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.
Click here to view previous coverage of Andean Resources (AND: TSX) from March 30, 2008
Event
In a note entitled “Cashed with New Eureka West Resource – Andean Sets Sights on Larger Potential at Cerro Negro” Kaip explains the reasons behind his Sector Outperform rating and target price of $2.60/sh.
Takeaways From The Event
Responding to news that Andean has just completed a $40 million bought deal, increased its Eureka West vein resource to 1.4 million ounces of gold and 23.7 million ounces of silver, Kaip writes “The recent financing establishes a solid cash position to advance Cerro Negro exploration. The updated Eureka West resource includes a 14% increase in tonnes, a 93% increase in gold and 194% increase in silver grade that highlights future resource growth.”
Kaip goes on to say “With the resource estimate confirming our thesis that Eureka West will increase in size and tenor, we continue to model 2.5 million ounces of gold and 40 million ounces of silver (5.3 million tonnes grading 14.38 g/t gold and 232 g/t silver). Our modelled reserve for Eureka West reflects 54% increase in size, a 17% increase in gold and 9% increase in silver grades above the current resource estimate.
Resource growth was driven by a combination of increased confidence through infill drilling, an eastward increase in gold and silver grades, and less onerous capping of high-grade gold and silver samples. The revised Eureka West resource released mid-April was prepared by Micon International Ltd. and was based on drilling results during the past six months. Based on the new resource estimate, additional drilling has translated into a 14% increase in tonnes, a 119% increase in gold and a 194% increase above the Q4/07 resource estimate (624,000 ounces of gold and 8 million ounces of silver) to 1.4 million ounces and 23.7 million ounces respectively. At a 3.0 g/t gold equivalent cut off, the Eureka West contains indicated resources of 2.5 million tonnes at 12.88 g/t gold and 235.3 g/t silver with 974,000 tonnes of inferred resource at 10.72 g/t gold and 156.5 g/t silver. Resource growth was driven by a 14% increase in tonnage, a 93% increase in gold and 159% increase in silver grades. The gold equivalent cut off is based on US$650 per ounce gold and a silver price of US$12.50 per ounce.
Gold and silver mineralization at Eureka west is largely restricted to well defined, subvertical quartz vein zones that are located at the contact between hanging wall andesite and footwall volcanic rocks and locally occurs within stockwork zones and brecciation in the wall rocks. With a refined understanding of the Eureka West zone, the resource estimate was separated into two distinct veins, informally named the 1.0 and 1.1 veins. The two veins are near vertical, strike in a north-westerly direction, and are closely spaced with the main Eureka West vein (1.0 Vein) hosting the bulk of the resource at higher grades. Indicated resources within the 1.0 Vein total 1.8 million tonnes at 15.79 g/t gold and 297.8 g/t silver for 916,000 ounces of gold and 17.3 million ounces of silver. 1.0 Vein grades are above those used in our valuation and support our thesis that grades will continue to improve with further delineation. The 1.1 Vein is located in the footwall of the 1.0 Vein.
The average resource grades were estimated using the ordinary kriging method with average densities determined for the two veins of 2.39 tonnes per cubic metre for the 1.0 Vein and 2.37 tonnes per cubic metre for the 1.1 Vein. The resource estimate was calculated on 58 holes, of which 40 were core drill-holes and 18 were reverse circulation holes. High grade gold and silver values for the 1.0 and 1.1 Veins grades were capped at 175, 85 or 22 g/t gold and 2,800, 1,000 and 450 g/t silver for different portions of the veins, in order not to distort the grade of the deposit with the influence of the highest grade composites. The capping cut the grades of about 1% of the composites and was derived using statistical methods and resulted in about a 3% to 8% decline in grade relative to the uncapped values. A lower cut off grade of 3 g/t gold equivalent was used. Assays were composited to regular 1 metre intervals.”
Catalysts
1) Drill Results – Q2
2) Cerro Negro prefeasibility - Q3
Valuation and Target Price
Regarding valuation, Kaip writes “We have revised our 12-month target up marginally from $2.55 to $2.60 incorporating the recent financing, and minor changes to our valuation. Our target is based on a 1.6x multiple of our after-tax corporate project NAV5% of US$704 million, or US$1.55 per share on a fully project-financed basis (see table below). We include US$80 million, or 49 million shares of project dilution at an issuance price of $1.65 per share. Andean trades at 1.0x project NAV5%, while companies in our universe trade at 0.9x (0.4x to 1.5x) project NAV5% to 10%.
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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