Drilling has now confirmed that the Eureka West Vein is at least 700m long with an estimated average true width of about 8 to 10m.The Eureka vein is open in multiple directions, and we continue to believe that our 2.9Moz upside resource assumption is well supported. We believe that Cerro Negro gold resources could grow to plus-3Moz, up from 1.5Moz, within the next 18 months. As a highgrade gold system with significant silver content, and hence silver by-product credits, we forecast Cerro Negro to ultimately be developed into a low-cost gold producer from two separate mines, with a minimum 10-year mine life and life-of-mine (LOM) project cash costs in the US$130/oz to US$200/oz range. Eight holes were drilled up to 250m to the west of the current resource boundary. While each hole returned elevated gold and silver grades, highlights include EDD769 which returned 33.5m @21.6g/t gold and 618g/t silver and EDD808 which returned 8m @38.0g/t gold and 696g/t silver. Hole EDD812 was drilled from 250m west of the existing resource and returned 14m @18.6g/t gold and 159g/t silver, and the zone remains open to the west and at depth. Six holes were drilled within the existing resource boundaries, including one of the highest grade assays to date at Cerro Negro. EDD809 returned 15m @51.5g/t gold and 1,099g/t silver.”
With regards to permitting risks, Walker writes “The Cerro Negro project is located in a rural area of Santa Cruz in southern Argentina, and it appears to us that the company has done an effective job of relating to the local community. We believe that Andean should have little difficulty obtaining all of the permits required to develop Cerro Negro. We note that two other mining projects in the province – Manantial Espejo (100% PAAS) and San Jose (51% Hochschild, 49% Minera Andes) – received permitting approval within six months of submitting their environmental studies.”
Walker expects an interim Eureka resource upgrade in April 2008 but adds that “Further in-fill drilling will be required to upgrade the resources to reserves on the Eureka and Vein Zones.”
Development Timeline – Walker expects “construction to start in calendar Q3/09 (Q1/F10) after the completion of a Bankable Feasibility Study (BFS) and project permitting. Following 28 months of construction and commissioning, we forecast the onset of commercial production at Vein Zone in early C2011 (Q3/F11), with production from Eureka coming on stream later in the year. The critical path appears to be long order lead-time for the mill. We have assumed that mill orders are placed in calendar Q3/08, with delivery to site in early C2010. Our schedule also assumes that the permitting process is relatively straightforward.
Walker expects that over the coming months Andean should release a series of positive drill results from Phase 4 of its drill program and within 12-18 month, he forecasts “that the company should complete a pre-feasibility study and receive required project permits for Cerro Negro.”
Valuation and Price Target
Walker values Andean by applying a 1.0x multiple to the average base case and upside valuation estimates. Our NAV for Andean is comprised of the company's two development mines (Vein Zone and Eureka Vein) and its corporate assets/liabilities. In addition, we ascribe value to the company's exploration upside, which we deem to be significant. Our base case valuation is C$1.82/share and our upside case valuation is C$2.25/share. We derive our C$2.25/sh target by applying a 1.0x multiple to the average of these two NAV estimates.”
Walker writes “Andean shares are currently trading at a 0.92x multiple to our base-case NAV, and 0.71x multiple to our upside case. AND’s upside case P-NAV ratio is at a slight discount to the peer group average of 0.77x, while the base-case ratio is at a slight premium. We reiterate our view that that there is significant upside potential to the AND share price, especially if the company can increase its resource base at Cerro Negro in the near term.”
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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