Company Profile
Canadian Royalties has initiated the development of an independent, stand-alone nickel-copper-PGE mine on its Nunavik Nickel Project, located 20 kilometres south of Xstrata Nickel's Raglan Mine in northern Quebec. Canadian Royalties is proceeding with permitting applications, as well as exploration for additional resources.
Click Here to watch a BNN video interview with Richard Faucher on February 8th, 2008 (Fast Forward to the 4 minute and 10 second mark)
Event
In a note entitled “Revisions Made to Estimates Following Financing; Rating Raised to Outperform (Speculative)” Miller explains the reasons behind his Outperform rating.
Takeaways From The Event
Canadian Royalties recently closed (March 18th/08) a $137,500,000 financing of convertible senior unsecured debentures due March 31, 2015. Solidarity Fund and Caisse de depot et placement du Quebec subscribed to $20 million and $40 million of the offering, respectively, However, since the financing closed, Canadian Royalties’ share price has weakened and according to Miller this is “due to a general malaise in the markets toward base metal companies. The recent share price drop has presented a buying opportunity.”
With the convertible debenture financing behind them, CZZ “only has to arrange project debt financing to fully fund the development of the Nunavik nickel-copper-platinum group metals project in Nunavik Territory, northern Quebec. The project will likely have to be permitted before the bank debt is finalized.”
After completing a feasibility study for the Nunavik project in June, CZZ has had further exploration successes with the discovery of the Allammaq deposit in September and the Puimajuq deposit at the end of October. Miller writes “Exploration of the two deposits
remains at an early stage, but the new mineralization, particularly at Allammaq, could potentially increase resources and reserves for the project. The company plans to further delineate the mineralization during the course of its 2008 exploration program.”
Furthermore, Miller adds “Resources on the property may also be positively impacted by the incorporation of the Mequillon deposit, which was not included in the June feasibility study. A preliminary economic assessment has been completed to evaluate the Mequillon deposit as an open pit and underground bulk mining operation. The pit at Mequillon would contribute about 1.95 million tonnes grading 0.63% Ni and 0.90% Cu at a strip ratio of 7.7 to 1. Total potentially mineable resources stand at 9.2 million tonnes grading 0.68% Ni, 0.96% Cu, 0.60 g/t Pt and 2.3 g/t Pd, which includes a component of inferred resources. The preliminary assessment assumed upfront capex of C$69 million and C$15 million in sustaining capex over a nine-year mine life. We have not yet included a mine scenario in our model for Mequillon, but we have shown the impacts of more tonnage and higher capex in our sensitivity tables below.”
Some of our key base case estimates are as follows:
16,500,000 tonnes @ 0.97% Ni; 1.13% Cu; .05% Co; 0.10 g/t Au;
1.86 g/t Pd and 0.45 g/t Pt.
Pre-production capex: C$490,000,000 including an allowance for
working capital
Sustaining capex: $38,416,000 (about C$3.5 million/year)
Costs/tonne: C$3.18 mining; C$21.57 processing; C$9.50 smelting,
etc.; C$12.78 G&A
Financing: C$250 million in project debt @ Libor+2% (4.4%);
equity component has been raised.
Metallurgical recovery rates: 95.5% Cu; 78.5% Ni
Payable factors: 95% Cu; 92% Ni
Miller estimates that construction for the Nunavik project begins during the summer of 2008 and that commercial operations commence in Q4/10.
Valuation and Price Target
Looking at CZZ’s current share price, Miller writes “Canadian Royalties shares are trading at a 59% discount to our 8% NAV estimate of C$4.34 per share using our forecast and long-term metal prices. The discount is 48% to our 10% NAV estimate of $3.47 per share.”
Moreover “The addition of Mequillon would add 9.2 million tonnes, lower overall Ni grade to 0.87%, lower overall Cu grade to 1.07% and increase pre-production capex to about C$550 million. Our analysis of the sensitivity tables suggests that the addition of Mequillon adds about $1.00 to our base-case 8% NAV of $4.37 per share.
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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Monday, March 31, 2008
Buy, Sell or Hold Canadian Royalties (CZZ: TSX)
On March 25th /08 BMO Capital Markets analyst Craig Miller provided an update on Royalties (CZZ: TSX)
Sunday, March 30, 2008
Buy, Sell or Hold Andean Resources (AND: TSX)
On March 25th /08 RBC Capital Markets analyst Stephen Walker provided an update on Andean Resources (AND: TSX).
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page in the comments section.
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$2.25/sh target by applying a 1.0x multiple to the average of these two NAV estimates.”
Walker writes “Andean shares are currently trading at a 0.92x multiple to our base-case NAV, and 0.71x multiple to our upside case. AND’s upside case P-NAV ratio is at a slight discount to the peer group average of 0.77x, while the base-case ratio is at a slight premium. We reiterate our view that that there is significant upside potential to the AND share price, especially if the company can increase its resource base at Cerro Negro in the near term.”
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page in the comments section.
Saturday, March 29, 2008
Canadian Portfolio Strategy Outlook - CIBC
March 27th, 2008 - CIBC World Markets Canadian Portfolio Strategy Outlook
Excerpt:
"The US economy is now in recession, and its financial system, needs more help. We’ve lowered our fed funds target by a half point to 1.25%, with the only concession to inflation hawks being that further moves will come in smaller steps. The US$ will remain out of favour against other majors, particularly versus the euro given Trichet’s evident reluctance to cut eurozone rates.Oil prices remain in triple-digit territory.
Natural gas prices have regained US$9 and power producers preference for a cleaner alternative to coal sets the stage for still-higher levels in the future. These developments prompted us to raise our energy overweight by a point to 5 percentage points. We also remained overweight materials stocks. The gold sector in particular should benefit as a sub-2% funds rate sees bullion hit US$1,100/oz later in the year."
To Download Jeff Rubin's March 5th, 2008 Canadian Portfolio Strategy Outlook Click Here
Jeff Rubin Bio - Chief Economist and Chief Strategist, Managing Director, CIBC World Markets Jeffrey Rubin has been the top-ranked economist in Canadian financial markets over the last decade. Prior to joining CIBC World Markets in 1988, Mr. Rubin was a Senior Policy Advisor at the Ontario Ministry of Finance where he oversaw economic forecasting. Throughout his career, Mr. Rubin's work has often been the subject of national headlines and has been instrumental in raising key issues to the national spotlight. The largest fund managers in North America, Europe and the Far East value his expertise in Canadian debt and equity markets. He frequently appears as a network commentator on the economy, financial markets, and federal budgets.
Friday, March 28, 2008
Buy, Sell or Hold Burmis Energy (BME: TSX)
On March 24th /08 PI Financial analyst Geoff Ready initiated coverage on Burmis Energy (BME: TSX).
Company Profile
Burmis Energy Inc. (BME: TSX) is a Calgary, AB based junior oil & gas company with operations in West Central Alberta. The company is engaged in full cycle exploration, development, production and marketing on natural gas and crude oil in Canada.
Event
In a note entitled “Initiating Coverage: Burmis Energy Inc. (BME: TSX)” Ready explains the reasons behind his Buy rating and $4.75 target.
Takeaways From The Event
Burmis is a junior oil and gas exploration and production company. “It recently increased production to over 4,000 boe/d (70% natural gas weighted) with 750 boe/d of behind pipe production.” Ready writes “This is a step change up from a 2007 production average of 2,405 boe/d. We are conservatively projecting average production of 4,060 boe/d for 2008. We also note that several high rate wells are currently being restricted to optimize condensate recovery at the wellhead and due to facility constraints. This serves to reduce the Company’s overall decline rate as the restricted wells will remain at their current production levels for months to come.”
Having focused its main efforts into West Central Alberta, “where it has over 91,000 net undeveloped acres of land. Wells are drilled up to 3,000m in depth for multiple productive horizons. Due to recent successes the Company is concentrating on Mannville formations which are providing wells capable of 1-3 MMcf/d of natural gas, of natural gas liquids, and reserve recoveries of 2-5 bcf per well. Burmis is in the top quartile for corporate operating netbacks ($27.88/boe in Q307 versus peer group average of $23.12/boe) due to the high condensate recoveries of these wells and the favorable pricing for this condensate.”
Burmis lowers its risk while development drilling due to downspacing. Ready writes “The nature of Burmis’ deep drilling into high pressure tight formations leads to high reserve recoveries from low areal extents. This allows Burmis to drill multiple wells on each section of land. The advantage of downspacing extends past the lower full cycle costs from not having to buy new land and being generally closer to infrastructure. The geologic risk is lower than drilling for new pools as you are close to an existing well in the same formation.”
The newly proposed Alberta Royalty rates are estimated by Ready, in a worst case scenario, to increase corporate royalty rates by 8% starting in 2009. He writes “The government has not clarified many of the details of their report and thus a precise analysis cannot be complete. Burmis will gain some relief from the royalty holidays available for “deep natural gas”, however it has many high rate wells which will be negatively affected.”
With regards to management, Ready notes “Few teams in industry have been together as long as management at Burmis have been with 4 out of 5 members of the team having working together at Elk Point Resources, the predecessor company of Burmis. The team has exhibited consistent organic growth from internally generated prospects including a 3 year average recycle ratio of 2.0x.”
To sum it up, Ready writes “While the Company is still undertaking some exploration projects, for the most part Burmis is a development story which we believe the market has not yet fully recognized. Its recent growth to over 4,000 boe/d and current pricing suggests it is trading at an EV/DACF of only 3.0x based on 2008 cash flow. We believe that the quality of assets and opportunities suggest that this stock should trade at an EV/DACF of 4.8x which equates to $4.75/share.”
Valuation and Price Target
“Based on 2007 year end reserves, Burmis achieved $13.75/boe (P+P) FD&A costs, a recycle ratio of 2.2x, and a $3.47/share NAV. The recycle ratio is a clear indicator of efficient capital spending during a period of lower commodity prices and high industry costs. We believe that Burmis will improve on this impressive metric in 2008 as costs continue to decrease and commodity prices increase. The NAV is based on P+P reserves discounted at 10% before tax. Current trading levels are around 0.86x NAV and we believe Burmis will have upward revisions to their reserves in the future based on the booking procedures for tight gas.”
Ready “project[s] Burmis to reduce its debt from $35.6MM at the end of 2007 to $20.9MM (debt to trailing cash flow of 0.5x) by the end of 2008. The Company currently has a bank line of $65MM which leaves them with flexibility to increase spending or look at potential accretive acquisitions during 2008. Burmis has also hedged approximately 23% of its production to secure its cash flow for its capital program”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page in the comments section.
Company Profile
Burmis Energy Inc. (BME: TSX) is a Calgary, AB based junior oil & gas company with operations in West Central Alberta. The company is engaged in full cycle exploration, development, production and marketing on natural gas and crude oil in Canada.
Event
In a note entitled “Initiating Coverage: Burmis Energy Inc. (BME: TSX)” Ready explains the reasons behind his Buy rating and $4.75 target.
Takeaways From The Event
Burmis is a junior oil and gas exploration and production company. “It recently increased production to over 4,000 boe/d (70% natural gas weighted) with 750 boe/d of behind pipe production.” Ready writes “This is a step change up from a 2007 production average of 2,405 boe/d. We are conservatively projecting average production of 4,060 boe/d for 2008. We also note that several high rate wells are currently being restricted to optimize condensate recovery at the wellhead and due to facility constraints. This serves to reduce the Company’s overall decline rate as the restricted wells will remain at their current production levels for months to come.”
Having focused its main efforts into West Central Alberta, “where it has over 91,000 net undeveloped acres of land. Wells are drilled up to 3,000m in depth for multiple productive horizons. Due to recent successes the Company is concentrating on Mannville formations which are providing wells capable of 1-3 MMcf/d of natural gas, of natural gas liquids, and reserve recoveries of 2-5 bcf per well. Burmis is in the top quartile for corporate operating netbacks ($27.88/boe in Q307 versus peer group average of $23.12/boe) due to the high condensate recoveries of these wells and the favorable pricing for this condensate.”
Burmis lowers its risk while development drilling due to downspacing. Ready writes “The nature of Burmis’ deep drilling into high pressure tight formations leads to high reserve recoveries from low areal extents. This allows Burmis to drill multiple wells on each section of land. The advantage of downspacing extends past the lower full cycle costs from not having to buy new land and being generally closer to infrastructure. The geologic risk is lower than drilling for new pools as you are close to an existing well in the same formation.”
The newly proposed Alberta Royalty rates are estimated by Ready, in a worst case scenario, to increase corporate royalty rates by 8% starting in 2009. He writes “The government has not clarified many of the details of their report and thus a precise analysis cannot be complete. Burmis will gain some relief from the royalty holidays available for “deep natural gas”, however it has many high rate wells which will be negatively affected.”
With regards to management, Ready notes “Few teams in industry have been together as long as management at Burmis have been with 4 out of 5 members of the team having working together at Elk Point Resources, the predecessor company of Burmis. The team has exhibited consistent organic growth from internally generated prospects including a 3 year average recycle ratio of 2.0x.”
To sum it up, Ready writes “While the Company is still undertaking some exploration projects, for the most part Burmis is a development story which we believe the market has not yet fully recognized. Its recent growth to over 4,000 boe/d and current pricing suggests it is trading at an EV/DACF of only 3.0x based on 2008 cash flow. We believe that the quality of assets and opportunities suggest that this stock should trade at an EV/DACF of 4.8x which equates to $4.75/share.”
Valuation and Price Target
“Based on 2007 year end reserves, Burmis achieved $13.75/boe (P+P) FD&A costs, a recycle ratio of 2.2x, and a $3.47/share NAV. The recycle ratio is a clear indicator of efficient capital spending during a period of lower commodity prices and high industry costs. We believe that Burmis will improve on this impressive metric in 2008 as costs continue to decrease and commodity prices increase. The NAV is based on P+P reserves discounted at 10% before tax. Current trading levels are around 0.86x NAV and we believe Burmis will have upward revisions to their reserves in the future based on the booking procedures for tight gas.”
Ready “project[s] Burmis to reduce its debt from $35.6MM at the end of 2007 to $20.9MM (debt to trailing cash flow of 0.5x) by the end of 2008. The Company currently has a bank line of $65MM which leaves them with flexibility to increase spending or look at potential accretive acquisitions during 2008. Burmis has also hedged approximately 23% of its production to secure its cash flow for its capital program”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page in the comments section.
Thursday, March 27, 2008
Private Placement of Note: Grayd Resources (GYD- TSX-V)
Official Grayd Resources Website: http://www.grayd.com/
Company Profile (Extracted from Canaccord’s February 27th/08 compilation of Gold Explorers): The report reads:
“Grayd Resource is a junior mining exploration company whose primary focus is on La India gold project in Sonora State, Mexico. The project is located near the northwest end of the Mulatos high-sulphidation epithermal system that spans 15 to 25 kilometres along a northwest trending axis and is host to Alamos Gold Inc.’s Mulatos gold deposit.”
Additionally, the Canaccord report notes “Grayd Resource released an initial mineral resource from La India in January 2008. An Inferred Resource for all zones totals 936,000 ounces (36.8 million tonnes at a grade of 0.79 g/t Au), including 708,000 ounces Au in oxide. The oxide resource starts near surface suggesting potentially low strip ratios, as low as 1:1. Initial bottle roll metallurgical tests suggest potentially high-oxide recoveries (90%+). Preliminary column leach metallurgical tests were initiated earlier this quarter and could be available within two months. Several zones near the existing resource have yet to be tested and provide the opportunity for resource expansion. The company has also suggested infill drilling should close distances between data points in the resource model that at this time are believed to be influencing a lower grade in the estimation. Grayd has an option to earn 100% in an Alaskan property (Delta) that covers a large area prospective for polymetallic massive sulphide mineralization. A 1998 Inferred Resource included several zones of polymetallic mineralization with a high Au component. The total Inferred Resource is as follows: 15.4 million tonnes grading 0.6% Cu, 1.7% Pb, 3.8% Zn, 62 g/t Ag, and 1.7 g/t Au.”
Event: On March 19th/08 Grayd announced that “Further to its news release dated February 26, 2008… it has closed a non-brokered private placement of 5,225,000 units at a price of $0.55 per unit. Each unit consists of one common share in the capital of
Grayd and one-half of a share purchase warrant (the “Units”). Each full warrant entitles the holder thereof to purchase one additional share of Grayd at a price of $0.75 per share on or before March 19, 2009.”
Of Note: According to the TSX Venture Daily Bulletin for March 17th/08, the Insider/ Pro Group Participants included:
Name
Banque Pasche SA - Purchased 1,000,000 shares
David Elliott – Purchased 100,000 shares
David Shepherd- Purchased 25,000 shares
John Tognetti - Purchased 400,000 shares
Acker Finley Asset Management - Purchased 1,375,000 shares
Julius Baer Multipartner Gold Equity Fund – Purchased 2,000,000 shares
Summary: Out of a total 5,225,000 units that were sold in the private placement, 4,900,000 units were sold to what I consider ‘Smart Money.’
Background on the Placees
Banque Pasche SA: Banque Pasche is the Private Banking arm of the CM-CIC group. The CM-CIC group is the fourth largest French banking group combining retail banking, commercial banking and specialised services, with a total balance sheet of € 325 billion. It is present in 47 countries and benefits from the «AA» rating (Fitch) of its parent company.
With its head office based in Geneva, where is was first established some 120 years ago, the Pasche CIC Private Banking group is specialised in asset management dedicated to an international clientele. As a reputed name in the financial centres of Geneva, Zurich, Lucerne, Monaco, Nassau, Dubaï, Liechtenstein, Istanbul, Rio de Janeiro, Montevideo and Marrakech, the Pasche group brings together, along with the utmost discretion, the security and the professional skills required to achieve the highest standards of performance in managing assets for its clients. Present in 70 countries around the world, the Pasche group is continually extending its product range and services for an exclusive clientele, mostly comprising key international players among the financial, cultural and artistic fields. Such a demanding clientele requires high quality advice with the combined objectives of preserving capital and meeting profitability targets. My Take: I don’t know too much about these guys other than this is the only record/instance of them investing in a junior resource stock in the last couple of years.
David Elliot, David Shepherd and John Tognetti: David Elliott is a Vice President and Director of Haywood Securities. He works with the management team at the firm’s Vancouver office where he also oversees trading operations. David began his career in 1968 as a floor trader in Montreal, and came to Vancouver in 1970. He met John Tognetti, who would later become President and CEO of Haywood Securities, while working at Westcoast Securities in the 1970s. David came to know David Shepherd, who would later be a Director and the Secretary Treasurer of Haywood, in 1979 when the two opened a Vancouver office for the brokerage known at the time as Mead and Co. David moved from trading to sales and stayed with Mead (which became Walwyn Stodgill) until 1985. Along with John Tognetti and David Shepherd, David purchased Haywood Securities in 1985. My Take: These 3 Vancouver based businessmen keep a very low media profile but are very active in the junior resource sector. Their contacts, knowledge and street smarts should not be discounted.
Acker Finley Asset Management: Founded by Brian Acker and Joe Finley, the firm focuses on achieving superior investment returns – through all market conditions – by consistently applying proprietary quantitative analysis to the investment process. My Take: Brian is frequently on BNN (Canada’s Financial News Network) discussing the model price (which is determined by analyzing a company’s balance sheet using a proprietary formula) for mostly mid to large cap stocks in the TSX 60. Not once have I heard him comment on a particular junior resource stock. Hence I would assume that this investment in Grayd Resources is on behalf of a managed portfolio. However, their involvement still makes me ponder that there might be something to Grayd Resources.
Click here to watch a video of Brian Acker’s view on the markets as of March 14th/08
Julius Baer Multipartner Gold Equity Fund ('Julius Baer Gold Fund'): A unit of Julius Baer Holding AG. The Julius Baer Group is the leading dedicated wealth manager in Switzerland. The Group, which has roots dating to the nineteenth century, concentrates exclusively on private banking and asset management for private and institutional clients. My Take: Once again I am not too familiar with these guys other than knowing that in November 2006, the fund purchased 12.0% of Ventura Gold Corp. (VGO: TSX-V). I can’t find too much information about the fund, at least in English, so if anyone knows more about the performance of the fund or the manager please leave a comment.
“Private Placement of Note” is a new feature in which I thought I might highlight the activities of ‘Smart Money’ in the world of junior resource stocks. Do you like the feature or not - leave a comment?
Company Profile (Extracted from Canaccord’s February 27th/08 compilation of Gold Explorers): The report reads:
“Grayd Resource is a junior mining exploration company whose primary focus is on La India gold project in Sonora State, Mexico. The project is located near the northwest end of the Mulatos high-sulphidation epithermal system that spans 15 to 25 kilometres along a northwest trending axis and is host to Alamos Gold Inc.’s Mulatos gold deposit.”
Additionally, the Canaccord report notes “Grayd Resource released an initial mineral resource from La India in January 2008. An Inferred Resource for all zones totals 936,000 ounces (36.8 million tonnes at a grade of 0.79 g/t Au), including 708,000 ounces Au in oxide. The oxide resource starts near surface suggesting potentially low strip ratios, as low as 1:1. Initial bottle roll metallurgical tests suggest potentially high-oxide recoveries (90%+). Preliminary column leach metallurgical tests were initiated earlier this quarter and could be available within two months. Several zones near the existing resource have yet to be tested and provide the opportunity for resource expansion. The company has also suggested infill drilling should close distances between data points in the resource model that at this time are believed to be influencing a lower grade in the estimation. Grayd has an option to earn 100% in an Alaskan property (Delta) that covers a large area prospective for polymetallic massive sulphide mineralization. A 1998 Inferred Resource included several zones of polymetallic mineralization with a high Au component. The total Inferred Resource is as follows: 15.4 million tonnes grading 0.6% Cu, 1.7% Pb, 3.8% Zn, 62 g/t Ag, and 1.7 g/t Au.”
Event: On March 19th/08 Grayd announced that “Further to its news release dated February 26, 2008… it has closed a non-brokered private placement of 5,225,000 units at a price of $0.55 per unit. Each unit consists of one common share in the capital of
Grayd and one-half of a share purchase warrant (the “Units”). Each full warrant entitles the holder thereof to purchase one additional share of Grayd at a price of $0.75 per share on or before March 19, 2009.”
Of Note: According to the TSX Venture Daily Bulletin for March 17th/08, the Insider/ Pro Group Participants included:
Name
Banque Pasche SA - Purchased 1,000,000 shares
David Elliott – Purchased 100,000 shares
David Shepherd- Purchased 25,000 shares
John Tognetti - Purchased 400,000 shares
Acker Finley Asset Management - Purchased 1,375,000 shares
Julius Baer Multipartner Gold Equity Fund – Purchased 2,000,000 shares
Summary: Out of a total 5,225,000 units that were sold in the private placement, 4,900,000 units were sold to what I consider ‘Smart Money.’
Background on the Placees
Banque Pasche SA: Banque Pasche is the Private Banking arm of the CM-CIC group. The CM-CIC group is the fourth largest French banking group combining retail banking, commercial banking and specialised services, with a total balance sheet of € 325 billion. It is present in 47 countries and benefits from the «AA» rating (Fitch) of its parent company.
With its head office based in Geneva, where is was first established some 120 years ago, the Pasche CIC Private Banking group is specialised in asset management dedicated to an international clientele. As a reputed name in the financial centres of Geneva, Zurich, Lucerne, Monaco, Nassau, Dubaï, Liechtenstein, Istanbul, Rio de Janeiro, Montevideo and Marrakech, the Pasche group brings together, along with the utmost discretion, the security and the professional skills required to achieve the highest standards of performance in managing assets for its clients. Present in 70 countries around the world, the Pasche group is continually extending its product range and services for an exclusive clientele, mostly comprising key international players among the financial, cultural and artistic fields. Such a demanding clientele requires high quality advice with the combined objectives of preserving capital and meeting profitability targets. My Take: I don’t know too much about these guys other than this is the only record/instance of them investing in a junior resource stock in the last couple of years.
David Elliot, David Shepherd and John Tognetti: David Elliott is a Vice President and Director of Haywood Securities. He works with the management team at the firm’s Vancouver office where he also oversees trading operations. David began his career in 1968 as a floor trader in Montreal, and came to Vancouver in 1970. He met John Tognetti, who would later become President and CEO of Haywood Securities, while working at Westcoast Securities in the 1970s. David came to know David Shepherd, who would later be a Director and the Secretary Treasurer of Haywood, in 1979 when the two opened a Vancouver office for the brokerage known at the time as Mead and Co. David moved from trading to sales and stayed with Mead (which became Walwyn Stodgill) until 1985. Along with John Tognetti and David Shepherd, David purchased Haywood Securities in 1985. My Take: These 3 Vancouver based businessmen keep a very low media profile but are very active in the junior resource sector. Their contacts, knowledge and street smarts should not be discounted.
Acker Finley Asset Management: Founded by Brian Acker and Joe Finley, the firm focuses on achieving superior investment returns – through all market conditions – by consistently applying proprietary quantitative analysis to the investment process. My Take: Brian is frequently on BNN (Canada’s Financial News Network) discussing the model price (which is determined by analyzing a company’s balance sheet using a proprietary formula) for mostly mid to large cap stocks in the TSX 60. Not once have I heard him comment on a particular junior resource stock. Hence I would assume that this investment in Grayd Resources is on behalf of a managed portfolio. However, their involvement still makes me ponder that there might be something to Grayd Resources.
Click here to watch a video of Brian Acker’s view on the markets as of March 14th/08
Julius Baer Multipartner Gold Equity Fund ('Julius Baer Gold Fund'): A unit of Julius Baer Holding AG. The Julius Baer Group is the leading dedicated wealth manager in Switzerland. The Group, which has roots dating to the nineteenth century, concentrates exclusively on private banking and asset management for private and institutional clients. My Take: Once again I am not too familiar with these guys other than knowing that in November 2006, the fund purchased 12.0% of Ventura Gold Corp. (VGO: TSX-V). I can’t find too much information about the fund, at least in English, so if anyone knows more about the performance of the fund or the manager please leave a comment.
“Private Placement of Note” is a new feature in which I thought I might highlight the activities of ‘Smart Money’ in the world of junior resource stocks. Do you like the feature or not - leave a comment?
Buy, Sell or Hold Etruscan Resources (EET: TSX)
On March 26th /08 Canaccord Adams released their Junior Mining Weekly in which they provided an update on Etruscan Resources (EET: TSX) after a site visit by an analyst.
Company Profile
Etruscan Resources Inc. is a diversified Canadian mining company that has been exploring for gold and diamonds in Africa for over 13 years. Today, Etruscan holds one of the largest strategic land positions in West Africa covering over 13,000 km² in the prolific gold belts of Mali, Niger, Burkina Faso, Côte d'Ivoire and Ghana. The Company is also active in diamond exploration and development in South Africa and iron oxide copper gold exploration in Namibia. Etruscan's interests include operations that produce gold and diamonds together with advanced stage projects and earlier stage regional exploration opportunities.
Takeaways From The Event
Etruscan’s principal assets include the Youga gold project in Burkina Faso, the Samira Hill gold mine in Niger, the Agbou gold project in Côte d’Ivoire and the Finkolo gold project in Mali.
On March 3rd/08 Etruscan reported that the first gold was poured at its 90% owned Youga Mine located in Burkina Faso, West Africa. Canaccord notes that the “project consists of six open pits hosted within the 80-kilometre-long Youga gold belt. The exploration permits for the Youga project represent a combined land package of more than 1,000 square kilometres. The Youga project has an estimated reserve base of 6.6 million tonnes of ore grading 2.7 g/t gold for an in situ gold reserve of 580,000 ounces of gold (100%). In addition to reserves, there are 271,000 ounces of measured and indicated gold resources and 114,000 ounces of inferred gold resources estimated for the Youga project. Etruscan has developed the Youga mine as an open pit mining operation with a conventional gravity-CIL plant capable of processing 1 million tonnes of ore per year. Gold recoveries are expected to average roughly 93%, with average gold production of roughly 90,000 ounces per year at full capacity, likely achievable in 2009. Total cash costs over the life of the mine are estimated at US$360 per ounce; however, during the first five years of production, total cash costs are expected to average US$425 per ounce and to drop to less than US$225 per ounce after year five, once mining operations cease (based on the current mine plan). Power is currently being supplied by diesel-powered Genset generators; however, Etruscan has now received approval to develop a power line connecting the project to the Volta River Authority hydro power supply across the border in Ghana. The power line is expected to be built and electrified by July 2008. Until such time, the Genset power production will add roughly US$50 per ounce to the total cash costs at the Youga project. After the power line has been developed, the Youga mine will have full Genset back-up power in case of any power disruptions from Ghana’s VRA.
To secure project debt financing, Etruscan purchased 456,000 put options exercisable at a price of US$629 per ounce and sold 246,000 call options exercisable at a price of US$700 per ounce. This effectively hedges 42% of the total forecast production from Youga at US$700 per ounce, with the remainder leveraged to higher gold prices. When we visited the Youga project, the company was in the process of adding cyanide to the CIL plant and starting up the gravity circuit On March 3, 2008, the company reported that the first gold pour from the smelting of gravity concentrate recovered 100 ounces of gold. The elution circuit, to extract gold from the CIL process, is in the final stages of commissioning. The company anticipates achieving commercial production in April 2008 with the objective of producing between 60,000 and 70,000 ounces of gold in 2008.”
Also in Etruscan’s March 3rd/08 press release were comments from President and CEO, Gerald McConnell that read “Our next gold producer will be Agbaou located in Côte d'Ivoire where the feasibility study will be completed this summer with production to follow in 2010.”
With regards to the Agbaou project, Canaccord reports that “Etruscan recently released the first NI 43-101 compliant resource estimate for the Agbaou gold project in the Côte d’Ivoire. Using a 1 g/t cut-off, Coffey Mining estimated an initial resource of more than 1 million ounces of gold (all categories). The initial resource estimate is summarized below:
The Agbou project area covers 939 square kilometres of Birimian greenstone belts in south-central Côte d’Ivoire. It is accessible by paved road and is within 10 kilometres of the national power grid. The company is looking to develop a conventional open mining/CIL processing operation capable of producing in excess of 100,000 ounces of gold per year. Combined with the gold production from the Youga operation, Agbou could propel Etruscan into a new 200,000 ounce per year gold producer by 2010, with significant exploration upside potential at both mines and several prospective gold exploration projects within its portfolio of projects.”
Additionally, Etruscan owns a 53.7% stake in Etruscan Diamonds, a private company which it is likely to spin out in an IPO. The company holds one mining permit and three prospecting permits over three adjacent properties in the Ventersdorp alluvial diamond district (Nooitgedacht, Hartbeestlaagte and Zwartrand properties) known as the Blue Gum Project. Canaccord reports that “Etruscan Diamonds has land holdings of over 5,000 square kilometres in the Ventersdorp Alluvial Diamond District, which hosts Etruscan Diamonds’ primary asset, the Blue Gum diamond project. The project hosts a NI 43-101 compliant resource of 20.5 million cubic metres of indicated resources and 17.0 million cubic metres of inferred resources, grading 1.77 ct/100 m3 in the upper gravel package and 2.85 ct/100 m3 in the lower gravel package. The diamonds have an average estimated value of US$466/ct. A prefeasibility study on the Blue Gum project, led by MDM Engineering of South Africa, is expected to be completed by mid-2008.” Diamonds are currently being produced at the Tirisano Diamond Mine, which is part of the Blue Gum Project and located in the district of Ventersdorp. According to a March 16th/08 article on the Resource Investor website “Tirisano yielded more than 1,220 carats at an overall grade of 2.67 carats per hundred cubic metres in February. A total 1,311 carats sold at an average bid price US$854 for US$727,000 in gross proceeds in an early March tender, well in excess of the US$466 per carat projected value included in the Blue Gum Project’s NI 43-101 resource estimate, which was released February 1. February diamond sales averaged more than US$750 per carat. When it is operating at full capacity, a rate expected within two months, management anticipates recovering more than 2,500 carats per month. Etruscan Diamonds is planning a public offering in order to finance further expansion that will bring Blue Gum’s diamond production rate to 260,000 cubic metres or gravel per month.”
The Finkolo gold project is located in Mali South approximately 300 kilometers southeast of Bamako. The Finkolo permit covers 160 square kilometers along the Syama gold belt and is contiguous with the Syama holdings of Resolute Mining Ltd. which hosts the 6.4 million ounce Syama gold deposit. Canaccord reports “A JORC standard resource estimate was completed on Finkolo in January 2008, which, based on a 0.5 g/t cutoff, outlined measured and indicated gold resources of 436,000 ounces hosted within 6.9 million tonnes of ore and inferred resources of 468,000 ounces hosted within 9.1 million tonnes of ore (100%). Finkolo is viewed as a potential satellite orebody of the Syama deposit, which is expected to be advanced to production in H2/08. The joint venture has approved a 6,100 metre drill program to test for further depth extensions of mineralization down to 300 metres below surface. The deposit is currently outlined to a depth of 120 metres. The drill program is expected to be completed by mid-2008.”
Lastly, the Canaccord report mentions that “Etruscan’s portfolio of gold exploration and development projects provides it with a solid platform of production and resource growth. With the Youga mine ramping up to full production, the company should begin to generate significant operating cash flows. The Agbou project represents the next leg of production growth for the company with production anticipated in 2010. Combined, the two projects could boost Etruscan’s annual gold production to almost 200,000 ounces of gold per year. Beyond 2010, the company should begin to receive a positive contribution from the Samira Hill operation in 2011 to 2012, and there is significant potential within its Mali and Namibian exploration projects to provide the next stage of production growth for the company. We note that the recent friendly acquisition bid by Lihir Gold Ltd. (LGG : TSX : C$3.31 Not rated) to acquire Equigold (EQI : ASX : AUD$4.59 Not rated) is a significant endorsement for companies with gold development projects in Côte d’Ivoire. Equigold has two producing gold operations in Australia; however, its gold production growth and a significant portion of its gold resources are associated with its Bonikro gold project, in Côte d’Ivoire. Lihir has made a bid of roughly US$953 million for Equigold, which represents a purchase price of roughly US$282 per ounce of gold resource (all categories). Based on the company’s current share price of C$2.42, the company has a market capitalization of C$297 million, which implies a value of C$89 per ounce of total resource.”
“At the end of November 2007, Etruscan had cash and equivalents of US$31.9 million and US$32.3 million of long-term debt (including current portion). It also had 17.1 million warrants and options outstanding.”
Valuation and Price Target
Since Canaccord does not officially cover Etruscan Resources, the only other analyst targets on the street are from Mike Niehuser of Beacon Rock Research who has a Strong Buy rating and a C8.00/sh target and Brad Humphrey of CIBC World Markets who as of March 3rd/08 has a Sector Outperform rating on Etruscan.
Additionally, Toronto-based portfolio managers Herbert Abramson and Randall Abramson of Trapeze Asset Management have a 12 month target of $7.30/sh on Etruscan (as of February 29th/08). The following are some of their comments from their quarterly investment letter dated November 12th/07:
“Our largest gold holding, Etruscan, is trading at less than net asset value and we believe that its growing FMV warrants a double in the share price over the next 3 years. Etruscan’s assets are predominantly in the Birmian trend in West Africa which enjoys similar characteristics to Nevada’s Carlin/Cortez belt in the '90s, but with the Birmian trend stretching over an even larger area. Etruscan has operated in the region for many years and now has claims over 20,000 sq km, likely making it the region’s largest landowner. The mines that Etruscan currently has in production and development alone justify our 3 year projection, but should the company have further exploration success on its prospective gold properties, or within subsidiary Etruscan Diamond’s enormous gravel package, the upside could be even greater.”
Have I mentioned that the guys at Trapeze have averaged annualized returns of 24.9% since inception (October 1st, 1998) in their long/short accounts and 24% over the same period in their long only accounts? I’m a huge fan of these guys and encourage everyone to visit their website (http://www.trapezeasset.com/)to read their quarterly letters (http://www.trapezeasset.com/news.html)
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.
My Take: Etruscan has perhaps the largest land package of any mining company in West Africa and expects to be a 200,000 ounce producer by 2010. I quite like the company’s business model which is focussed on finding less than million ounces deposits with strong exploration potential and building fairly modest production facilities on those sites. Case in point, all 3 of Etruscan’s most advanced projects: Youga, Agbaou and Finkolo have satellite deposits that have the potential to increase resources or extend mine lives at these projects. As the cash flow starts pouring in from the from operations at the Tirisano Diamond Mine and the Youga Mine, Etruscan will have the wherewithal to fund its exploration activities from its existing cash flow. With a highly prospective exploration portfolio, several company-owned drill rigs, trained staff and a bulked up exploration budget, investors should expect plenty of news flow in 2008. Plus, investors can also look forward to the IPO of Etruscan Diamonds in the coming months and perhaps a listing on an American exchange.
The one drawback of Etruscan is that due to a hedging program (which was a stipulation Etruscan had to adhere by in order to receive debt financing for Youga), there is a cap on the amount Etruscan can receive on 42% of its production at $700 per ounce (at the time gold was trading around $640/oz). The remaining 60% is unhedged and will allow the company to reap the benefits of current gold prices.
The weekly and daily RSI-7 values are at 49.29 and 41.08 and hence do not proclaim a Buy signal (which would be triggered if both the weekly and daily RSI-7 values dipped below 30). Additionally, the MACD and Stochastics (slow) still indicate further downside for the stock. In the short term, maybe in the case of a dramatic sell-off in spot price of gold or the S&P/TSX Composite Index, the stock dips to the $2.00 level but longer term I think this is a neat little gold holding with great upside.
Click here to watch a video where Donald Burton, Vice President of Corporate Development & Chief Operating Officer of Etruscan provides investors with an update on January 20th/ 2008
Disclosure: I do not own any shares, options or warrants of Etruscan.
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Company Profile
Etruscan Resources Inc. is a diversified Canadian mining company that has been exploring for gold and diamonds in Africa for over 13 years. Today, Etruscan holds one of the largest strategic land positions in West Africa covering over 13,000 km² in the prolific gold belts of Mali, Niger, Burkina Faso, Côte d'Ivoire and Ghana. The Company is also active in diamond exploration and development in South Africa and iron oxide copper gold exploration in Namibia. Etruscan's interests include operations that produce gold and diamonds together with advanced stage projects and earlier stage regional exploration opportunities.
Takeaways From The Event
Etruscan’s principal assets include the Youga gold project in Burkina Faso, the Samira Hill gold mine in Niger, the Agbou gold project in Côte d’Ivoire and the Finkolo gold project in Mali.
On March 3rd/08 Etruscan reported that the first gold was poured at its 90% owned Youga Mine located in Burkina Faso, West Africa. Canaccord notes that the “project consists of six open pits hosted within the 80-kilometre-long Youga gold belt. The exploration permits for the Youga project represent a combined land package of more than 1,000 square kilometres. The Youga project has an estimated reserve base of 6.6 million tonnes of ore grading 2.7 g/t gold for an in situ gold reserve of 580,000 ounces of gold (100%). In addition to reserves, there are 271,000 ounces of measured and indicated gold resources and 114,000 ounces of inferred gold resources estimated for the Youga project. Etruscan has developed the Youga mine as an open pit mining operation with a conventional gravity-CIL plant capable of processing 1 million tonnes of ore per year. Gold recoveries are expected to average roughly 93%, with average gold production of roughly 90,000 ounces per year at full capacity, likely achievable in 2009. Total cash costs over the life of the mine are estimated at US$360 per ounce; however, during the first five years of production, total cash costs are expected to average US$425 per ounce and to drop to less than US$225 per ounce after year five, once mining operations cease (based on the current mine plan). Power is currently being supplied by diesel-powered Genset generators; however, Etruscan has now received approval to develop a power line connecting the project to the Volta River Authority hydro power supply across the border in Ghana. The power line is expected to be built and electrified by July 2008. Until such time, the Genset power production will add roughly US$50 per ounce to the total cash costs at the Youga project. After the power line has been developed, the Youga mine will have full Genset back-up power in case of any power disruptions from Ghana’s VRA.
To secure project debt financing, Etruscan purchased 456,000 put options exercisable at a price of US$629 per ounce and sold 246,000 call options exercisable at a price of US$700 per ounce. This effectively hedges 42% of the total forecast production from Youga at US$700 per ounce, with the remainder leveraged to higher gold prices. When we visited the Youga project, the company was in the process of adding cyanide to the CIL plant and starting up the gravity circuit On March 3, 2008, the company reported that the first gold pour from the smelting of gravity concentrate recovered 100 ounces of gold. The elution circuit, to extract gold from the CIL process, is in the final stages of commissioning. The company anticipates achieving commercial production in April 2008 with the objective of producing between 60,000 and 70,000 ounces of gold in 2008.”
Also in Etruscan’s March 3rd/08 press release were comments from President and CEO, Gerald McConnell that read “Our next gold producer will be Agbaou located in Côte d'Ivoire where the feasibility study will be completed this summer with production to follow in 2010.”
With regards to the Agbaou project, Canaccord reports that “Etruscan recently released the first NI 43-101 compliant resource estimate for the Agbaou gold project in the Côte d’Ivoire. Using a 1 g/t cut-off, Coffey Mining estimated an initial resource of more than 1 million ounces of gold (all categories). The initial resource estimate is summarized below:
The Agbou project area covers 939 square kilometres of Birimian greenstone belts in south-central Côte d’Ivoire. It is accessible by paved road and is within 10 kilometres of the national power grid. The company is looking to develop a conventional open mining/CIL processing operation capable of producing in excess of 100,000 ounces of gold per year. Combined with the gold production from the Youga operation, Agbou could propel Etruscan into a new 200,000 ounce per year gold producer by 2010, with significant exploration upside potential at both mines and several prospective gold exploration projects within its portfolio of projects.”
Additionally, Etruscan owns a 53.7% stake in Etruscan Diamonds, a private company which it is likely to spin out in an IPO. The company holds one mining permit and three prospecting permits over three adjacent properties in the Ventersdorp alluvial diamond district (Nooitgedacht, Hartbeestlaagte and Zwartrand properties) known as the Blue Gum Project. Canaccord reports that “Etruscan Diamonds has land holdings of over 5,000 square kilometres in the Ventersdorp Alluvial Diamond District, which hosts Etruscan Diamonds’ primary asset, the Blue Gum diamond project. The project hosts a NI 43-101 compliant resource of 20.5 million cubic metres of indicated resources and 17.0 million cubic metres of inferred resources, grading 1.77 ct/100 m3 in the upper gravel package and 2.85 ct/100 m3 in the lower gravel package. The diamonds have an average estimated value of US$466/ct. A prefeasibility study on the Blue Gum project, led by MDM Engineering of South Africa, is expected to be completed by mid-2008.” Diamonds are currently being produced at the Tirisano Diamond Mine, which is part of the Blue Gum Project and located in the district of Ventersdorp. According to a March 16th/08 article on the Resource Investor website “Tirisano yielded more than 1,220 carats at an overall grade of 2.67 carats per hundred cubic metres in February. A total 1,311 carats sold at an average bid price US$854 for US$727,000 in gross proceeds in an early March tender, well in excess of the US$466 per carat projected value included in the Blue Gum Project’s NI 43-101 resource estimate, which was released February 1. February diamond sales averaged more than US$750 per carat. When it is operating at full capacity, a rate expected within two months, management anticipates recovering more than 2,500 carats per month. Etruscan Diamonds is planning a public offering in order to finance further expansion that will bring Blue Gum’s diamond production rate to 260,000 cubic metres or gravel per month.”
The Finkolo gold project is located in Mali South approximately 300 kilometers southeast of Bamako. The Finkolo permit covers 160 square kilometers along the Syama gold belt and is contiguous with the Syama holdings of Resolute Mining Ltd. which hosts the 6.4 million ounce Syama gold deposit. Canaccord reports “A JORC standard resource estimate was completed on Finkolo in January 2008, which, based on a 0.5 g/t cutoff, outlined measured and indicated gold resources of 436,000 ounces hosted within 6.9 million tonnes of ore and inferred resources of 468,000 ounces hosted within 9.1 million tonnes of ore (100%). Finkolo is viewed as a potential satellite orebody of the Syama deposit, which is expected to be advanced to production in H2/08. The joint venture has approved a 6,100 metre drill program to test for further depth extensions of mineralization down to 300 metres below surface. The deposit is currently outlined to a depth of 120 metres. The drill program is expected to be completed by mid-2008.”
Lastly, the Canaccord report mentions that “Etruscan’s portfolio of gold exploration and development projects provides it with a solid platform of production and resource growth. With the Youga mine ramping up to full production, the company should begin to generate significant operating cash flows. The Agbou project represents the next leg of production growth for the company with production anticipated in 2010. Combined, the two projects could boost Etruscan’s annual gold production to almost 200,000 ounces of gold per year. Beyond 2010, the company should begin to receive a positive contribution from the Samira Hill operation in 2011 to 2012, and there is significant potential within its Mali and Namibian exploration projects to provide the next stage of production growth for the company. We note that the recent friendly acquisition bid by Lihir Gold Ltd. (LGG : TSX : C$3.31 Not rated) to acquire Equigold (EQI : ASX : AUD$4.59 Not rated) is a significant endorsement for companies with gold development projects in Côte d’Ivoire. Equigold has two producing gold operations in Australia; however, its gold production growth and a significant portion of its gold resources are associated with its Bonikro gold project, in Côte d’Ivoire. Lihir has made a bid of roughly US$953 million for Equigold, which represents a purchase price of roughly US$282 per ounce of gold resource (all categories). Based on the company’s current share price of C$2.42, the company has a market capitalization of C$297 million, which implies a value of C$89 per ounce of total resource.”
“At the end of November 2007, Etruscan had cash and equivalents of US$31.9 million and US$32.3 million of long-term debt (including current portion). It also had 17.1 million warrants and options outstanding.”
Valuation and Price Target
Since Canaccord does not officially cover Etruscan Resources, the only other analyst targets on the street are from Mike Niehuser of Beacon Rock Research who has a Strong Buy rating and a C8.00/sh target and Brad Humphrey of CIBC World Markets who as of March 3rd/08 has a Sector Outperform rating on Etruscan.
Additionally, Toronto-based portfolio managers Herbert Abramson and Randall Abramson of Trapeze Asset Management have a 12 month target of $7.30/sh on Etruscan (as of February 29th/08). The following are some of their comments from their quarterly investment letter dated November 12th/07:
“Our largest gold holding, Etruscan, is trading at less than net asset value and we believe that its growing FMV warrants a double in the share price over the next 3 years. Etruscan’s assets are predominantly in the Birmian trend in West Africa which enjoys similar characteristics to Nevada’s Carlin/Cortez belt in the '90s, but with the Birmian trend stretching over an even larger area. Etruscan has operated in the region for many years and now has claims over 20,000 sq km, likely making it the region’s largest landowner. The mines that Etruscan currently has in production and development alone justify our 3 year projection, but should the company have further exploration success on its prospective gold properties, or within subsidiary Etruscan Diamond’s enormous gravel package, the upside could be even greater.”
Have I mentioned that the guys at Trapeze have averaged annualized returns of 24.9% since inception (October 1st, 1998) in their long/short accounts and 24% over the same period in their long only accounts? I’m a huge fan of these guys and encourage everyone to visit their website (http://www.trapezeasset.com/)to read their quarterly letters (http://www.trapezeasset.com/news.html)
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.
My Take: Etruscan has perhaps the largest land package of any mining company in West Africa and expects to be a 200,000 ounce producer by 2010. I quite like the company’s business model which is focussed on finding less than million ounces deposits with strong exploration potential and building fairly modest production facilities on those sites. Case in point, all 3 of Etruscan’s most advanced projects: Youga, Agbaou and Finkolo have satellite deposits that have the potential to increase resources or extend mine lives at these projects. As the cash flow starts pouring in from the from operations at the Tirisano Diamond Mine and the Youga Mine, Etruscan will have the wherewithal to fund its exploration activities from its existing cash flow. With a highly prospective exploration portfolio, several company-owned drill rigs, trained staff and a bulked up exploration budget, investors should expect plenty of news flow in 2008. Plus, investors can also look forward to the IPO of Etruscan Diamonds in the coming months and perhaps a listing on an American exchange.
The one drawback of Etruscan is that due to a hedging program (which was a stipulation Etruscan had to adhere by in order to receive debt financing for Youga), there is a cap on the amount Etruscan can receive on 42% of its production at $700 per ounce (at the time gold was trading around $640/oz). The remaining 60% is unhedged and will allow the company to reap the benefits of current gold prices.
The weekly and daily RSI-7 values are at 49.29 and 41.08 and hence do not proclaim a Buy signal (which would be triggered if both the weekly and daily RSI-7 values dipped below 30). Additionally, the MACD and Stochastics (slow) still indicate further downside for the stock. In the short term, maybe in the case of a dramatic sell-off in spot price of gold or the S&P/TSX Composite Index, the stock dips to the $2.00 level but longer term I think this is a neat little gold holding with great upside.
Click here to watch a video where Donald Burton, Vice President of Corporate Development & Chief Operating Officer of Etruscan provides investors with an update on January 20th/ 2008
Disclosure: I do not own any shares, options or warrants of Etruscan.
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Wednesday, March 26, 2008
Company Update on Gran Tierra (GTE: TSX)
On March 25th /08 Blackmont Capital analyst Alexander Klein released an update on Gran Tierra (GTE: TSX)
Company Profile
Gran Tierra is an international exploration and production company headquartered in Calgary, Alberta, Canada. The company has exploration and producing assets in Colombia, and Argentina, and exploration acreage in Peru.
Event
In a note entitled “Operational Update: Oil/water Contact in C-3 Still Inconclusive - Reservoir Size Likely Larger than Previous Interpretations” Klein explains the reasons behind his Speculative Buy rating and $4.25 target.
Takeaways From The Event
On March 24th/08 Gran Tierra announced that it had begun “testing operations for Costayaco-3, the third well drilled in the Costayaco field, a new oil field discovered in 2007, on March 19.” The news release also provided an operational update on Gran Tierra’s developments at the Azar Block, the Popa-2 exploration well in the Rio Magdalena Block, Juanambu oil field in the Guayuyco Block and operations in Peru and Argentina.
Commenting on operational update, Klein writes “Costayaco-3 (C-3) testing operations began March 19 and are expected to take at least four weeks, with results available towards the end of April. Only the Lower Caballos and Villeta T formations are being tested. The C-3 well is located 950 metres west and down-dip from the C-1 discovery well (Figure 1). Gran Tierra is the operator of the Chaza Block with a 50% working interest. Solana Resources (SOR-TVX) has the other 50% working interest. Results from the drilling of C-3 indicate the following:
- Initial log interpretation indicates potential hydrocarbon pay in the same four formations as found in the C-1 and C-2 wells (Rumiyaco Kg, Villeta U, Villeta T, and Caballos).
- Good oil shows while drilling were encountered in these potential reservoir sections.
- Based on log interpretation, there is a potential oil/water contact in the lower Caballos formation at a depth of 8,511 feet, 34 feet below the lowest oil level in the C-2 well. The only way to be sure of the oil/water contact is through testing but according to management there is a greater than 50% probability that it does exist.
- Log interpretations do not indicate an oil/water contact in the other three formations including the Villeta T. It is unlikely therefore that an oil/water contact in the Villeta T would be found during testing, therefore the Villeta T reservoir is quite likely larger than what was first thought.”
Furthermore, Klein writes “Gran Tierra is in the process of permitting a new delineation well (C-5) northwest of C-3 and further down-dip to test for an oil/water contact in the Villeta T formation. The exact location is not known but we estimate the distance from C-3 would be no less than 500 metres. This well would not spud until C-4 drilling is complete (somewhere around the end of April) because Gran Tierra currently only has one rig on contract. The company will likely attempt to secure a second rig in 2009 to speed up the pace of development drilling at Costayaco.
The C-5 well is in addition to the three infill development locations that the company had already included in its 2008 capital plan. These development locations were planned based on the results from the C-1 discovery well and were not based on reservoir size, which remains unknown at this juncture.”
Regarding other Costayaco developments, Klein notes “The C-4 infill development well spud on March 16 and is expected to take six weeks to drill; this is a longer period of time than the other Costayaco wells because cores will be extracted from the primary reservoir formations. C-4 is a deviated well being drilled from the C-2 pad with a targeted location 541 metres to the north of the C-2 location.
The six-inch flow-line between the C-2 site and the C-1 truck-loading facility is complete and should be operational by the end of March at which point long-term testing of the C-2 well will begin. Production from the well will vary between 1,800 and 3,500 bbls/d (gross) as various zones are tested over a four-month period.
The C-1 well continues to produce at approximately 3,500 bbls/d (gross) with only trace water.
Line pipe has been delivered and environmental permits received for the eight-inch 10 km pipeline that will connect Costayaco-1 to pipeline infrastructure at Uchupayaco. This pipeline is expected to be completed by June 2008 and will eliminate current trucking operations.”
Other Exploration Prospects
“The production line between the Juanambu-1 (J-1) discovery (GTE 35%, SOR 35%) and Gran Tierra's Torayaco facility was completed at the end of February, eliminating trucking operations. The well is producing between 1,300 and 1,500 bbls/d (gross), which is in-line with the 1,400 bbls/d included in our forecasts.”
“The Popa-2 exploration well in the Rio Magdalena Block is scheduled to spud in early April. We have not assigned any value to this well in our NAV estimate.
On the Azar Block, Gran Tierra is planning a workover of the Palmera-1 well with testing scheduled for Q2/08. New 3D seismic has been acquired and is being interpreted with the objective of drilling a new exploration well in the fourth quarter. We have assigned a minimal risked value of only $0.06/share to the Azar Block in our NAV estimate. Our estimated un-risked value is $0.22/share.”
Lastly, Klein writes “Gran Tierra remains our top international E&P pick for 2008. We continue to gain confidence in the Costayaco discovery based on on-going positive operational developments.”
Valuation and Price Target
Klein bases his $4.25/sh target on “a risked after tax PV 10% NAV estimate” of $4.22/sh. In formulating his target, Klein assumes a long term oil price of US $72.30/bbl and estimates recoverable reserves at Costayaso of 46 mmbbls (gross). He adds “Given the potential for reserves size to expand based on a lower oil/water contact depth in the Caballos formation than originally expected and no oil/water contact established in the Villeta T formation, we believe investors should be favouring an upward bias to their own reserve estimates.”
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.
My Take: Costayaco-1 was tested at 5,906 BOPD and is currently producing 3,500 BOPD (gross) while Costayaco-2 is being prepared for long term testing and production after being tested at 6,600 BOPD. Results from testing of the Costayaco-3 well are expected towards the end of April. The untapped potential of Costayaco itself is worth between $1-3 in NAV as Gran Tierra brings on existing discoveries and should be reason enough to purchase the shares. But there’s more: not only does the company expect production to grow to 5,000 BOPD by the end of 2008 after exiting 2007 at 3,300 BOPD (net after royalty production) but investors can also look to production and high impact exploration potential in Argentina and early stage monster hunting in Peru with billion barrel potential. My analysis of Stochastics (slow) and RSI indicate further downside for the stock but not by much (8-10% from current levels). If one was looking to add to an existing position or initiate a position in the stock, look for days when either the S&P/TSX Composite Index or the price of crude oil comes off. In conclusion, Gran Tierra offers investors international exposure with downside protection in the form of a growing production base and upside stemming from its massive ownership of acreage in Colombia, Argentina and Peru.
Disclosure: I do not own any shares, options or warrants of Gran Tierra.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page.
Company Profile
Gran Tierra is an international exploration and production company headquartered in Calgary, Alberta, Canada. The company has exploration and producing assets in Colombia, and Argentina, and exploration acreage in Peru.
Event
In a note entitled “Operational Update: Oil/water Contact in C-3 Still Inconclusive - Reservoir Size Likely Larger than Previous Interpretations” Klein explains the reasons behind his Speculative Buy rating and $4.25 target.
Takeaways From The Event
On March 24th/08 Gran Tierra announced that it had begun “testing operations for Costayaco-3, the third well drilled in the Costayaco field, a new oil field discovered in 2007, on March 19.” The news release also provided an operational update on Gran Tierra’s developments at the Azar Block, the Popa-2 exploration well in the Rio Magdalena Block, Juanambu oil field in the Guayuyco Block and operations in Peru and Argentina.
Commenting on operational update, Klein writes “Costayaco-3 (C-3) testing operations began March 19 and are expected to take at least four weeks, with results available towards the end of April. Only the Lower Caballos and Villeta T formations are being tested. The C-3 well is located 950 metres west and down-dip from the C-1 discovery well (Figure 1). Gran Tierra is the operator of the Chaza Block with a 50% working interest. Solana Resources (SOR-TVX) has the other 50% working interest. Results from the drilling of C-3 indicate the following:
- Initial log interpretation indicates potential hydrocarbon pay in the same four formations as found in the C-1 and C-2 wells (Rumiyaco Kg, Villeta U, Villeta T, and Caballos).
- Good oil shows while drilling were encountered in these potential reservoir sections.
- Based on log interpretation, there is a potential oil/water contact in the lower Caballos formation at a depth of 8,511 feet, 34 feet below the lowest oil level in the C-2 well. The only way to be sure of the oil/water contact is through testing but according to management there is a greater than 50% probability that it does exist.
- Log interpretations do not indicate an oil/water contact in the other three formations including the Villeta T. It is unlikely therefore that an oil/water contact in the Villeta T would be found during testing, therefore the Villeta T reservoir is quite likely larger than what was first thought.”
Furthermore, Klein writes “Gran Tierra is in the process of permitting a new delineation well (C-5) northwest of C-3 and further down-dip to test for an oil/water contact in the Villeta T formation. The exact location is not known but we estimate the distance from C-3 would be no less than 500 metres. This well would not spud until C-4 drilling is complete (somewhere around the end of April) because Gran Tierra currently only has one rig on contract. The company will likely attempt to secure a second rig in 2009 to speed up the pace of development drilling at Costayaco.
The C-5 well is in addition to the three infill development locations that the company had already included in its 2008 capital plan. These development locations were planned based on the results from the C-1 discovery well and were not based on reservoir size, which remains unknown at this juncture.”
Regarding other Costayaco developments, Klein notes “The C-4 infill development well spud on March 16 and is expected to take six weeks to drill; this is a longer period of time than the other Costayaco wells because cores will be extracted from the primary reservoir formations. C-4 is a deviated well being drilled from the C-2 pad with a targeted location 541 metres to the north of the C-2 location.
The six-inch flow-line between the C-2 site and the C-1 truck-loading facility is complete and should be operational by the end of March at which point long-term testing of the C-2 well will begin. Production from the well will vary between 1,800 and 3,500 bbls/d (gross) as various zones are tested over a four-month period.
The C-1 well continues to produce at approximately 3,500 bbls/d (gross) with only trace water.
Line pipe has been delivered and environmental permits received for the eight-inch 10 km pipeline that will connect Costayaco-1 to pipeline infrastructure at Uchupayaco. This pipeline is expected to be completed by June 2008 and will eliminate current trucking operations.”
Other Exploration Prospects
“The production line between the Juanambu-1 (J-1) discovery (GTE 35%, SOR 35%) and Gran Tierra's Torayaco facility was completed at the end of February, eliminating trucking operations. The well is producing between 1,300 and 1,500 bbls/d (gross), which is in-line with the 1,400 bbls/d included in our forecasts.”
“The Popa-2 exploration well in the Rio Magdalena Block is scheduled to spud in early April. We have not assigned any value to this well in our NAV estimate.
On the Azar Block, Gran Tierra is planning a workover of the Palmera-1 well with testing scheduled for Q2/08. New 3D seismic has been acquired and is being interpreted with the objective of drilling a new exploration well in the fourth quarter. We have assigned a minimal risked value of only $0.06/share to the Azar Block in our NAV estimate. Our estimated un-risked value is $0.22/share.”
Lastly, Klein writes “Gran Tierra remains our top international E&P pick for 2008. We continue to gain confidence in the Costayaco discovery based on on-going positive operational developments.”
Valuation and Price Target
Klein bases his $4.25/sh target on “a risked after tax PV 10% NAV estimate” of $4.22/sh. In formulating his target, Klein assumes a long term oil price of US $72.30/bbl and estimates recoverable reserves at Costayaso of 46 mmbbls (gross). He adds “Given the potential for reserves size to expand based on a lower oil/water contact depth in the Caballos formation than originally expected and no oil/water contact established in the Villeta T formation, we believe investors should be favouring an upward bias to their own reserve estimates.”
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.
My Take: Costayaco-1 was tested at 5,906 BOPD and is currently producing 3,500 BOPD (gross) while Costayaco-2 is being prepared for long term testing and production after being tested at 6,600 BOPD. Results from testing of the Costayaco-3 well are expected towards the end of April. The untapped potential of Costayaco itself is worth between $1-3 in NAV as Gran Tierra brings on existing discoveries and should be reason enough to purchase the shares. But there’s more: not only does the company expect production to grow to 5,000 BOPD by the end of 2008 after exiting 2007 at 3,300 BOPD (net after royalty production) but investors can also look to production and high impact exploration potential in Argentina and early stage monster hunting in Peru with billion barrel potential. My analysis of Stochastics (slow) and RSI indicate further downside for the stock but not by much (8-10% from current levels). If one was looking to add to an existing position or initiate a position in the stock, look for days when either the S&P/TSX Composite Index or the price of crude oil comes off. In conclusion, Gran Tierra offers investors international exposure with downside protection in the form of a growing production base and upside stemming from its massive ownership of acreage in Colombia, Argentina and Peru.
Disclosure: I do not own any shares, options or warrants of Gran Tierra.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards. Also, feel free to debate, discuss or comment on the any of the stocks you see on this page.
Tuesday, March 25, 2008
Buy, Sell or Hold International Minerals (IMZ: TSX)
On March 24th /08 Wellington West Capital analyst Catherine Gignac released an update on International Minerals Corp. (IMZ: TSX)
Company Profile
International Minerals is a new silver producer with partner Hochschild plc (HOC-LSE) the operator of the high-grade Pallacanta silver mine in Peru. IMZ is at the permitting stage for the Rio Blanco gold/silver project in Ecuador for planned start-up in 2010. The large Gaby gold project (70%) in Ecuador is at the feasibility stage.
Event
In a note entitled “Increased Gold and Silver Reserves; Feasibility Drilling Results for Gaby Project” Gignac explains the reasons behind her Buy rating and $8.50 target.
Takeaways From The Event
International Minerals is an emerging precious metals producer with a strong balance sheet. The company is currently advancing 2 of its own projects in Ecuador (Rio Blanco gold-silver development project and Gaby gold feasibility project) and owns a 40% joint venture interest in the producing Pallancata silver mine with Peruvian miner, Hochschild Mining plc (HOC-LSE). Gignac writes “Permits for the Rio Blanco gold/silver proposed underground mine have been delayed and are now anticipated in mid-2008, enabling a construction start this year and production to start one year later in 2010. Low-grade gold mineralization of over 8.8 million ounces and a pre-feasibility study have been released for the Gaby Project (70%). International Minerals has several exploration programs and options with senior companies that are likely to be advanced this year for potential mine development.”
Gaby Gold Project In Ecuador
On March 20th/08 International Minerals reported assay results from an additional 38 core drill holes totalling 10,927 metres from the Main Gaby deposit. Gignac writes that the average result was “63 metres grading 1 g/t gold. This drilling program is intended to add additional resources and upgrade existing inferred resources to the measured and indicated categories. The February 2008 positive pre-feasibility study was based on a 20,000 tpd open pit mine/mill scenario. An optimization study to define the costs of quadrupling mine throughput to 80,000 tpd is expected in calendar Q3/08, and the results of the final feasibility study (if justified) are anticipated by calendar Q2/09. The Gaby gold resources are valued at US$50/oz, which equates to $330 million or $3.45 per share, or 42% of the Company`s total net asset value.”
On March 3rd/08 International Minerals announced that it has acquired an option to purchase the remaining 50-per-cent interest in the Papa Grande deposit not currently owned by it. The Papa Grande deposit is one of two gold deposits comprising the Gaby project in Ecuador. “The acquisition of the remaining 50-per-cent interest in the Papa Grande property raises the number of measured and indicated resources attributable to IMZ in the overall Gaby project by approximately 21 per cent, from an estimated 3.78 million to 4.59 million contained ounces of gold (224 million tonnes) at an average grade of 0.64 gram per tonne (g/t). It also increases the inferred resources attributable to IMZ by approximately 20 per cent, from an estimated 1.66 million to 2.03 million contained ounces of gold (95 million tonnes at an average grade of 0.66 g/t).” Gignac comments “Details of the option recently signed for the remaining 50% interest will be provided in a technical report shortly, along with the February updated resources. International Minerals’ economic interest in Gaby resources range from 73.75% in the measured and indicated category to 77.8% in the inferred category, based on their location within different land holdings and optioned properties.”
Regarding geo-political risk in Ecuador, Gignac writes “As mining law revision
discussions will continue for a few more months between government and some of the most-advanced foreign companies working in the country (International Minerals, Corriente Resources CTQ-T, Aurelian Resources ARU-T), Ecuador exposure compels a market discount for the near-term. A new mining law is anticipated by year-end 2008. International Minerals is trading at US$99/oz measured & indicated resource (including proven and probable reserves) compared to a weighted average for junior and emerging peers at US$128/oz.”
Pallancata Silver Mine in Peru
On March 17th/08 Hochschild Mining PLC, the mine operator and joint venture partner of International Minerals provided an updated JORC-compliant mineral resource and reserve estimates for the Pallancata silver-gold mine in southern Peru. Gignac writes “Reserves increased 187% to a total of 32.9 million ounces silver and 142,000 ounces gold. Inferred resources rose 12.5% to 33.2 million ounces silver and 93,000 oz gold. This was the largest increase for any of Hochschild’s mines and International Minerals holds a 40% interest. International Minerals is commissioning an independent N.I. 43-101 compliant verification of the resource, which is expected to be released in a technical report within 45 days. Hochschild announced earlier this year the acceleration of the Selene plant expansion for processing ore from the Pallancata mine. The mill will be able to handle 2,250 tpd of Pallancata ore by the end of 2008, up from the initial projection of 1,000 tpd. International Minerals` production interest would total nearly 3.0 million ounces. The net asset value of the Pallancata interest is estimated at $238 million or $2.49 per share, about 30% of the Company’s total net asset value.”
Valuation and Price Target
After assimilating and analyzing the recently released drill results from the Main Gaby deposit and the updated JORC-compliant mineral resource and reserve estimates for the Pallancata silver-gold mine, Gignac writes “Reserve and resource increases positively impacted the net asset value by 2%, rising to US$788 million or $8.23 per share. Ecuador exposure equates to $5.00/share or 61%, plus silver production in Peru and working capital. Breakdown of the key projects is 42% Gaby, 30% Pallancata and 19% Rio Blanco. Applying a modest premium indicates a target price of $8.50/share.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards
Company Profile
International Minerals is a new silver producer with partner Hochschild plc (HOC-LSE) the operator of the high-grade Pallacanta silver mine in Peru. IMZ is at the permitting stage for the Rio Blanco gold/silver project in Ecuador for planned start-up in 2010. The large Gaby gold project (70%) in Ecuador is at the feasibility stage.
Event
In a note entitled “Increased Gold and Silver Reserves; Feasibility Drilling Results for Gaby Project” Gignac explains the reasons behind her Buy rating and $8.50 target.
Takeaways From The Event
International Minerals is an emerging precious metals producer with a strong balance sheet. The company is currently advancing 2 of its own projects in Ecuador (Rio Blanco gold-silver development project and Gaby gold feasibility project) and owns a 40% joint venture interest in the producing Pallancata silver mine with Peruvian miner, Hochschild Mining plc (HOC-LSE). Gignac writes “Permits for the Rio Blanco gold/silver proposed underground mine have been delayed and are now anticipated in mid-2008, enabling a construction start this year and production to start one year later in 2010. Low-grade gold mineralization of over 8.8 million ounces and a pre-feasibility study have been released for the Gaby Project (70%). International Minerals has several exploration programs and options with senior companies that are likely to be advanced this year for potential mine development.”
Gaby Gold Project In Ecuador
On March 20th/08 International Minerals reported assay results from an additional 38 core drill holes totalling 10,927 metres from the Main Gaby deposit. Gignac writes that the average result was “63 metres grading 1 g/t gold. This drilling program is intended to add additional resources and upgrade existing inferred resources to the measured and indicated categories. The February 2008 positive pre-feasibility study was based on a 20,000 tpd open pit mine/mill scenario. An optimization study to define the costs of quadrupling mine throughput to 80,000 tpd is expected in calendar Q3/08, and the results of the final feasibility study (if justified) are anticipated by calendar Q2/09. The Gaby gold resources are valued at US$50/oz, which equates to $330 million or $3.45 per share, or 42% of the Company`s total net asset value.”
On March 3rd/08 International Minerals announced that it has acquired an option to purchase the remaining 50-per-cent interest in the Papa Grande deposit not currently owned by it. The Papa Grande deposit is one of two gold deposits comprising the Gaby project in Ecuador. “The acquisition of the remaining 50-per-cent interest in the Papa Grande property raises the number of measured and indicated resources attributable to IMZ in the overall Gaby project by approximately 21 per cent, from an estimated 3.78 million to 4.59 million contained ounces of gold (224 million tonnes) at an average grade of 0.64 gram per tonne (g/t). It also increases the inferred resources attributable to IMZ by approximately 20 per cent, from an estimated 1.66 million to 2.03 million contained ounces of gold (95 million tonnes at an average grade of 0.66 g/t).” Gignac comments “Details of the option recently signed for the remaining 50% interest will be provided in a technical report shortly, along with the February updated resources. International Minerals’ economic interest in Gaby resources range from 73.75% in the measured and indicated category to 77.8% in the inferred category, based on their location within different land holdings and optioned properties.”
Regarding geo-political risk in Ecuador, Gignac writes “As mining law revision
discussions will continue for a few more months between government and some of the most-advanced foreign companies working in the country (International Minerals, Corriente Resources CTQ-T, Aurelian Resources ARU-T), Ecuador exposure compels a market discount for the near-term. A new mining law is anticipated by year-end 2008. International Minerals is trading at US$99/oz measured & indicated resource (including proven and probable reserves) compared to a weighted average for junior and emerging peers at US$128/oz.”
Pallancata Silver Mine in Peru
On March 17th/08 Hochschild Mining PLC, the mine operator and joint venture partner of International Minerals provided an updated JORC-compliant mineral resource and reserve estimates for the Pallancata silver-gold mine in southern Peru. Gignac writes “Reserves increased 187% to a total of 32.9 million ounces silver and 142,000 ounces gold. Inferred resources rose 12.5% to 33.2 million ounces silver and 93,000 oz gold. This was the largest increase for any of Hochschild’s mines and International Minerals holds a 40% interest. International Minerals is commissioning an independent N.I. 43-101 compliant verification of the resource, which is expected to be released in a technical report within 45 days. Hochschild announced earlier this year the acceleration of the Selene plant expansion for processing ore from the Pallancata mine. The mill will be able to handle 2,250 tpd of Pallancata ore by the end of 2008, up from the initial projection of 1,000 tpd. International Minerals` production interest would total nearly 3.0 million ounces. The net asset value of the Pallancata interest is estimated at $238 million or $2.49 per share, about 30% of the Company’s total net asset value.”
Valuation and Price Target
After assimilating and analyzing the recently released drill results from the Main Gaby deposit and the updated JORC-compliant mineral resource and reserve estimates for the Pallancata silver-gold mine, Gignac writes “Reserve and resource increases positively impacted the net asset value by 2%, rising to US$788 million or $8.23 per share. Ecuador exposure equates to $5.00/share or 61%, plus silver production in Peru and working capital. Breakdown of the key projects is 42% Gaby, 30% Pallancata and 19% Rio Blanco. Applying a modest premium indicates a target price of $8.50/share.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards
Monday, March 24, 2008
Buy, Sell or Hold Baffinland Iron Mines (BIM: TSX)
On March 17th /08 Jennings Capital analyst Peter Campbell initiated coverage on Baffinland Iron Mines Corp. (BIM: AMEX)
Company Profile
Baffinland Iron Mines Corporation is a Canadian junior mining company engaged in the exploration and development of its wholly owned Mary River iron ore deposits. The high-grade Mary River ore deposits are located approximately 160 km south of Pond Inlet on northern Baffin Island in Nunavut Territory, Canada. Baffinland intends to supply direct lump ore and sinter feed into the European and Asian markets.
Event
In a note entitled “Baffinland Iron Mines – Initiating Coverage” Campbell explains the reasons behind his Speculative Buy rating and $6.20 target.
Takeaways From The Event
Baffinland’s sole project is “Mary River, a world class deposit of high-grade hematite and magnetite iron ore, located on Baffin Island, Nunavut. The Mary River project is a large, high-grade, open pit mining project whose iron ore requires no processing – except for crushing and screening – for use in blast furnaces. At present, the project currently has nearly a billion tonnes in reserves and resources. The extent of the known deposits plus the as yet unexplored Deposit No. 4 leave open the possibility of the ultimate existence of as much as 2 billion tonnes of high-grade iron ore to be mined.”
Campbell writes “the ore to be mined at the Mary River project is approximately 65% Fe, which is close to the stoichiometric limit of iron in pure hematite. Pure hematite, the principal mineral to be mined at Mary River, contains 70% iron. Under normal circumstances, iron ore containing less than 50% iron (Fe) will need to undergo a beneficiation process before it can be used in a blast furnace. The beneficiation process normally involves standard flotation and then pelletizing, which adds considerably to the cost of production, as well as capital cost for plant construction. Permitting for tailings disposal is also required. This is why the ore from Mary River requires no additional processing, offering Baffinland a high margin on its product.”
In 2008, Baffinland released the findings of a Definitive Feasibility Study (DFS) completed by “Aker Kvaerner that indicates positive project economics. Iron prices have been steadily increasing for several years driven by the demand for steel, primarily by China, to support the explosive infrastructure build-out that country is experiencing. While there have been some new sources of direct-shipping ore – most notably Fortescue Metals in Australia – current supply remains critically tight as steel producers scramble to secure supply. For example, India’s Tata Steel recently signed a joint venture agreement with SODEMI, a state owned company in Côte d’Ivoire, for developing the Mount Nimba iron ore deposits at a cost of US$1.5 billion. The ore deposits are spread across Ivory Coast, Liberia and Guinea. While most of the deposits are large in tonnage, they are lower in grade, likely requiring beneficiation since higher grade portions have already been mined."
Campbell believes that "The biggest challenge confronting the project is the construction of the 145 km rail line that needs to be built from mining operations at Mary River to the port location at Steensby Inlet. While there are numerous reasons why Steensby is the superior choice of port location, significant challenges remain. First, a portion of the rail bed is to be constructed on permafrost, which will likely experience thawing in the active layer during the summer months. The construction of railways over permafrost has a history of more than 100 years, yet the most common method still used is the build-and-maintain approach. Second, the proposed route has approximately 200 water crossings and three or four short tunnels. Some of the planned crossings are large enough to require a short bridging structure, while the remaining crossings are anticipated to be crossed via culverts. About half of the total capital cost of the project is for rail and port facilities. We believe the construction of the rail line represents the largest element of risk in the project, from the standpoint of engineering, construction, operation and cost control."
The company has “signed four Letters of Intent (LOIs) for the off take of ore from the Mary River project, representing approximately 40% of the 16 M tpa it expects to ship into the European market. We believe this represents significant interest in the Mary Project and bodes well for further expressions of interest, especially when it comes time to negotiate long-term off-take agreements. Baffinland expects to complete a 250,000 tonne bulk sample in 2008, and we expect the parties who have signed LOIs to receive a portion of the bulk sample for testing in their blast furnaces. Baffinland intends to provide meaningful samples for testing, and we interpret this to mean that each furnace will likely receive approximately 50,000 tonnes of bulk sample material. The bulk sample, therefore, will likely go to five different steel mills. With four LOIs already signed, we realistically expect only one or two more to be signed to fully take up the bulk sample.”
With regards to project financing, the DFS “has been completed to a nominal accuracy of ±15% and includes a 12% contingency. Total Capex is estimated to be US$4.1B. This level of expenditure puts the Mary River project into “mega-project” category and will require significant debt financing from a banking consortium, and there is no guarantee that financing can be arranged. The rapid rise of commodity prices over the last few years has resulted in significant demand for capital for project financing. However, we believe that, while not all projects will receive financing, high quality projects producing high-demand commodities that are experiencing the greatest price growth will continue to be financed. We count Baffinland’s Mary River project in this category.”
“Recently, the Company has announced a C$190 M bought deal that is expected to close by the end of March 2008. In 2007, Baffinland invested cash on hand that was not immediately required, to finance operations in asset backed commercial paper (“ABCP”). On December 24 2007, Baffinland announced that it had received C$16.75 million of its C$16.95 million invested in the Skeena Capital Trust managed by Coventree Capital Group Inc. (“Coventree”). The Company currently holds approximately C$14.9 million in the Structured Investment Trust III managed by Coventree, net of C$5.2 million write down taken in 2007.
Mitsubishi Corporation’s Metals Group has taken a strategic investor position in Baffinland, to secure the option of high-grade ore to Asia in the wake of China’s ever increasing demand. Mitsubishi has been an investor in Baffinland since December 2005 and currently holds a 4.0% interest in the Company. Despite having let its participation right in October 2007 expire, by not participating in Baffinland’s financing at the time, Mitsubishi has since reiterated its support as a strategic investor.”
Catalysts
“Considered in our target price is our outlook on how events will unfold for Baffinland in the coming years. Our DCF valuation has assumed that significant project milestones as outlined below are accomplished on schedule. We see the following events providing positive news flow and adding value to Baffinland as the Mary River project continues to be advanced.
2008
- completion of the “Blue Sky” Study in Q2
- shipment of 250,000 tonne bulk sample completed by end of October
- results from ongoing infill drilling at Deposit Nos. 1, 2 & 3
- initiation of environmental permitting process with Nunavut Impact Review Board and the Canadian Environmental Assessment Agency
- submission of comprehensive Environmental Impact Statement in second half 2008 to Nunavut Impact Review Board
2009
- successful negotiation of long-term marketing contracts
- obtain approvals for pre-construction staging
- completion of preconstruction staging: cargo, heavy equipment, fuel and materials by end of September
2010
- obtain all necessary permits and approvals
- successful debt and equity financing for initial capital expenditures
- initiation of mine construction in May
2013
- staged start-up of mining operations and stockpiling in anticipation of first commercial delivery
2014
- first commercial delivery of iron ore from Deposit No.1 to European market
Valuation and Price Target
Campbell bases his target on Baffinland’s development plans, as outlined in the Definitive Feasibility Study. “The February 2008 DFS describes the feasibility of mine development and production at a rate of 18.0 M tpa.” Campbell creates an after tax, post financing DCF model in order to value the company which is presented below. He also adjusts certain inputs to the DCF model to reflect his biases and opinions.
Campbell adds “The most sensitive of all inputs to our DCF model is our metal price assumption. Not only does it have a “first-order” effect on our NPV calculation, recent price increases make it difficult to form reliable estimates of future scenarios. This is one of the main reasons we have chosen to use established 2007 prices. In the table below, we provide our 12-month target price under a number of pricing scenarios including our estimate for 2008 prices.”
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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Company Profile
Baffinland Iron Mines Corporation is a Canadian junior mining company engaged in the exploration and development of its wholly owned Mary River iron ore deposits. The high-grade Mary River ore deposits are located approximately 160 km south of Pond Inlet on northern Baffin Island in Nunavut Territory, Canada. Baffinland intends to supply direct lump ore and sinter feed into the European and Asian markets.
Event
In a note entitled “Baffinland Iron Mines – Initiating Coverage” Campbell explains the reasons behind his Speculative Buy rating and $6.20 target.
Takeaways From The Event
Baffinland’s sole project is “Mary River, a world class deposit of high-grade hematite and magnetite iron ore, located on Baffin Island, Nunavut. The Mary River project is a large, high-grade, open pit mining project whose iron ore requires no processing – except for crushing and screening – for use in blast furnaces. At present, the project currently has nearly a billion tonnes in reserves and resources. The extent of the known deposits plus the as yet unexplored Deposit No. 4 leave open the possibility of the ultimate existence of as much as 2 billion tonnes of high-grade iron ore to be mined.”
Campbell writes “the ore to be mined at the Mary River project is approximately 65% Fe, which is close to the stoichiometric limit of iron in pure hematite. Pure hematite, the principal mineral to be mined at Mary River, contains 70% iron. Under normal circumstances, iron ore containing less than 50% iron (Fe) will need to undergo a beneficiation process before it can be used in a blast furnace. The beneficiation process normally involves standard flotation and then pelletizing, which adds considerably to the cost of production, as well as capital cost for plant construction. Permitting for tailings disposal is also required. This is why the ore from Mary River requires no additional processing, offering Baffinland a high margin on its product.”
In 2008, Baffinland released the findings of a Definitive Feasibility Study (DFS) completed by “Aker Kvaerner that indicates positive project economics. Iron prices have been steadily increasing for several years driven by the demand for steel, primarily by China, to support the explosive infrastructure build-out that country is experiencing. While there have been some new sources of direct-shipping ore – most notably Fortescue Metals in Australia – current supply remains critically tight as steel producers scramble to secure supply. For example, India’s Tata Steel recently signed a joint venture agreement with SODEMI, a state owned company in Côte d’Ivoire, for developing the Mount Nimba iron ore deposits at a cost of US$1.5 billion. The ore deposits are spread across Ivory Coast, Liberia and Guinea. While most of the deposits are large in tonnage, they are lower in grade, likely requiring beneficiation since higher grade portions have already been mined."
Campbell believes that "The biggest challenge confronting the project is the construction of the 145 km rail line that needs to be built from mining operations at Mary River to the port location at Steensby Inlet. While there are numerous reasons why Steensby is the superior choice of port location, significant challenges remain. First, a portion of the rail bed is to be constructed on permafrost, which will likely experience thawing in the active layer during the summer months. The construction of railways over permafrost has a history of more than 100 years, yet the most common method still used is the build-and-maintain approach. Second, the proposed route has approximately 200 water crossings and three or four short tunnels. Some of the planned crossings are large enough to require a short bridging structure, while the remaining crossings are anticipated to be crossed via culverts. About half of the total capital cost of the project is for rail and port facilities. We believe the construction of the rail line represents the largest element of risk in the project, from the standpoint of engineering, construction, operation and cost control."
The company has “signed four Letters of Intent (LOIs) for the off take of ore from the Mary River project, representing approximately 40% of the 16 M tpa it expects to ship into the European market. We believe this represents significant interest in the Mary Project and bodes well for further expressions of interest, especially when it comes time to negotiate long-term off-take agreements. Baffinland expects to complete a 250,000 tonne bulk sample in 2008, and we expect the parties who have signed LOIs to receive a portion of the bulk sample for testing in their blast furnaces. Baffinland intends to provide meaningful samples for testing, and we interpret this to mean that each furnace will likely receive approximately 50,000 tonnes of bulk sample material. The bulk sample, therefore, will likely go to five different steel mills. With four LOIs already signed, we realistically expect only one or two more to be signed to fully take up the bulk sample.”
With regards to project financing, the DFS “has been completed to a nominal accuracy of ±15% and includes a 12% contingency. Total Capex is estimated to be US$4.1B. This level of expenditure puts the Mary River project into “mega-project” category and will require significant debt financing from a banking consortium, and there is no guarantee that financing can be arranged. The rapid rise of commodity prices over the last few years has resulted in significant demand for capital for project financing. However, we believe that, while not all projects will receive financing, high quality projects producing high-demand commodities that are experiencing the greatest price growth will continue to be financed. We count Baffinland’s Mary River project in this category.”
“Recently, the Company has announced a C$190 M bought deal that is expected to close by the end of March 2008. In 2007, Baffinland invested cash on hand that was not immediately required, to finance operations in asset backed commercial paper (“ABCP”). On December 24 2007, Baffinland announced that it had received C$16.75 million of its C$16.95 million invested in the Skeena Capital Trust managed by Coventree Capital Group Inc. (“Coventree”). The Company currently holds approximately C$14.9 million in the Structured Investment Trust III managed by Coventree, net of C$5.2 million write down taken in 2007.
Mitsubishi Corporation’s Metals Group has taken a strategic investor position in Baffinland, to secure the option of high-grade ore to Asia in the wake of China’s ever increasing demand. Mitsubishi has been an investor in Baffinland since December 2005 and currently holds a 4.0% interest in the Company. Despite having let its participation right in October 2007 expire, by not participating in Baffinland’s financing at the time, Mitsubishi has since reiterated its support as a strategic investor.”
Catalysts
“Considered in our target price is our outlook on how events will unfold for Baffinland in the coming years. Our DCF valuation has assumed that significant project milestones as outlined below are accomplished on schedule. We see the following events providing positive news flow and adding value to Baffinland as the Mary River project continues to be advanced.
2008
- completion of the “Blue Sky” Study in Q2
- shipment of 250,000 tonne bulk sample completed by end of October
- results from ongoing infill drilling at Deposit Nos. 1, 2 & 3
- initiation of environmental permitting process with Nunavut Impact Review Board and the Canadian Environmental Assessment Agency
- submission of comprehensive Environmental Impact Statement in second half 2008 to Nunavut Impact Review Board
2009
- successful negotiation of long-term marketing contracts
- obtain approvals for pre-construction staging
- completion of preconstruction staging: cargo, heavy equipment, fuel and materials by end of September
2010
- obtain all necessary permits and approvals
- successful debt and equity financing for initial capital expenditures
- initiation of mine construction in May
2013
- staged start-up of mining operations and stockpiling in anticipation of first commercial delivery
2014
- first commercial delivery of iron ore from Deposit No.1 to European market
Valuation and Price Target
Campbell bases his target on Baffinland’s development plans, as outlined in the Definitive Feasibility Study. “The February 2008 DFS describes the feasibility of mine development and production at a rate of 18.0 M tpa.” Campbell creates an after tax, post financing DCF model in order to value the company which is presented below. He also adjusts certain inputs to the DCF model to reflect his biases and opinions.
Campbell adds “The most sensitive of all inputs to our DCF model is our metal price assumption. Not only does it have a “first-order” effect on our NPV calculation, recent price increases make it difficult to form reliable estimates of future scenarios. This is one of the main reasons we have chosen to use established 2007 prices. In the table below, we provide our 12-month target price under a number of pricing scenarios including our estimate for 2008 prices.”
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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Sunday, March 23, 2008
Company Update on Oilexco (OIL: TSX)
On March 20th /08 Canaccord Adams analyst Frederick Kozak released an update on Oilexco (OIL: TSX)
Company Profile
Oilexco is a Canadian company focused on the exploration and development of known oil producing trends in the UK sector of the North Sea. The Moray Firth is central to the group's strategy, where it believes substantial exploration and development opportunity remains due to the stratigraphic nature of trapping mechanisms and close proximity to existing infrastructure.
Event
In a note entitled “OILEXCO RELEASES YEAR-END RESULTS: MAINTAINING RATING AND TARGET PRICE” Kozak explains the reasons behind his Buy rating and C$24.00 target.
Takeaways From The Event
On March 19th/08 Oilexco reported 2007 year end results and provided an update on its reserves (see http://www.oilexco.com/).Highlights included a revenue increase to $345.4 million (2006: $8.8 million), net income of $76.3 million (2006: ($14.0) million) and an EBITDA of $265.6 million (2006: ($9.7) million). Additionally, the company reported a 53% increase in 1P reserves to 40,824.6 Mboe (2006: 26,614.1 Mboe), 46% increase in 2P reserves to 62, 925.8 Mboe (2006: 42,994.0 Mboe) and 61% increase in 3P reserves to 91,130.3 Mboe (2006: 56,713.0 Mboe).
Kozak writes “The company’s reserves base increased substantially year over year, resulting in an improved net asset value of $9.93 per basic share. However, this NAV is still a conservative estimate of the company’s true value as the 2007 year-end reserves do not include all the recent exploration discoveries such as Huntington Fulmar, Bugle and Kildare. We believe Oilexco’s current successes, as well as its extensive exploration asset base, provides it with significant value upside potential.”
With regards to production numbers, Kozak adds “Oilexco’s production for the fourth quarter averaged 18,671 boe/d, which was 10.7% less than our 20,908 boe/d estimate. On a full-year basis, the company reported average production of 11,748 boe/d, 4.6% below our estimate of 12,312 boe/d. On a cash flow basis, the company reported cash flow for the fourth quarter of $119.9 million, which was 14.4% below our estimate of $140.1 million. For the full year, the company realized cash flow of $245.9 million versus our estimate of $266.1 million.”
“Through 2007, Oilexco replaced approximately 3.9 times Q4/07 production of 18,610 boe/d when compared to 2007 2P reserves. Additionally, the company’s Proved reserve life index was 6.2 years and its 2P reserve life index 9.6 years for 2007. Oilexco’s finding and development costs were $26.43/boe for Proved reserves and $19.78/boe for 2P reserves for 2007. However, the company has a 3-year average of $18.67/boe for 2P reserves.”
Management guided that it “plans to spend approximately US$707 million on exploration, appraisal, and development drilling in 2008. This program includes drilling an additional one or two production wells at the Brenda, an additional well in the Nicol field and one or two more development wells in the Balmoral production area. Development activities will also be focused on the Shelly field. Two production wells will be drilled mid year, and well completions and tie-ins to the Sevan Voyaguer are expected to occur in the fall with production commencing in the fourth quarter. Oilexco anticipates exit production for 2008 to be approximately 45,000 bbl/d of oil.
At Huntington, the company is planning appraisal drilling in both the Paleocene Forties and Jurassic Fulmar zones. The company and its partners are currently working on development solutions for the Huntington field. The company expects the field could be onstream as early as late 2009 or early 2010. The operator of the Kildare project (50% interest) is planning to use one of its drilling vessels to conduct appraisal drilling in the second half of the year. This project remains unappraised since its discovery in 2007 and has the potential to provide material reserves upside in the future, depending on the appraisal drilling results. In 2008, exploration drilling is planned for the Moth, Shelley North and Manhattan prospects. Oilexco also plans to invest additional capital in equipment and maintenance for the Balmoral Floating Production Vessel in preparation to receive increased production throughput.”
Catalyst
Kozak writes “Oilexco is currently drilling an exploration well on the Moth prospect. This well is targeting an Upper Jurassic-aged Fulmar sand, which may contain either oil or gas. The well is expected to reach total depth by the end of April.”
Valuation and Price Target
Kozak maintains his target of C$24.00/sh based on “multiple of debt-adjusted cash flow per share. The company currently trades at 5.4 times our estimated 2008 debt-adjusted cash flow per share. Our target price of C$24.00 is based on 8.9 times 2008E debt-adjusted CFPS but only 4.4 times 2009E debt-adjusted CFPS using US$75.00/bbl oil.”
Kozak’s NAV estimate for Oilexco incorporating the 2007 year end financial, reserve and share information come to $9.44/share.
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.
My Take: Longer term (2-3 years) Oilexco is a Buy. Management has consistently delivered and is targeting production of 100,000 bbl/d from the current production rate of 22,000/23,000 bbl/d. This would generate cash flow in excess of today’s share price. Short term, the stock price could dip down to the $9.90-10.75 level, as it did on January 21st /08. However, within 3 days (by January 24th/ 08) the stock had bounced back to the $12.41 level. The weekly and daily RSI-7 values are at 44.21 and 29.21. The daily RSI-7 value already indicates an over-sold condition but if the weekly RSI-7 value also drops to the low 30’s or even below 30, I would consider loading up on the stock.
Disclosure: I do not own any shares, options or warrants of Oilexco.
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Company Profile
Oilexco is a Canadian company focused on the exploration and development of known oil producing trends in the UK sector of the North Sea. The Moray Firth is central to the group's strategy, where it believes substantial exploration and development opportunity remains due to the stratigraphic nature of trapping mechanisms and close proximity to existing infrastructure.
Event
In a note entitled “OILEXCO RELEASES YEAR-END RESULTS: MAINTAINING RATING AND TARGET PRICE” Kozak explains the reasons behind his Buy rating and C$24.00 target.
Takeaways From The Event
On March 19th/08 Oilexco reported 2007 year end results and provided an update on its reserves (see http://www.oilexco.com/).Highlights included a revenue increase to $345.4 million (2006: $8.8 million), net income of $76.3 million (2006: ($14.0) million) and an EBITDA of $265.6 million (2006: ($9.7) million). Additionally, the company reported a 53% increase in 1P reserves to 40,824.6 Mboe (2006: 26,614.1 Mboe), 46% increase in 2P reserves to 62, 925.8 Mboe (2006: 42,994.0 Mboe) and 61% increase in 3P reserves to 91,130.3 Mboe (2006: 56,713.0 Mboe).
Kozak writes “The company’s reserves base increased substantially year over year, resulting in an improved net asset value of $9.93 per basic share. However, this NAV is still a conservative estimate of the company’s true value as the 2007 year-end reserves do not include all the recent exploration discoveries such as Huntington Fulmar, Bugle and Kildare. We believe Oilexco’s current successes, as well as its extensive exploration asset base, provides it with significant value upside potential.”
With regards to production numbers, Kozak adds “Oilexco’s production for the fourth quarter averaged 18,671 boe/d, which was 10.7% less than our 20,908 boe/d estimate. On a full-year basis, the company reported average production of 11,748 boe/d, 4.6% below our estimate of 12,312 boe/d. On a cash flow basis, the company reported cash flow for the fourth quarter of $119.9 million, which was 14.4% below our estimate of $140.1 million. For the full year, the company realized cash flow of $245.9 million versus our estimate of $266.1 million.”
“Through 2007, Oilexco replaced approximately 3.9 times Q4/07 production of 18,610 boe/d when compared to 2007 2P reserves. Additionally, the company’s Proved reserve life index was 6.2 years and its 2P reserve life index 9.6 years for 2007. Oilexco’s finding and development costs were $26.43/boe for Proved reserves and $19.78/boe for 2P reserves for 2007. However, the company has a 3-year average of $18.67/boe for 2P reserves.”
Management guided that it “plans to spend approximately US$707 million on exploration, appraisal, and development drilling in 2008. This program includes drilling an additional one or two production wells at the Brenda, an additional well in the Nicol field and one or two more development wells in the Balmoral production area. Development activities will also be focused on the Shelly field. Two production wells will be drilled mid year, and well completions and tie-ins to the Sevan Voyaguer are expected to occur in the fall with production commencing in the fourth quarter. Oilexco anticipates exit production for 2008 to be approximately 45,000 bbl/d of oil.
At Huntington, the company is planning appraisal drilling in both the Paleocene Forties and Jurassic Fulmar zones. The company and its partners are currently working on development solutions for the Huntington field. The company expects the field could be onstream as early as late 2009 or early 2010. The operator of the Kildare project (50% interest) is planning to use one of its drilling vessels to conduct appraisal drilling in the second half of the year. This project remains unappraised since its discovery in 2007 and has the potential to provide material reserves upside in the future, depending on the appraisal drilling results. In 2008, exploration drilling is planned for the Moth, Shelley North and Manhattan prospects. Oilexco also plans to invest additional capital in equipment and maintenance for the Balmoral Floating Production Vessel in preparation to receive increased production throughput.”
Catalyst
Kozak writes “Oilexco is currently drilling an exploration well on the Moth prospect. This well is targeting an Upper Jurassic-aged Fulmar sand, which may contain either oil or gas. The well is expected to reach total depth by the end of April.”
Valuation and Price Target
Kozak maintains his target of C$24.00/sh based on “multiple of debt-adjusted cash flow per share. The company currently trades at 5.4 times our estimated 2008 debt-adjusted cash flow per share. Our target price of C$24.00 is based on 8.9 times 2008E debt-adjusted CFPS but only 4.4 times 2009E debt-adjusted CFPS using US$75.00/bbl oil.”
Kozak’s NAV estimate for Oilexco incorporating the 2007 year end financial, reserve and share information come to $9.44/share.
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.
My Take: Longer term (2-3 years) Oilexco is a Buy. Management has consistently delivered and is targeting production of 100,000 bbl/d from the current production rate of 22,000/23,000 bbl/d. This would generate cash flow in excess of today’s share price. Short term, the stock price could dip down to the $9.90-10.75 level, as it did on January 21st /08. However, within 3 days (by January 24th/ 08) the stock had bounced back to the $12.41 level. The weekly and daily RSI-7 values are at 44.21 and 29.21. The daily RSI-7 value already indicates an over-sold condition but if the weekly RSI-7 value also drops to the low 30’s or even below 30, I would consider loading up on the stock.
Disclosure: I do not own any shares, options or warrants of Oilexco.
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Saturday, March 22, 2008
Company Update on Rainy River Resources (RR: TSX-V)
On March 20th /08 Wellington West Capital analyst Catherine Gignac released an update on Rainy River Resources. (RR: TSX-V)
Company Profile
Rainy River Resources is a junior explorer active in northwestern Ontario. An initial resource estimate is pending for the shallow gold-rich zones on the Company’s very large property; host to several other precious and base metal rich zones, which have received minimal testing to-date. Three drill rigs are testing strike and depth extensions of the main gold zones, plus parallel and nearby base metal zones.
Event
In a note entitled “Encouraging Potential for Mineralization at Depth and Along Strike in Parallel Zones” Gignac explains the reasons behind her Buy rating and $7.00 target.
Takeaways From The Event
Gignac writes “Rainy River is aggressively exploring the district-scale project. An initial resource estimate of 3.62 million ounces has now been released and the five drill rigs will remain active through 2008 as the new mineralized zones beyond the main resource area are tested. Based mainly on the ODM and 17 Zone, 1.4 million ounces gold in indicated resource, grading 1.26 g/t gold, and 2.2 million ounces at 1.03 g/t were reported in the inferred category. This covers about one-third of the prospective 3.1 km trend, excludes the extent of the new parallel zones, excludes nickel, copper, zinc and silver mineralization that occurs in proximity to the gold-rich zones, and several large untested geophysical anomalies (silver resources are estimated at 2.9M oz in the indicated category and 2.35M oz in the inferred resource category). Results confirm that a new mining camp with large-scale potential is emerging in this area of NW Ontario.”
Commenting on Rainy River’s March 18th and 19th/ news releases (See http://www.rainyriverresources.com/), Gignac writes “Positive assay results were returned from three holes drilled across a strike length of 120 metres, at a depth of 300 metres. The results from the 433 Zone, located 400-500 m stratigraphically below the 17/ODM zone, indicate potentially economic gold intersections over wide intervals. NR08-221 intersected 13.0 meters grading 5.12 g/t gold, NR08-221 intersected 29.2 metres grading 2.01 g/t gold, and NR08-224 intersected 19.5 metres grading 1.14 g/t gold.”
“Hole NR07-198 was designed to test at least the three known shallow and parallel zones included in the resource estimate. The previously reported high-grade intersection of 4 metres grading 25.6 g/t gold and 184.1 g/t silver was reported from an area that is likely the deeper extension of the Cap Zone. In addition, assay results from this deepest hole drilled to date at 1,656 metres, returned 11 additional gold intercepts over intervals of 27m, 8m, and 44m, grading 0.5 to 1.0 g/t gold. This suggests that mineralization continues at depth and the system could be substantially expanded with additional drilling. The resource estimate is comprised of 145,630 metres or 218 drill holes into the 17/ODM Zone, 433 and Cap zones and accounts for less than 7% of the large prospective land package. Results suggest that significant expansion beyond the current 1.4M oz (Indicated) and 2.2M oz (Inferred) resource is likely, at depth, along trend and in other areas of the property package. We believe the market has not yet fully recognized the current value of the project and the work to-date, nor appreciates the upside potential for a resource expansion later this year.”
Valuation and Price Target
Gignac maintains her target of $7.00/sh based on “initial resources of 3.6M oz valued at US$100-$150/oz, equating to $6.45-$9.68/sh, which excludes future expansion potential.” She believes “a market re-rating should occur as visibility increases and relatively higher market multiples are accorded to companies active in mining-friendly regions. Applying average market multiples of US$100-$150/oz to the current mineralization implies a target trading range of $6.45-$9.68 per share.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Rainy River Resources is a junior explorer active in northwestern Ontario. An initial resource estimate is pending for the shallow gold-rich zones on the Company’s very large property; host to several other precious and base metal rich zones, which have received minimal testing to-date. Three drill rigs are testing strike and depth extensions of the main gold zones, plus parallel and nearby base metal zones.
Event
In a note entitled “Encouraging Potential for Mineralization at Depth and Along Strike in Parallel Zones” Gignac explains the reasons behind her Buy rating and $7.00 target.
Takeaways From The Event
Gignac writes “Rainy River is aggressively exploring the district-scale project. An initial resource estimate of 3.62 million ounces has now been released and the five drill rigs will remain active through 2008 as the new mineralized zones beyond the main resource area are tested. Based mainly on the ODM and 17 Zone, 1.4 million ounces gold in indicated resource, grading 1.26 g/t gold, and 2.2 million ounces at 1.03 g/t were reported in the inferred category. This covers about one-third of the prospective 3.1 km trend, excludes the extent of the new parallel zones, excludes nickel, copper, zinc and silver mineralization that occurs in proximity to the gold-rich zones, and several large untested geophysical anomalies (silver resources are estimated at 2.9M oz in the indicated category and 2.35M oz in the inferred resource category). Results confirm that a new mining camp with large-scale potential is emerging in this area of NW Ontario.”
Commenting on Rainy River’s March 18th and 19th/ news releases (See http://www.rainyriverresources.com/), Gignac writes “Positive assay results were returned from three holes drilled across a strike length of 120 metres, at a depth of 300 metres. The results from the 433 Zone, located 400-500 m stratigraphically below the 17/ODM zone, indicate potentially economic gold intersections over wide intervals. NR08-221 intersected 13.0 meters grading 5.12 g/t gold, NR08-221 intersected 29.2 metres grading 2.01 g/t gold, and NR08-224 intersected 19.5 metres grading 1.14 g/t gold.”
“Hole NR07-198 was designed to test at least the three known shallow and parallel zones included in the resource estimate. The previously reported high-grade intersection of 4 metres grading 25.6 g/t gold and 184.1 g/t silver was reported from an area that is likely the deeper extension of the Cap Zone. In addition, assay results from this deepest hole drilled to date at 1,656 metres, returned 11 additional gold intercepts over intervals of 27m, 8m, and 44m, grading 0.5 to 1.0 g/t gold. This suggests that mineralization continues at depth and the system could be substantially expanded with additional drilling. The resource estimate is comprised of 145,630 metres or 218 drill holes into the 17/ODM Zone, 433 and Cap zones and accounts for less than 7% of the large prospective land package. Results suggest that significant expansion beyond the current 1.4M oz (Indicated) and 2.2M oz (Inferred) resource is likely, at depth, along trend and in other areas of the property package. We believe the market has not yet fully recognized the current value of the project and the work to-date, nor appreciates the upside potential for a resource expansion later this year.”
Valuation and Price Target
Gignac maintains her target of $7.00/sh based on “initial resources of 3.6M oz valued at US$100-$150/oz, equating to $6.45-$9.68/sh, which excludes future expansion potential.” She believes “a market re-rating should occur as visibility increases and relatively higher market multiples are accorded to companies active in mining-friendly regions. Applying average market multiples of US$100-$150/oz to the current mineralization implies a target trading range of $6.45-$9.68 per share.”
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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Friday, March 21, 2008
Buy, Sell or Hold Lundin Mining (LUN: TSX)
On March 19th /08 Dundee Securities analyst Mike Collison released an update on Lundin Mining Corp. (LUN: AMEX)
Company Profile
Lundin Mining Corporation is a rapidly growing mid-tier zinc-copper producer with mines in Sweden, Ireland, and Portugal, mines in development in Portugal and the DRC, and advanced exploration projects in Russia and Spain.
Event
In a note entitled “What Do You Call A Half Billion Dollar Write-down? An Entry Point!” Collison explains the reasons behind his Buy rating and C$11.40 target.
Takeaways From The Event
March 19th, 2008: After announcing a $491.9 million impairment charge related to the assets acquired in the Eurozinc and Rio Narcea transactions of 2006 and summer 2007, shares of Lundin Mining closed down 10.53%, ending the day at $6.63/share. In a note to clients, analyst Mike Collison writes “Although an impairment charge was expected, we believe that the market was stunned by the sheer size of the charge. We have adjusted our model to account for the new numbers and guidance, and our valuation indicates that this event probably represents the best entry point investors are likely to see. With arguably the best internal growth profile in the sector for its price, we believe that Lundin Mining represents incredible value on this announcement-related sell-off.”
The $491.9 million impairment charge resulted in the company “taking a non-cash impairment charge of US$543.1 million, with a matched tax recovery of US$51.2 million, resulting in a Q4/07 net loss of US$436.6 million (unaudited). With the charge, full year 2007 unaudited earnings are a loss of US$154.1 million, with a fully diluted EPS of US$ -0.46 per share. Without the charge, unaudited earnings would be US$337.8 million with a fully diluted pre-charge EPS of US$0.14.”
In response to the impairment charges, Collison writes “The company conducted its impairment test on the basis of future cash flows at consensus forward metal prices with its Euro denominated costs. There has been no change to the reserves at the operations. In the presentation by the company during the conference call, the impairment charge was broken down as follows:
We believe that the company has significantly written-down the value attributed to the Aljustrel property acquired in the EuroZinc transaction. During the conference call, CFO Anders Haker stated that the book value of Aljustrel at the end of the year was US$30 million, having been reduced by US$193.1 million. This is the company's estimate of the fair value based on the estimated future cash flows. The effect that the write-down will have going forward is to reduce the depreciation and depletion declared by the company, which will increase declared net earnings going forward.”
Valuation and Price Target
Collison believes “that the market is seriously undervaluing Lundin Mining. It might take a few quarters for the company to show the market that it can profitably operate its current operations and meet or exceed earnings estimates. However, we believe that it can and will. When it does, the value attributed to the stock by the market should be much higher than it currently is. We believe investors who buy now will profit with that revaluation.”
“We have revisited our model valuation of the company on the basis of the announcements of the last several weeks. We have increased our cost assumptions across the board, at both the operations and the capex requirements for development properties. We have decreased our 2008 production estimates for Aljustrel. We have increased the tax rate applied to the Portuguese operations. We have increased our discount rate for Ozernoe from 12% to 14%. As a result of these changes, we have what we believe to be the most pessimistic valuation for any company in our universe. Even with this, we find that the share price is trading below our estimate of the discounted cash flows through life of all currently producing mines and estimated cash. All of the upside, which we estimate at over C$2.00 per share, is free. For an investor to reasonably believe that the share price is currently fairly valued, he/she must also believe that long term metal prices are likely to be below our estimates of US$1.50/lb copper and US$0.75/lb zinc, while simultaneously believing that the US$/Euro exchange rate will maintain its current levels. This would require MASSIVE surpluses in the metals, with Euro-denominated metal prices near the lowest prices in the past 20 years. We find this scenario an extremely unlikely one, baring a technological breakthrough in mining and processing."
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Lundin Mining Corporation is a rapidly growing mid-tier zinc-copper producer with mines in Sweden, Ireland, and Portugal, mines in development in Portugal and the DRC, and advanced exploration projects in Russia and Spain.
Event
In a note entitled “What Do You Call A Half Billion Dollar Write-down? An Entry Point!” Collison explains the reasons behind his Buy rating and C$11.40 target.
Takeaways From The Event
March 19th, 2008: After announcing a $491.9 million impairment charge related to the assets acquired in the Eurozinc and Rio Narcea transactions of 2006 and summer 2007, shares of Lundin Mining closed down 10.53%, ending the day at $6.63/share. In a note to clients, analyst Mike Collison writes “Although an impairment charge was expected, we believe that the market was stunned by the sheer size of the charge. We have adjusted our model to account for the new numbers and guidance, and our valuation indicates that this event probably represents the best entry point investors are likely to see. With arguably the best internal growth profile in the sector for its price, we believe that Lundin Mining represents incredible value on this announcement-related sell-off.”
The $491.9 million impairment charge resulted in the company “taking a non-cash impairment charge of US$543.1 million, with a matched tax recovery of US$51.2 million, resulting in a Q4/07 net loss of US$436.6 million (unaudited). With the charge, full year 2007 unaudited earnings are a loss of US$154.1 million, with a fully diluted EPS of US$ -0.46 per share. Without the charge, unaudited earnings would be US$337.8 million with a fully diluted pre-charge EPS of US$0.14.”
In response to the impairment charges, Collison writes “The company conducted its impairment test on the basis of future cash flows at consensus forward metal prices with its Euro denominated costs. There has been no change to the reserves at the operations. In the presentation by the company during the conference call, the impairment charge was broken down as follows:
We believe that the company has significantly written-down the value attributed to the Aljustrel property acquired in the EuroZinc transaction. During the conference call, CFO Anders Haker stated that the book value of Aljustrel at the end of the year was US$30 million, having been reduced by US$193.1 million. This is the company's estimate of the fair value based on the estimated future cash flows. The effect that the write-down will have going forward is to reduce the depreciation and depletion declared by the company, which will increase declared net earnings going forward.”
Valuation and Price Target
Collison believes “that the market is seriously undervaluing Lundin Mining. It might take a few quarters for the company to show the market that it can profitably operate its current operations and meet or exceed earnings estimates. However, we believe that it can and will. When it does, the value attributed to the stock by the market should be much higher than it currently is. We believe investors who buy now will profit with that revaluation.”
“We have revisited our model valuation of the company on the basis of the announcements of the last several weeks. We have increased our cost assumptions across the board, at both the operations and the capex requirements for development properties. We have decreased our 2008 production estimates for Aljustrel. We have increased the tax rate applied to the Portuguese operations. We have increased our discount rate for Ozernoe from 12% to 14%. As a result of these changes, we have what we believe to be the most pessimistic valuation for any company in our universe. Even with this, we find that the share price is trading below our estimate of the discounted cash flows through life of all currently producing mines and estimated cash. All of the upside, which we estimate at over C$2.00 per share, is free. For an investor to reasonably believe that the share price is currently fairly valued, he/she must also believe that long term metal prices are likely to be below our estimates of US$1.50/lb copper and US$0.75/lb zinc, while simultaneously believing that the US$/Euro exchange rate will maintain its current levels. This would require MASSIVE surpluses in the metals, with Euro-denominated metal prices near the lowest prices in the past 20 years. We find this scenario an extremely unlikely one, baring a technological breakthrough in mining and processing."
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Thursday, March 20, 2008
Company Update on Timminco (TIM: TSX)
On March 18th /08 CIBC World Markets analyst Michael Willemse released an update on Timminco Limited (TIM: TSX)
Company Profile
Timminco is a leading manufacturer of silicon metal and magnesium products. Timminco is also a growing supplier of solar grade silicon to the solar industry.
Event
In a note entitled “Q4/07 Review And Outlook - Outlook Remains Essentially Intact” Willemse explains the reasons behind his Sector Outperformer rating and $27.00 target.
Takeaways From The Event
With regards to Timminco’s Q4/07 results, Willemse writes “Timminco reported Q4/07 FD EPS of ($0.08) versus ($0.22) in Q4/06 and ($0.05) in Q3/07. Our FD EPS estimate and consensus were ($0.03). The weaker-than-expected results were due to lower-than-expected revenues (partially currency related) and costs related to the ramp up of the new solar grade silicon facility (approximately $1.9 million). Sales were $36.4 million versus $47.6 million in Q4/06 and $43.0 million in Q3/07. The year-over-year appreciation of the Canadian dollar had a $4.6 million negative impact on sales (suggesting that on a currency adjusted basis sales declined $6.6 million versus Q4/06). The Canadian dollar appreciated 13.3% versus Q4/06 and 7.5% versus Q3/07. Gross margin was (7.1%) in Q4/07 versus 3.7% in Q4/06 and 7.2% in Q3/07. Gross margin was negatively impacted by start-up costs for the ramp up of the solar silicon production lines, higher magnesium feedstock costs and the stronger Canadian dollar. Recall results in Q4/07 were primarily a reflection of the existing silicon metal business and the magnesium business. Timminco has announced price increases for both businesses for 2008 due to tight market conditions, particularly for silicon metal where spot prices have doubled versus last year. Regardless, we currently attribute no value to either businesses in our valuation of Timminco, suggesting the Q4/07 results will likely be viewed as irrelevant. Earnings at Fundo continue to be negatively impacted by higher aluminum prices and a soft automotive sector.”
Furthermore, Willemse adds “While the share price of Timminco (TIM-SO) will likely remain volatile until the company can report results in-line with its suggested annualized production rate and hit its targeted profitability levels, we the believe the company’s share price is currently trading at the low end of an appropriate trading range. The shares should start to rebound once again as new customers/contracts are announced, greater customer feedback related to Timminco’s product is provided, and as investors once again begin to consider the relative valuation discount between Timminco and its peer group. Another potential catalyst would be the potential award of two patents for Timminco’s purification process. We believe the March 17th decline in Timminco’s share price in particular may have also been related to share price weakness at Timminco’s parent company, Advanced Metallurgical Group (AMG-L) due to unrelated reasons.
On March 17/08 AMG announced a share purchase agreement to acquire a 62.3% interest in Graphit Kropfmuehl AG (GK-F) for €32.7 million. GK is a traditional producer of high-grade natural graphite and is also a producer of silicon metal. AMG intends to launch a voluntary public tender offer for the remaining outstanding shares in GK. Historically, GK and Bécancour Silicon Inc. (Timminco's silicon metal company) were divisions of the same parent company. However, we believe there are no immediate plans to merge the two operations (perhaps at a later date). AMG also announced that the company is considering a primary equity offering (not to exceed 10% of the company’s shares outstanding) in order to take advantages of opportunities in the market. The AG acquisition and the suggestion of the equity issue resulted in a 13% decline in AMG’s share price, which we believe may have negatively impacted the share price of Timminco. Yesterday afternoon AMG subsequently released a press release, indicating that the company wanted to clarify that the issuance of new ordinary shares is not imminent and will only be launched in connection with specified initiatives which would enhance shareholder value.”
Additionally, Willemse reduces his 2008 fully diluted earnings per share estimate to $0.42 from $0.48 “Based on lower-than-expected profitability from the Magnesium Group and at Fundo Wheels, in addition to a slower-than-expected UMG-Si production ramp-up.”
Looking to the future, Willemse writes “Going forward we expect continued capacity expansions at Timminco and potential growth in new products to offset a declining
polysilicon price environment. During the conference call management expressed an interest in entering the wafer or cell manufacturing markets. While management is still in the initial stages of evaluating this opportunity, readily available turnkey equipment suggests Timminco could begin manufacturing wafers/cells relatively quickly once a decision was made. Additionally, management indicated that customers with specialized processes have been able to use a higher blend of Timminco’s UMG-Si product versus customers with traditional processes. Management also suggested that Timminco could develop its own specialized process, which could be licensed to customers.”
Valuation and Price Target
Willemse maintained his 12-18 month price target of $27.00/sh reflecting no changes to his outlook or 2009 and 2010 earnings estimates. He bases his target on 13x 2009E and 2010E fully diluted earnings per share. Willemse adds “The closest comps for Timminco are trading at approximately 13x 2009E FD EPS. On a DCF basis, we generate a value of approximately $27, although obviously this DCF analysis is subject to several alternative underlying assumptions with respect to ultimate production capacity and pricing.”
“At production of over 14,400 tonnes and a continuation of strong growth in the
solar industry Timminco should easily generate $2.50 in FD EPS on an annualized basis by 2H09 and into 2010. Regardless, at Timminco's current trading multiple of 7.6x 2009E FD EPS of $2.10, Timminco continues to trade at a discount to the polysilicon industry peer group average of 13.0x 2009E FD EPS, and to the solar module industry peer group average of 17.0x FD EPS. As investors consider the potential for Timminco to potentially earn over $3.00 in FD EPS in 2009 or 2010 the company’s share price could appreciate to over $30.00.”
In formulating his target price, Willemse assumes “solar grade silicon pricing of approximately US$50/kg in 2009 and US$45/kg in 2010. If the average price of Timminco’s contracts end up being as high as US$60/kg (approximately 20% below current polysilicon contract prices of US$80/kg), earnings of over $3.00 in 2009 or 2010 would not be unreasonable.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Timminco is a leading manufacturer of silicon metal and magnesium products. Timminco is also a growing supplier of solar grade silicon to the solar industry.
Event
In a note entitled “Q4/07 Review And Outlook - Outlook Remains Essentially Intact” Willemse explains the reasons behind his Sector Outperformer rating and $27.00 target.
Takeaways From The Event
With regards to Timminco’s Q4/07 results, Willemse writes “Timminco reported Q4/07 FD EPS of ($0.08) versus ($0.22) in Q4/06 and ($0.05) in Q3/07. Our FD EPS estimate and consensus were ($0.03). The weaker-than-expected results were due to lower-than-expected revenues (partially currency related) and costs related to the ramp up of the new solar grade silicon facility (approximately $1.9 million). Sales were $36.4 million versus $47.6 million in Q4/06 and $43.0 million in Q3/07. The year-over-year appreciation of the Canadian dollar had a $4.6 million negative impact on sales (suggesting that on a currency adjusted basis sales declined $6.6 million versus Q4/06). The Canadian dollar appreciated 13.3% versus Q4/06 and 7.5% versus Q3/07. Gross margin was (7.1%) in Q4/07 versus 3.7% in Q4/06 and 7.2% in Q3/07. Gross margin was negatively impacted by start-up costs for the ramp up of the solar silicon production lines, higher magnesium feedstock costs and the stronger Canadian dollar. Recall results in Q4/07 were primarily a reflection of the existing silicon metal business and the magnesium business. Timminco has announced price increases for both businesses for 2008 due to tight market conditions, particularly for silicon metal where spot prices have doubled versus last year. Regardless, we currently attribute no value to either businesses in our valuation of Timminco, suggesting the Q4/07 results will likely be viewed as irrelevant. Earnings at Fundo continue to be negatively impacted by higher aluminum prices and a soft automotive sector.”
Furthermore, Willemse adds “While the share price of Timminco (TIM-SO) will likely remain volatile until the company can report results in-line with its suggested annualized production rate and hit its targeted profitability levels, we the believe the company’s share price is currently trading at the low end of an appropriate trading range. The shares should start to rebound once again as new customers/contracts are announced, greater customer feedback related to Timminco’s product is provided, and as investors once again begin to consider the relative valuation discount between Timminco and its peer group. Another potential catalyst would be the potential award of two patents for Timminco’s purification process. We believe the March 17th decline in Timminco’s share price in particular may have also been related to share price weakness at Timminco’s parent company, Advanced Metallurgical Group (AMG-L) due to unrelated reasons.
On March 17/08 AMG announced a share purchase agreement to acquire a 62.3% interest in Graphit Kropfmuehl AG (GK-F) for €32.7 million. GK is a traditional producer of high-grade natural graphite and is also a producer of silicon metal. AMG intends to launch a voluntary public tender offer for the remaining outstanding shares in GK. Historically, GK and Bécancour Silicon Inc. (Timminco's silicon metal company) were divisions of the same parent company. However, we believe there are no immediate plans to merge the two operations (perhaps at a later date). AMG also announced that the company is considering a primary equity offering (not to exceed 10% of the company’s shares outstanding) in order to take advantages of opportunities in the market. The AG acquisition and the suggestion of the equity issue resulted in a 13% decline in AMG’s share price, which we believe may have negatively impacted the share price of Timminco. Yesterday afternoon AMG subsequently released a press release, indicating that the company wanted to clarify that the issuance of new ordinary shares is not imminent and will only be launched in connection with specified initiatives which would enhance shareholder value.”
Additionally, Willemse reduces his 2008 fully diluted earnings per share estimate to $0.42 from $0.48 “Based on lower-than-expected profitability from the Magnesium Group and at Fundo Wheels, in addition to a slower-than-expected UMG-Si production ramp-up.”
Looking to the future, Willemse writes “Going forward we expect continued capacity expansions at Timminco and potential growth in new products to offset a declining
polysilicon price environment. During the conference call management expressed an interest in entering the wafer or cell manufacturing markets. While management is still in the initial stages of evaluating this opportunity, readily available turnkey equipment suggests Timminco could begin manufacturing wafers/cells relatively quickly once a decision was made. Additionally, management indicated that customers with specialized processes have been able to use a higher blend of Timminco’s UMG-Si product versus customers with traditional processes. Management also suggested that Timminco could develop its own specialized process, which could be licensed to customers.”
Valuation and Price Target
Willemse maintained his 12-18 month price target of $27.00/sh reflecting no changes to his outlook or 2009 and 2010 earnings estimates. He bases his target on 13x 2009E and 2010E fully diluted earnings per share. Willemse adds “The closest comps for Timminco are trading at approximately 13x 2009E FD EPS. On a DCF basis, we generate a value of approximately $27, although obviously this DCF analysis is subject to several alternative underlying assumptions with respect to ultimate production capacity and pricing.”
“At production of over 14,400 tonnes and a continuation of strong growth in the
solar industry Timminco should easily generate $2.50 in FD EPS on an annualized basis by 2H09 and into 2010. Regardless, at Timminco's current trading multiple of 7.6x 2009E FD EPS of $2.10, Timminco continues to trade at a discount to the polysilicon industry peer group average of 13.0x 2009E FD EPS, and to the solar module industry peer group average of 17.0x FD EPS. As investors consider the potential for Timminco to potentially earn over $3.00 in FD EPS in 2009 or 2010 the company’s share price could appreciate to over $30.00.”
In formulating his target price, Willemse assumes “solar grade silicon pricing of approximately US$50/kg in 2009 and US$45/kg in 2010. If the average price of Timminco’s contracts end up being as high as US$60/kg (approximately 20% below current polysilicon contract prices of US$80/kg), earnings of over $3.00 in 2009 or 2010 would not be unreasonable.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Update on Oilsands Quest (BQI: AMEX)
On March 19th /08 Blackmont Capital analyst Menno Hulshof released an update on Oilsands Quest Inc. (BQI: AMEX)
Company Profile
Oilsands Quest Inc. is aggressively exploring Canada's largest holding of contiguous oil sands permits and licences, located in Saskatchewan and Alberta, and developing Saskatchewan's first global-scale oil sands discovery. It is leading the establishment of the province of Saskatchewan's emerging oil sands industry.
Event
In a note entitled “Positive Preliminary Drilling Results; Reservoir Field Test Construction Slightly Behind Schedule” Hulshof explains the reasons behind his Buy rating and US$7.25 target.
Takeaways From The Event
Hulshof writes “Oilsands Quest Inc. (BQI-AMEX) released a positive winter drilling update yesterday (March 18) morning and indicated that it is currently in the process of winding down its operations given the arrival of spring. Oilsands Quest completed 25 of 30 planned core holes in Alberta and exceeded its objectives in Saskatchewan by completing 125 exploration and delineation wells, 28 more than its original goal of 97 (as per its October 2007 corporate presentation). Of the 25 wells completed in Alberta, 18 encountered “meaningful” intercepts of bitumen-bearing McMurray formation. Although positive, it is difficult to draw any conclusions given that no details were disclosed with respect to location, net pay, bitumen saturation, permeability, and porosity. Reservoir field test construction, however, appears to be a little behind schedule. Of the total of 18 planned wells, it has drilled two and is in the process of drilling a third. The remainder will be drilled after spring breakup. First steam is expected sometime this summer.”
“Oilsands Quest had originally planned 97 exploration and delineation wells in Saskatchewan and an additional 30 exploration wells on its Athabasca leases in Alberta (as per its October 2007 corporate presentation). It exceeded this objective in completing 125 exploration and delineation wells in Saskatchewan (28 more than expected) and 25 of the 30 exploration wells in Alberta. Of the total of 150 exploration and delineation wells drilled, the 25 wells drilled on its Athabasca leases have the potential to have a meaningful impact on its NAV given that these leases account for 4.5 billion barrels of its total resource estimate of 10 billion barrels. Little information on the 25 wells drilled was provided although it did indicate that 18 encountered “meaningful” intercepts of bitumen bearing McMurray formation. Although directionally positive, we cannot draw any conclusions at this time given the lack of detail with respect to location, net pay, bitumen saturation, permeability, and porosity. Oilsands Quest also indicated that it has largely completed its planned seismic work. It had originally planned 1,860 line km of 3D seismic on a combined basis for both Alberta and Saskatchewan. Of this total, it completed 1,500 line kms (or 81%), making it one of the largest programs undertaken globally in 2008. The project required a seismic crew of 150 individuals and was conducted over the period October through March.”
Furthermore, Hulshof adds “Oilsands Quest has planned a reservoir field test composed of three injector/producer wells, each targeting one of three pods located on its Axe Lake discovery. In addition, it intends to drill five observation wells around each injector/producer well for a total of 18 wells. The company has completed two of the 18 wells and is in the process of drilling a third. On completion of the third well, the company will have to wait for spring break-up to pass, at which point it can complete the drilling program. The purpose of this field test is two-fold; first, to demonstrate the migration of steam from the injector/producer well to the five surrounding observation wells and second, to produce small volumes of bitumen once the wells have switched over from steam injection to production. First steam injection is expected to begin sometime in the summer of 2008, and meaningful results are not expected until the fall. We believe positive field test results will largely dispel the market's concern with the lack of capping shale at Axe Lake.”
Valuation and Price Target
Due to the lack of detail in the news release, Hulshof maintains his Buy recommendation. He writes “Although these results were directionally positive, we are not making any adjustments to our estimate of net asset value of US$7.18 per share given the lack of detail. Our US$7.25 per share target price therefore remains unchanged, as does our BUY recommendation.”
He does add that the 2 most significant upcoming catalysts for the company are: “the formal release of detailed winter drilling results and the release of preliminary field test results which, in turn, could set the stage for formal joint venture negotiations on the commercial development of Axe Lake.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Oilsands Quest Inc. is aggressively exploring Canada's largest holding of contiguous oil sands permits and licences, located in Saskatchewan and Alberta, and developing Saskatchewan's first global-scale oil sands discovery. It is leading the establishment of the province of Saskatchewan's emerging oil sands industry.
Event
In a note entitled “Positive Preliminary Drilling Results; Reservoir Field Test Construction Slightly Behind Schedule” Hulshof explains the reasons behind his Buy rating and US$7.25 target.
Takeaways From The Event
Hulshof writes “Oilsands Quest Inc. (BQI-AMEX) released a positive winter drilling update yesterday (March 18) morning and indicated that it is currently in the process of winding down its operations given the arrival of spring. Oilsands Quest completed 25 of 30 planned core holes in Alberta and exceeded its objectives in Saskatchewan by completing 125 exploration and delineation wells, 28 more than its original goal of 97 (as per its October 2007 corporate presentation). Of the 25 wells completed in Alberta, 18 encountered “meaningful” intercepts of bitumen-bearing McMurray formation. Although positive, it is difficult to draw any conclusions given that no details were disclosed with respect to location, net pay, bitumen saturation, permeability, and porosity. Reservoir field test construction, however, appears to be a little behind schedule. Of the total of 18 planned wells, it has drilled two and is in the process of drilling a third. The remainder will be drilled after spring breakup. First steam is expected sometime this summer.”
“Oilsands Quest had originally planned 97 exploration and delineation wells in Saskatchewan and an additional 30 exploration wells on its Athabasca leases in Alberta (as per its October 2007 corporate presentation). It exceeded this objective in completing 125 exploration and delineation wells in Saskatchewan (28 more than expected) and 25 of the 30 exploration wells in Alberta. Of the total of 150 exploration and delineation wells drilled, the 25 wells drilled on its Athabasca leases have the potential to have a meaningful impact on its NAV given that these leases account for 4.5 billion barrels of its total resource estimate of 10 billion barrels. Little information on the 25 wells drilled was provided although it did indicate that 18 encountered “meaningful” intercepts of bitumen bearing McMurray formation. Although directionally positive, we cannot draw any conclusions at this time given the lack of detail with respect to location, net pay, bitumen saturation, permeability, and porosity. Oilsands Quest also indicated that it has largely completed its planned seismic work. It had originally planned 1,860 line km of 3D seismic on a combined basis for both Alberta and Saskatchewan. Of this total, it completed 1,500 line kms (or 81%), making it one of the largest programs undertaken globally in 2008. The project required a seismic crew of 150 individuals and was conducted over the period October through March.”
Furthermore, Hulshof adds “Oilsands Quest has planned a reservoir field test composed of three injector/producer wells, each targeting one of three pods located on its Axe Lake discovery. In addition, it intends to drill five observation wells around each injector/producer well for a total of 18 wells. The company has completed two of the 18 wells and is in the process of drilling a third. On completion of the third well, the company will have to wait for spring break-up to pass, at which point it can complete the drilling program. The purpose of this field test is two-fold; first, to demonstrate the migration of steam from the injector/producer well to the five surrounding observation wells and second, to produce small volumes of bitumen once the wells have switched over from steam injection to production. First steam injection is expected to begin sometime in the summer of 2008, and meaningful results are not expected until the fall. We believe positive field test results will largely dispel the market's concern with the lack of capping shale at Axe Lake.”
Valuation and Price Target
Due to the lack of detail in the news release, Hulshof maintains his Buy recommendation. He writes “Although these results were directionally positive, we are not making any adjustments to our estimate of net asset value of US$7.18 per share given the lack of detail. Our US$7.25 per share target price therefore remains unchanged, as does our BUY recommendation.”
He does add that the 2 most significant upcoming catalysts for the company are: “the formal release of detailed winter drilling results and the release of preliminary field test results which, in turn, could set the stage for formal joint venture negotiations on the commercial development of Axe Lake.”
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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Wednesday, March 19, 2008
Company Update on Western Goldfields (WGI: TSX)
On March 18th /08 Wellington West Capital analyst Catherine Gignac released an update on Western Goldfields Inc. (WGI: TSX)
Company Profile
Western Goldfields is a new gold producer with the Mesquite open pit/heap leach mine in California with annual output forecast at about 160,000 ounces over a 12-year mine life. Additional resources on the property could increase future output and/or extend its mine life. The location is proximal to several major mining districts in Nevada and northern Mexico for future opportunities.
Event
In a note entitled “Reported year-end result; “Platform for Growth” Gignac explains the reasons behind her Buy rating and $5.50 target.
Takeaways From The Event
Gignac writes “Western Goldfields started removing overburden mid-2007 and mining and stockpiling of ore onto the new leach pad commenced in Q4/07. Production is forecast at 155,000-165,000 oz in 2008, and 150,000-160,000 oz in 2009. Modest residual leaching was reported in 2007 and 2006 (total output of 20,100 oz) from historical mining. Annual output is in line with initial projections of 165,000 oz over the mine life. Gold production this year is forecast to rise from 10,000-13,000 oz in Q1/08 to 40,000-50,000 oz for Q2/08, when a steady output rate should be achieved.”
In terms of operating costs, “Speed constraints from the truck tires used on the mining fleet required a program of systematic replacement, which should be resolved by year-end. A fourth crew was added to make up some of the productivity, but will add to 2008 costs by about $20-$25/oz. Conservative expense accounting for the overburden removal required prior to mining will result in a $25-$30/oz charge this year based on the gold in inventory accounted for at year-end 2007. Costs in 2008 are now projected at $410-$430/oz, dropping to a management forecast of $360-$370/oz in 2009.”
In regards to Western Goldfields’ hedges, Gignac writes “As part of the $108 million Investec loan to finance mine development, forward sales contracts were secured for 429,000 oz gold at an average price of US$801/oz, 33,000oz in 2008, and 66,000 oz. per year from 2009 to 2014. This is about 40% of our annual production forecast and 16% of reserves. The mark-to-market value of the hedge was $57.0 million at year-end 2007. Western Goldfields has $46.2 million in working capital and the loan at Dec. 2007 was $69.6 million. For every 10% change in the gold price, our cash flow per share estimate changes by $0.06/share or 17%. At current gold spot
prices cash flow per share rises 43% to $0.50/sh from $0.35/sh. Net asset value rises 65% to $8.29/sh using the five-year forward gold price curve (Bloomberg).”
Valuation and Price Target
Gignac bases her $5.50/sh target on a “1.1x multiple of P/NAV($5.02/sh) for mine NPV ($3.77/sh) and additional resources at US$100/oz (1.25/sh).”
Gignac’s assumptions are based on “a long-term average gold price of US$700/oz, taking
into account forward sales at US$801/oz for 40% of annual output in the next six years. The shares offer positive leverage in a rising gold price environment. The net present value of forecast discounted operating cash flows at 3% is reduced 7% to US$510 million or $3.77 per share, while additional resources outside of our mine model valued at US$100/oz increases to $1.25/share. The total net asset value remains unchanged at $5.02/share. A modest growth and management premium of 1.10x indicates a potential value of $5.53/share.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Western Goldfields is a new gold producer with the Mesquite open pit/heap leach mine in California with annual output forecast at about 160,000 ounces over a 12-year mine life. Additional resources on the property could increase future output and/or extend its mine life. The location is proximal to several major mining districts in Nevada and northern Mexico for future opportunities.
Event
In a note entitled “Reported year-end result; “Platform for Growth” Gignac explains the reasons behind her Buy rating and $5.50 target.
Takeaways From The Event
Gignac writes “Western Goldfields started removing overburden mid-2007 and mining and stockpiling of ore onto the new leach pad commenced in Q4/07. Production is forecast at 155,000-165,000 oz in 2008, and 150,000-160,000 oz in 2009. Modest residual leaching was reported in 2007 and 2006 (total output of 20,100 oz) from historical mining. Annual output is in line with initial projections of 165,000 oz over the mine life. Gold production this year is forecast to rise from 10,000-13,000 oz in Q1/08 to 40,000-50,000 oz for Q2/08, when a steady output rate should be achieved.”
In terms of operating costs, “Speed constraints from the truck tires used on the mining fleet required a program of systematic replacement, which should be resolved by year-end. A fourth crew was added to make up some of the productivity, but will add to 2008 costs by about $20-$25/oz. Conservative expense accounting for the overburden removal required prior to mining will result in a $25-$30/oz charge this year based on the gold in inventory accounted for at year-end 2007. Costs in 2008 are now projected at $410-$430/oz, dropping to a management forecast of $360-$370/oz in 2009.”
In regards to Western Goldfields’ hedges, Gignac writes “As part of the $108 million Investec loan to finance mine development, forward sales contracts were secured for 429,000 oz gold at an average price of US$801/oz, 33,000oz in 2008, and 66,000 oz. per year from 2009 to 2014. This is about 40% of our annual production forecast and 16% of reserves. The mark-to-market value of the hedge was $57.0 million at year-end 2007. Western Goldfields has $46.2 million in working capital and the loan at Dec. 2007 was $69.6 million. For every 10% change in the gold price, our cash flow per share estimate changes by $0.06/share or 17%. At current gold spot
prices cash flow per share rises 43% to $0.50/sh from $0.35/sh. Net asset value rises 65% to $8.29/sh using the five-year forward gold price curve (Bloomberg).”
Valuation and Price Target
Gignac bases her $5.50/sh target on a “1.1x multiple of P/NAV($5.02/sh) for mine NPV ($3.77/sh) and additional resources at US$100/oz (1.25/sh).”
Gignac’s assumptions are based on “a long-term average gold price of US$700/oz, taking
into account forward sales at US$801/oz for 40% of annual output in the next six years. The shares offer positive leverage in a rising gold price environment. The net present value of forecast discounted operating cash flows at 3% is reduced 7% to US$510 million or $3.77 per share, while additional resources outside of our mine model valued at US$100/oz increases to $1.25/share. The total net asset value remains unchanged at $5.02/share. A modest growth and management premium of 1.10x indicates a potential value of $5.53/share.”
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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Buy, Sell or Hold Capital Gold (CGC: TSX)
On March 17th /08 Jennings Capital analyst Stuart McDougall initiated coverage on Capital Gold Corporation (CGC: TSX)
Company Profile
Capital Gold is an emerging junior gold producer focused on Mexico. The company's sole asset, the El Chanate open-pit, heap-leach mine, was advanced to production in July 2007, at capital cost of US$18 million. Annualized production is targeted to increase from 50,000 ounces currently to 80,000-100,000 ounces in the next year.
Event
In a note entitled “LOW-COST GOLD PRODUCTION IN MEXICO – PROFITABLE FROM DAY ONE!” McDougall explains the reasons behind his Buy rating and C$2.15 target.
Takeaways From The Event
McDougall writes “The company’s 100%-owned El Chanate open-pit, heap-leach mine covers 3,544 hectares located 280 km northwest of Hermosillo, in Mexico’s Sonora Desert. Production began in August 2007 and is forecast to total 50,000 ounces in the first year, 60,000-65,000 ounces in the second year and 80,000-100,000 ounces thereafter. Cash costs totalled US$246/ounce in the first six months, translating into US$6.8 million in operating cash flow! We expect costs to rise in the coming quarters, but then taper back to current levels as throughput rates and recovery rates are ramped up. We forecast CFPS of US$0.06 in F2008, US$0.11 in F2009 and US$0.15 in F2010. Our earnings estimates are similar because of the low initial capex of US$18 million. Proven and Probable Reserves total 39 million tonnes grading 0.66 g/t tonne, for 835,000 contained ounces, sufficient to support planned operations for 10 years. We see excellent potential to increase reserves and extend the mine life, even with the proposed expansion. Beyond El Chanate, Capital Gold Corporation has staked 7,000 hectares hosting virtually untested gold showings.”
“Since August 2007, when commercial operations began at its 100%-owned El Chanate mine, Capital Gold has produced approximately 19,500 ounces at a cash cost of approximately US$246/ounce, enabling two consecutive quarters of positive earnings and cash flow. El Chanate itself is an extremely robust operation, with our assumptions showing an estimated net present value of US$265 million (inclusive of capex) and an internal rate exceeding 100%. We base our model on forecast metal prices of US$900 per ounce for gold and US$16 per ounce for silver; an assumed doubling of reserves; the implementation of a proposed expansion of throughput rates to 15,000 tonnes per day; and an expected improvement in recovery rates.”
McDougall reminds investors that “In 2001, Capital Gold purchased the property from a subsidiary of AngloGold Ashanti (NYSE-AU) for US$55,000 in cash, a 10% net profits interest (capped at US$1 million), a 4% net smelter return royalty (caped at US$17 million) and a one-time back-in right for a 51% interest, subject to payment of two-times Capital Gold’s total expenditures. AngloGold Ashanti recently sold its royalties to Royal Gold (NASDAQ-RGLD), making the back-in right noted earlier in the report the company’s only tie to the project. Subsequently, Capital Gold triggered the back-in by reporting that it had outlined a drill-indicated resource exceeding 2 million contained ounces (as defined in the agreement, not in NI 43-101). AngloGold has until July 28, 2008, to exercise the right, subject to repayment of two-times Capital Gold’s total project expenditures since 2001 (~US$90 million). Investors are therefore cautioned that we would need to adjust our model if AngloGold exercises the back-in right.”
“Capital Gold has a highly experienced management team, and we expect this to translate into a growing production profile through a combination of organic and acquisitive means. Of particular note, from 1995-2000, Chief Operating Officer John Brownlie served as General Manager of the Zarafshan-Newmont Joint Venture in Uzbekistan, a one-million-tonne-per-month heap leach operation that produced over 400,000 ounces of gold per year. His experience has already materialized in the form of having ramped up throughput rates two years ahead of the feasibility schedule. Additionally, leach pad construction is five years ahead of mining, and most of the capital components needed to achieve the targeted capacity of 15,000 tonnes per day have already been acquired.”
“El Chanate is a conventional open-pit, heap-leach operation that employs contract mining and a three-stage crushing and stacking system. Mining is carried out by contractors, with all other activities managed by Capital Gold. Gold and silver are recovered by adsorption-desorption and electrowinning techniques. Recoveries have exceeded 67% so far and are expected to exceed 70% with the implementation of current and proposed expansion plans.”
With regards to production and costs estimates McDougall writes “Management has indicated that it plans to increase throughput rates to 15,000 tonnes per day from the current rate of 12,500 tonnes per day. The proposed expansion is expected to cost US$7 million to complete (US$2.9 million spent to date) and would mainly involve doubling the pumping capacity to the leach pad (done), adding new carbon and elution tanks (expected by year-end), and installing another secondary crusher (expected in 2009). The mine plan also needs to be updated, but we expect a positive outcome based on discussions with management and our observations during a site visit earlier this year. As part of this expansion plan, Capital Gold drilled 26 definition and infill drill holes in 2007, results for which are pending.
We consider the proposed expansion requirements to be minor and are impressed with management’s execution to date. Accordingly, we have incorporated the proposed expansion in our modelling assumptions, assuming that the targeted expansion rate and improved gold recoveries are achieved in fiscal 2010 (mid-2009 on the calendar). Also, as noted, we assume a 75% conversion rate on the measured and indicated resource, net of reserves, putting our mine life assumption at 13 years.”
Valuation and Price Target
McDougall formulates his $2.15/sh rating by assigning equal weight to “a multiple of 1.5x NAV and a multiple of 13x to his F2010 CFPS estimate.” After modelling “Capital Gold’s cash flows at metal prices of US$900 per ounce for gold and US$16 per ounce for silver,” McDougall determines a fully diluted NAV of US$1.50/sh. He mentions that his “NAV is net of sunk capital costs and includes a nominal value for exploration, plus balance sheet items and in-the-money options and warrants.”
“Under the loan agreement with Standard Bank, Capital Gold had to hedge 122,000 ounces of gold, which it has since reduced to approximately 90,000 ounces. The hedge is structured such that Capital Gold actually sells its gold at spot prices and writes a check to the bank equalling the net difference on the hedge – US$35 per ounce on approximately 8,000 ounces per quarter, until unwound. Although technically hedged, the Company participates fully in the gold price under this structure. Furthermore, management expects to recover twice as much silver as gold once the additional carbon tanks are installed, meaning that the by-product revenue would more than cover the required payments to Standard Bank at our price assumption of US$16 per ounce. That said, investors are cautioned that Capital Gold must report the fair value of the hedge on a quarterly basis, but this is a non-cash item, so the difference is added back to operating cash flow. For the sake of simplicity, we account for the estimated payments owed to Standard Bank as an operating expense.”
“Capital Gold maintains a healthy balance sheet, with working capital of US$9.8 million, cash of US$5.0 million and long-term debt of US$10.5 million as at January 31, 2008. The Company also had 4.75 options having a weighted average strike price of C$0.49 per share and 16.9 million warrants having a weighted average strike price of C$0.34 per share on that date. The options are exercisable over approximately 3 years and the warrants over approximately 2.5 years, and represent a potential equity inflow of C$8.1 million if exercised.”
Lastly, McDougall estimates “fully diluted EPS of US$0.05 in F2008 (ending July 31, 2008), US$0.10 in F2009, and US$0.14 in F2010. We estimate fully diluted CFPS of US$0.06 in F2008, US$0.11 in F2009 and US$0.15 in F2010. Our financial estimates are based on realized prices to date and forecast prices of US$900 per ounce for gold and US$16 per ounce for silver. We also would note that should silver production double, this would add US$0.01 to our financial estimates.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Capital Gold is an emerging junior gold producer focused on Mexico. The company's sole asset, the El Chanate open-pit, heap-leach mine, was advanced to production in July 2007, at capital cost of US$18 million. Annualized production is targeted to increase from 50,000 ounces currently to 80,000-100,000 ounces in the next year.
Event
In a note entitled “LOW-COST GOLD PRODUCTION IN MEXICO – PROFITABLE FROM DAY ONE!” McDougall explains the reasons behind his Buy rating and C$2.15 target.
Takeaways From The Event
McDougall writes “The company’s 100%-owned El Chanate open-pit, heap-leach mine covers 3,544 hectares located 280 km northwest of Hermosillo, in Mexico’s Sonora Desert. Production began in August 2007 and is forecast to total 50,000 ounces in the first year, 60,000-65,000 ounces in the second year and 80,000-100,000 ounces thereafter. Cash costs totalled US$246/ounce in the first six months, translating into US$6.8 million in operating cash flow! We expect costs to rise in the coming quarters, but then taper back to current levels as throughput rates and recovery rates are ramped up. We forecast CFPS of US$0.06 in F2008, US$0.11 in F2009 and US$0.15 in F2010. Our earnings estimates are similar because of the low initial capex of US$18 million. Proven and Probable Reserves total 39 million tonnes grading 0.66 g/t tonne, for 835,000 contained ounces, sufficient to support planned operations for 10 years. We see excellent potential to increase reserves and extend the mine life, even with the proposed expansion. Beyond El Chanate, Capital Gold Corporation has staked 7,000 hectares hosting virtually untested gold showings.”
“Since August 2007, when commercial operations began at its 100%-owned El Chanate mine, Capital Gold has produced approximately 19,500 ounces at a cash cost of approximately US$246/ounce, enabling two consecutive quarters of positive earnings and cash flow. El Chanate itself is an extremely robust operation, with our assumptions showing an estimated net present value of US$265 million (inclusive of capex) and an internal rate exceeding 100%. We base our model on forecast metal prices of US$900 per ounce for gold and US$16 per ounce for silver; an assumed doubling of reserves; the implementation of a proposed expansion of throughput rates to 15,000 tonnes per day; and an expected improvement in recovery rates.”
McDougall reminds investors that “In 2001, Capital Gold purchased the property from a subsidiary of AngloGold Ashanti (NYSE-AU) for US$55,000 in cash, a 10% net profits interest (capped at US$1 million), a 4% net smelter return royalty (caped at US$17 million) and a one-time back-in right for a 51% interest, subject to payment of two-times Capital Gold’s total expenditures. AngloGold Ashanti recently sold its royalties to Royal Gold (NASDAQ-RGLD), making the back-in right noted earlier in the report the company’s only tie to the project. Subsequently, Capital Gold triggered the back-in by reporting that it had outlined a drill-indicated resource exceeding 2 million contained ounces (as defined in the agreement, not in NI 43-101). AngloGold has until July 28, 2008, to exercise the right, subject to repayment of two-times Capital Gold’s total project expenditures since 2001 (~US$90 million). Investors are therefore cautioned that we would need to adjust our model if AngloGold exercises the back-in right.”
“Capital Gold has a highly experienced management team, and we expect this to translate into a growing production profile through a combination of organic and acquisitive means. Of particular note, from 1995-2000, Chief Operating Officer John Brownlie served as General Manager of the Zarafshan-Newmont Joint Venture in Uzbekistan, a one-million-tonne-per-month heap leach operation that produced over 400,000 ounces of gold per year. His experience has already materialized in the form of having ramped up throughput rates two years ahead of the feasibility schedule. Additionally, leach pad construction is five years ahead of mining, and most of the capital components needed to achieve the targeted capacity of 15,000 tonnes per day have already been acquired.”
“El Chanate is a conventional open-pit, heap-leach operation that employs contract mining and a three-stage crushing and stacking system. Mining is carried out by contractors, with all other activities managed by Capital Gold. Gold and silver are recovered by adsorption-desorption and electrowinning techniques. Recoveries have exceeded 67% so far and are expected to exceed 70% with the implementation of current and proposed expansion plans.”
With regards to production and costs estimates McDougall writes “Management has indicated that it plans to increase throughput rates to 15,000 tonnes per day from the current rate of 12,500 tonnes per day. The proposed expansion is expected to cost US$7 million to complete (US$2.9 million spent to date) and would mainly involve doubling the pumping capacity to the leach pad (done), adding new carbon and elution tanks (expected by year-end), and installing another secondary crusher (expected in 2009). The mine plan also needs to be updated, but we expect a positive outcome based on discussions with management and our observations during a site visit earlier this year. As part of this expansion plan, Capital Gold drilled 26 definition and infill drill holes in 2007, results for which are pending.
We consider the proposed expansion requirements to be minor and are impressed with management’s execution to date. Accordingly, we have incorporated the proposed expansion in our modelling assumptions, assuming that the targeted expansion rate and improved gold recoveries are achieved in fiscal 2010 (mid-2009 on the calendar). Also, as noted, we assume a 75% conversion rate on the measured and indicated resource, net of reserves, putting our mine life assumption at 13 years.”
Valuation and Price Target
McDougall formulates his $2.15/sh rating by assigning equal weight to “a multiple of 1.5x NAV and a multiple of 13x to his F2010 CFPS estimate.” After modelling “Capital Gold’s cash flows at metal prices of US$900 per ounce for gold and US$16 per ounce for silver,” McDougall determines a fully diluted NAV of US$1.50/sh. He mentions that his “NAV is net of sunk capital costs and includes a nominal value for exploration, plus balance sheet items and in-the-money options and warrants.”
“Under the loan agreement with Standard Bank, Capital Gold had to hedge 122,000 ounces of gold, which it has since reduced to approximately 90,000 ounces. The hedge is structured such that Capital Gold actually sells its gold at spot prices and writes a check to the bank equalling the net difference on the hedge – US$35 per ounce on approximately 8,000 ounces per quarter, until unwound. Although technically hedged, the Company participates fully in the gold price under this structure. Furthermore, management expects to recover twice as much silver as gold once the additional carbon tanks are installed, meaning that the by-product revenue would more than cover the required payments to Standard Bank at our price assumption of US$16 per ounce. That said, investors are cautioned that Capital Gold must report the fair value of the hedge on a quarterly basis, but this is a non-cash item, so the difference is added back to operating cash flow. For the sake of simplicity, we account for the estimated payments owed to Standard Bank as an operating expense.”
“Capital Gold maintains a healthy balance sheet, with working capital of US$9.8 million, cash of US$5.0 million and long-term debt of US$10.5 million as at January 31, 2008. The Company also had 4.75 options having a weighted average strike price of C$0.49 per share and 16.9 million warrants having a weighted average strike price of C$0.34 per share on that date. The options are exercisable over approximately 3 years and the warrants over approximately 2.5 years, and represent a potential equity inflow of C$8.1 million if exercised.”
Lastly, McDougall estimates “fully diluted EPS of US$0.05 in F2008 (ending July 31, 2008), US$0.10 in F2009, and US$0.14 in F2010. We estimate fully diluted CFPS of US$0.06 in F2008, US$0.11 in F2009 and US$0.15 in F2010. Our financial estimates are based on realized prices to date and forecast prices of US$900 per ounce for gold and US$16 per ounce for silver. We also would note that should silver production double, this would add US$0.01 to our financial estimates.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Monday, March 17, 2008
Buy, Sell or Hold Coastal Energy (CEN: TSX-V)
On March 12th /08 RBC Capital Markets analyst Nathan Piper initiated coverage on Coastal Energy (CEN: TSX-V)
Company Profile
Coastal Energy is an international exploration and production company focused on Southeast Asia.The Company's current operations are based in Thailand where it has production from the onshore Phu Horm gas field and development opportunities in the Gulf of Thailand. The Company currently produces in the range of 12 million cubic feet of gas per day (approximately 2000 barrels oil equivalent per day) from the Phu Horm gas field located in north east Thailand and has a number of offshore oil fields currently under development.
Event
In a note entitled “Growing an Asian E&P from Thai Asset Base” Piper explains the reasons behind his Outperform rating and $6.50 target.
Takeaways From The Event
Piper writes “Coastal Energy plans to start production Q2 2008 (4kb/d) from its 4.5mmbbl Songkhla oil field (100% Coastal) offshore Thailand. This should increase total production to 6kboe/d from its Thai asset base, which is all oil price linked (36mmboe 50/50 oil and gas). On the same block (G5/43), the 13mmbbl Bua Ban oil field could be onstream late 2008 (although we assume 2009) pushing production to 10kboe/d by year end. The 8,500 km2 block has a series of similar prospects close to Songkhla and Bua Ban and although each accumulation is modest (~10mmbbls) the prospect inventory provides repeatability with exploration and appraisal drilling in 2008.”
“Coastal (12.6%) and UK-listed Salamander Energy (9.5%) (SMDR.L) hold stakes in the Phu Horm field onshore Thailand. Both Coastal and London-listed Salamander (SMDR.L) hold their stakes indirectly through a private US company APICO that has a 35% stake in Phu Horm (Coastal has a 36.1% stake and Salamander 27% stake in APICO). It supplies gas to the 750MW Nam Phong power plant; the current gas sales agreement (GSA) is for the supply of 507 bcf over 15 years. There is the potential to expand the capacity of the power plant in 2008 that could add around 140bcf demand within the period of the current GSA. The field has 2P reserves of 870bcf and could satisfy this increase; however, there are limited gas market opportunities in northern Thailand. The Phu Horm field has been brought onstream following the underperformance of the Exxon-operated Nam Phong gas field that initially supplied the power plant with all its gas requirements. The Phu Horm field has contingent resources of 6.8Tcf which on further drilling (Phu Horm South Q1 2008, PH-8 and PH-6 frac through 2008) could help build the critical mass to justify a pipeline to gas markets in southern Thailand. In 2008, Coastal with Salamander has gas appraisal drilling planned on 3 blocks close to Phu Horm targeting gas (prospects 200-740bcf); unrisked this could add $1.80/share (90p) to our valuation. Thailand's gas market is set to grow 8%/yr and already imports gas from Myanmar and is considering LNG.”
Coastal currently has about $30 million in its treasury (1/1/2008) alongside a $43 million debt facility (based on Phu Horm production), hence it may require additional financing to carry out it’s ~$100 million cap-ex budget for 2008. Piper writes “Although the company could use equity, it is considering debt to develop its two offshore oil fields.”
Piper believes “Management is keen to expand their portfolio outside Thailand, remaining focused on those areas in Asia (between India and China) with proven hydrocarbons. Coastal’s strategy is to expand by identifying ‘orphaned’ discoveries with appraisal opportunities that may previously have been uneconomic / overlooked. Successful expansion could make Coastal an acquisition target longer term. Expansion may not need equity funding – indeed, a portion of Coastal’s 100% stake in Block G5/43 could be used as a trading chip to swap into acreage with greater long term impact.”
Lastly, Piper feels “Coastal offers investors access to near-term production growth and appraisal upside in 2008 at an attractive valuation, shares trade at a 35% discount to our estimated $5.50/share net asset value (275p). Coastal’s oil price linked gas production, near term oil production and the tax and royalty fiscal regime in Thailand provides direct benefits to the current high oil price.”
Valuation and Price Target
Piper bases his $6.50/sh rating on “company’s year end 2008 NAV; i.e. we have discounted projected future cash flows back to January 1, 2009 at a 10% discount rate, and then considered the potential outcome of the company’s exploration /appraisal campaign (using a ~25% chance of success). By the start of 2009, Coastal should have two onstream oil fields and up to four appraisals well completed across the onshore acreage that may begin to prove sufficient reserves to justify a gas pipeline to the southern gas markets.
On a sum of the parts basis, Piper values Coastal at an NAV of $5.50/sh. “This comprises a core value of $4.34/share, which includes producing assets, development upside and net financial position, and a risked upside of $1.16/share. In other words, in our view at the current share price, the investor is paying for the producing/near production assets and enjoying appraisal upside for free. We use a 10% discount rate in-line with other small cap E&P companies; Thailand is a safe operating environment with stable fiscal terms. Coastal’s core value is derived from its stake “in the producing Phu Horm field and its 100% stake in the Songkhla and Bua Ban oil field, both are due onstream over the next 12 months. The core also includes the company’s financial position, its 2008 exploration/appraisal commitments and forecast year end 2007 cash position. Utilizing the appropriate Thai fiscal terms (tax and royalty), we have modeled the assets based on $88/bbl in 2008, $85/bbl in 2009, $75/bbl in 2010 and a $60/bbl long-term oil price assumption. Coastal benefits greatly from the current high oil price. We assume parity between US/Canadian dollar and exchange rate. Future cash flows are discounted at 10% (for a small-cap E&P company).”
Click here to watch Peter Hodson of Sprott Asset Management highlight Coastal Energy on BNN on January 31st, 2008
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Coastal Energy is an international exploration and production company focused on Southeast Asia.The Company's current operations are based in Thailand where it has production from the onshore Phu Horm gas field and development opportunities in the Gulf of Thailand. The Company currently produces in the range of 12 million cubic feet of gas per day (approximately 2000 barrels oil equivalent per day) from the Phu Horm gas field located in north east Thailand and has a number of offshore oil fields currently under development.
Event
In a note entitled “Growing an Asian E&P from Thai Asset Base” Piper explains the reasons behind his Outperform rating and $6.50 target.
Takeaways From The Event
Piper writes “Coastal Energy plans to start production Q2 2008 (4kb/d) from its 4.5mmbbl Songkhla oil field (100% Coastal) offshore Thailand. This should increase total production to 6kboe/d from its Thai asset base, which is all oil price linked (36mmboe 50/50 oil and gas). On the same block (G5/43), the 13mmbbl Bua Ban oil field could be onstream late 2008 (although we assume 2009) pushing production to 10kboe/d by year end. The 8,500 km2 block has a series of similar prospects close to Songkhla and Bua Ban and although each accumulation is modest (~10mmbbls) the prospect inventory provides repeatability with exploration and appraisal drilling in 2008.”
“Coastal (12.6%) and UK-listed Salamander Energy (9.5%) (SMDR.L) hold stakes in the Phu Horm field onshore Thailand. Both Coastal and London-listed Salamander (SMDR.L) hold their stakes indirectly through a private US company APICO that has a 35% stake in Phu Horm (Coastal has a 36.1% stake and Salamander 27% stake in APICO). It supplies gas to the 750MW Nam Phong power plant; the current gas sales agreement (GSA) is for the supply of 507 bcf over 15 years. There is the potential to expand the capacity of the power plant in 2008 that could add around 140bcf demand within the period of the current GSA. The field has 2P reserves of 870bcf and could satisfy this increase; however, there are limited gas market opportunities in northern Thailand. The Phu Horm field has been brought onstream following the underperformance of the Exxon-operated Nam Phong gas field that initially supplied the power plant with all its gas requirements. The Phu Horm field has contingent resources of 6.8Tcf which on further drilling (Phu Horm South Q1 2008, PH-8 and PH-6 frac through 2008) could help build the critical mass to justify a pipeline to gas markets in southern Thailand. In 2008, Coastal with Salamander has gas appraisal drilling planned on 3 blocks close to Phu Horm targeting gas (prospects 200-740bcf); unrisked this could add $1.80/share (90p) to our valuation. Thailand's gas market is set to grow 8%/yr and already imports gas from Myanmar and is considering LNG.”
Coastal currently has about $30 million in its treasury (1/1/2008) alongside a $43 million debt facility (based on Phu Horm production), hence it may require additional financing to carry out it’s ~$100 million cap-ex budget for 2008. Piper writes “Although the company could use equity, it is considering debt to develop its two offshore oil fields.”
Piper believes “Management is keen to expand their portfolio outside Thailand, remaining focused on those areas in Asia (between India and China) with proven hydrocarbons. Coastal’s strategy is to expand by identifying ‘orphaned’ discoveries with appraisal opportunities that may previously have been uneconomic / overlooked. Successful expansion could make Coastal an acquisition target longer term. Expansion may not need equity funding – indeed, a portion of Coastal’s 100% stake in Block G5/43 could be used as a trading chip to swap into acreage with greater long term impact.”
Lastly, Piper feels “Coastal offers investors access to near-term production growth and appraisal upside in 2008 at an attractive valuation, shares trade at a 35% discount to our estimated $5.50/share net asset value (275p). Coastal’s oil price linked gas production, near term oil production and the tax and royalty fiscal regime in Thailand provides direct benefits to the current high oil price.”
Valuation and Price Target
Piper bases his $6.50/sh rating on “company’s year end 2008 NAV; i.e. we have discounted projected future cash flows back to January 1, 2009 at a 10% discount rate, and then considered the potential outcome of the company’s exploration /appraisal campaign (using a ~25% chance of success). By the start of 2009, Coastal should have two onstream oil fields and up to four appraisals well completed across the onshore acreage that may begin to prove sufficient reserves to justify a gas pipeline to the southern gas markets.
On a sum of the parts basis, Piper values Coastal at an NAV of $5.50/sh. “This comprises a core value of $4.34/share, which includes producing assets, development upside and net financial position, and a risked upside of $1.16/share. In other words, in our view at the current share price, the investor is paying for the producing/near production assets and enjoying appraisal upside for free. We use a 10% discount rate in-line with other small cap E&P companies; Thailand is a safe operating environment with stable fiscal terms. Coastal’s core value is derived from its stake “in the producing Phu Horm field and its 100% stake in the Songkhla and Bua Ban oil field, both are due onstream over the next 12 months. The core also includes the company’s financial position, its 2008 exploration/appraisal commitments and forecast year end 2007 cash position. Utilizing the appropriate Thai fiscal terms (tax and royalty), we have modeled the assets based on $88/bbl in 2008, $85/bbl in 2009, $75/bbl in 2010 and a $60/bbl long-term oil price assumption. Coastal benefits greatly from the current high oil price. We assume parity between US/Canadian dollar and exchange rate. Future cash flows are discounted at 10% (for a small-cap E&P company).”
Click here to watch Peter Hodson of Sprott Asset Management highlight Coastal Energy on BNN on January 31st, 2008
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Saturday, March 15, 2008
Buy, Sell or Hold CGA Mining (CGA: TSX)
On March 10th /08 Haywood Securities analyst Andrew Kaip initiated coverage on CGA Mining Ltd. (CGA: TSX)
Company Profile
CGA Mining is an emerging gold producer that is developing the Masbate project in the Philippines. Targeting production to begin in Q1/09, CGA Mining is forecasting an output of 181,700 ounces of gold annually at a cash cost of US$316 over a 10-year mine life.
Event
In a note entitled “Re-Developing Masbate: Low-Risk Development Targeting 2009 Production of 200,000 Ounces of Gold” Kaip explains the reasons behind his Sector Outperform rating and $3.00 target.
Takeaways From The Event
Kaip writes “CGA Mining is on track to announce Masbate commercial production in Q1/09 at an annualized rate of 202,000 ounces of gold over a +13-year mine life.
Masbate development is insulated by a lump-sum, turnkey contract with Leighton Holdings Limited, Australasia’s premier mine contractor. Once in production, operating costs are contained through a mining contract with Leighton. Future escalation in processing costs should be offset by conversion from on-site to grid power with the installation of a planned thermal generating plant on the island of Masbate.”
With Masbate development approximately 30% complete, the current mine plan forcatsa 219,00 ounces of gold over the first 2 years of production and an average of 209,000 ounces of gold annually over 8 years. “Mined between 1980 and 1994, Masbate produced 1.1 million ounces of gold, with gold recoveries from carbon-in-pulp processing averaging 86%.” Kaip sees the combination of “brownfields development utilizing modern processing, and average recoveries of 82.6% as providing potential for operational improvements above the designed processing parameters.”
Masbate has “Current probable reserves of 2.0 million ounces. With reserves estimated at US$450 per ounce, or 46% of the spot gold price (US$975 per ounce), and a 67% conversion of indicated resource (3.0 million ounces of gold),” Kaip sees numerous avenues for increasing the current 10 year mine life and “model[s] a +13-year mine life based on a 67% increase in reserves to 3.3 million ounces of gold. Our preferred avenue for enhancing the current mine life is through: 1) ongoing delineation drilling to upgrade the more than 1.8 million ounces of inferred resource that largely occur as near-surface extensions to delineated open pits, and 2) new discoveries such as the new high-grade Libra North vein. In the near-term, we expect Masbate reserves could grow to our modelled size, once results from ongoing drilling are included and reserves are estimated using a higher gold price.”
In terms of infrastructure, “The Masbate project is located in central Philippines on the northeastern part of the island of Masbate. The project is 2 kilometres from tidewater, making it easier to mobilize equipment and machinery to the site by barge from the port of Manila located 340 kilometres to the north. The project’s reduced reliance on ground transportation will improve future site logistics.”
CGA’s “Capex expenditures are insulated by a turnkey contract with Leighton Holdings Limited, Australasia’s premier mine contractor. The contract with Leighton covers US$84.9 million or 70% of development costs, with the remaining US$34.4 million related to owner costs and contingencies. Current processing costs are based on on-site generation, with CGA Mining expecting to reduce operating costs beyond 2010 with the introduction of thermal coal-power generation on the island of Masbate. As part of the Environmental Compliance certificate, CGA Mining has permitted potential of 50 MW. D.M. Consunji, a Philippine company in conjunction with Thermex, is planning the construction of a thermal coal-fired power generating plant adjacent to the Masbate operations. Based on current estimates, processing costs could decrease by 18% to US$4.50 from US$5.50 per tonne milled.”
Valuation and Price Target
Kaip bases his $3.00/sh rating on a 1.2x multiple of his after tax project NAV (discounted at 5%) of US$510 million or US$2.40/sh on a fully diluted basis. Kaip’s project NAV (5%) is based on “development an open-pit mining operation at Masbate, with gold extraction using conventional milling and carbon-in-pulp (CIP), followed by elution and electrowinning to produce doré. We model an initial rate of 11,000 tonnes per day during the first 2-years of operations to reflect fine-grinding of oxide gold ore to improve recoveries. In years 3 and 4 we model continued production from oxide reserves, largely derived from the Panique open pit (inferred resource of 15.3 million tonnes at 1.87 g/t gold, or 900,000 ounces of gold), but at a higher rate of 12,500 tonnes per day as operations are optimized. Once oxide reserves are depleted, mill throughput increases to 14,000 tonnes per day.
With construction on schedule, we expect commissioning of operations to start in Q4/08, followed by commercial production beginning in Q1/09. Based on the Q4/07 optimization study, we project gold production during the first 2 years to average 210,800 ounces of gold at total cash costs of US$312, increasing to 233,100 ounces at total cash costs of around US$302 per ounce in years 3 and 4. Thereafter, gold production is expected to moderate to 195,100 ounces of gold annually as higher throughput rates of 5 million tonnes per annum are offset by declining reserve grades and a reduced recovery rate. We have modelled a 67% increase in current reserves, or 3.3 million ounces of gold over a 13.75-year mine life.”
Click Here to watch Andrew Kaip highlight CGA Mining on BNN on March 15th, 2008 (Fast Forward to the 20th minute 36th second mark)
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
CGA Mining is an emerging gold producer that is developing the Masbate project in the Philippines. Targeting production to begin in Q1/09, CGA Mining is forecasting an output of 181,700 ounces of gold annually at a cash cost of US$316 over a 10-year mine life.
Event
In a note entitled “Re-Developing Masbate: Low-Risk Development Targeting 2009 Production of 200,000 Ounces of Gold” Kaip explains the reasons behind his Sector Outperform rating and $3.00 target.
Takeaways From The Event
Kaip writes “CGA Mining is on track to announce Masbate commercial production in Q1/09 at an annualized rate of 202,000 ounces of gold over a +13-year mine life.
Masbate development is insulated by a lump-sum, turnkey contract with Leighton Holdings Limited, Australasia’s premier mine contractor. Once in production, operating costs are contained through a mining contract with Leighton. Future escalation in processing costs should be offset by conversion from on-site to grid power with the installation of a planned thermal generating plant on the island of Masbate.”
With Masbate development approximately 30% complete, the current mine plan forcatsa 219,00 ounces of gold over the first 2 years of production and an average of 209,000 ounces of gold annually over 8 years. “Mined between 1980 and 1994, Masbate produced 1.1 million ounces of gold, with gold recoveries from carbon-in-pulp processing averaging 86%.” Kaip sees the combination of “brownfields development utilizing modern processing, and average recoveries of 82.6% as providing potential for operational improvements above the designed processing parameters.”
Masbate has “Current probable reserves of 2.0 million ounces. With reserves estimated at US$450 per ounce, or 46% of the spot gold price (US$975 per ounce), and a 67% conversion of indicated resource (3.0 million ounces of gold),” Kaip sees numerous avenues for increasing the current 10 year mine life and “model[s] a +13-year mine life based on a 67% increase in reserves to 3.3 million ounces of gold. Our preferred avenue for enhancing the current mine life is through: 1) ongoing delineation drilling to upgrade the more than 1.8 million ounces of inferred resource that largely occur as near-surface extensions to delineated open pits, and 2) new discoveries such as the new high-grade Libra North vein. In the near-term, we expect Masbate reserves could grow to our modelled size, once results from ongoing drilling are included and reserves are estimated using a higher gold price.”
In terms of infrastructure, “The Masbate project is located in central Philippines on the northeastern part of the island of Masbate. The project is 2 kilometres from tidewater, making it easier to mobilize equipment and machinery to the site by barge from the port of Manila located 340 kilometres to the north. The project’s reduced reliance on ground transportation will improve future site logistics.”
CGA’s “Capex expenditures are insulated by a turnkey contract with Leighton Holdings Limited, Australasia’s premier mine contractor. The contract with Leighton covers US$84.9 million or 70% of development costs, with the remaining US$34.4 million related to owner costs and contingencies. Current processing costs are based on on-site generation, with CGA Mining expecting to reduce operating costs beyond 2010 with the introduction of thermal coal-power generation on the island of Masbate. As part of the Environmental Compliance certificate, CGA Mining has permitted potential of 50 MW. D.M. Consunji, a Philippine company in conjunction with Thermex, is planning the construction of a thermal coal-fired power generating plant adjacent to the Masbate operations. Based on current estimates, processing costs could decrease by 18% to US$4.50 from US$5.50 per tonne milled.”
Valuation and Price Target
Kaip bases his $3.00/sh rating on a 1.2x multiple of his after tax project NAV (discounted at 5%) of US$510 million or US$2.40/sh on a fully diluted basis. Kaip’s project NAV (5%) is based on “development an open-pit mining operation at Masbate, with gold extraction using conventional milling and carbon-in-pulp (CIP), followed by elution and electrowinning to produce doré. We model an initial rate of 11,000 tonnes per day during the first 2-years of operations to reflect fine-grinding of oxide gold ore to improve recoveries. In years 3 and 4 we model continued production from oxide reserves, largely derived from the Panique open pit (inferred resource of 15.3 million tonnes at 1.87 g/t gold, or 900,000 ounces of gold), but at a higher rate of 12,500 tonnes per day as operations are optimized. Once oxide reserves are depleted, mill throughput increases to 14,000 tonnes per day.
With construction on schedule, we expect commissioning of operations to start in Q4/08, followed by commercial production beginning in Q1/09. Based on the Q4/07 optimization study, we project gold production during the first 2 years to average 210,800 ounces of gold at total cash costs of US$312, increasing to 233,100 ounces at total cash costs of around US$302 per ounce in years 3 and 4. Thereafter, gold production is expected to moderate to 195,100 ounces of gold annually as higher throughput rates of 5 million tonnes per annum are offset by declining reserve grades and a reduced recovery rate. We have modelled a 67% increase in current reserves, or 3.3 million ounces of gold over a 13.75-year mine life.”
Click Here to watch Andrew Kaip highlight CGA Mining on BNN on March 15th, 2008 (Fast Forward to the 20th minute 36th second mark)
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Friday, March 14, 2008
Buy, Sell or Hold CGX Energy (OYL: TSX-V)
On March 11th /08 Jennings Capital analyst Gregory Chornoboy initiated coverage on CGX Energy Inc. (OYL: TSX-V).
Company Profile
CGX Energy Inc. is a junior E&P company with four concession blocks offshore of Guyana in the highly prospective but unexplored Guyana-Suriname Basin.
Event
In a note entitled “EXPLORING FOR BILLION BARREL FIELDS IN OFFSHORE GUYANA” Chornoboy explains the reasons behind his Speculative Buy rating and C$12.00 target.
Takeaways From The Event
Chornoboy writes “CGX has interests in four offshore and one onshore block in Guyana totaling 9.5 million gross acres (7.2 million net). A resource assessment by Gastavson and Associates has estimated potentially recoverable P50 resources of 2.7 billion Bbl in just the Corentyne block (one of the four concessions). The P90 and P10 volumes from this block are 1.1 and 6.2 billion Bbl. The Company is also working on five other prospects on a second block (Georgetown). It has 100% interests in and operates three of the offshore blocks. The fourth is operated by Repsol, and the Company owns 25%. The onshore lands, held through a subsidiary, comprise less than 7% of the total lands.”
“Water depths on CGX’s concessions vary from a few feet to 1,000 metres. The areas of the Corentyne and Georgetown blocks with defined prospects are in water depths of 200 metres or less. The targets lie as deep as 5,600 metres, so costs will be high – preliminary estimates put the total cost of a 3D seismic program and the first exploration well at $121 million. The rewards are equally high – initial production rates could be 8,000 Bbl/d for shallow wells, and 25,000 Bbl/d for deep ones, and recoveries up to 10 MMBbl per well.”
With regards to the profit sharing agreements, “concession agreements with Guyana provide very favourable profit sharing and cost recovery terms: Up to 75% of the gross revenue for the first three years; 65% thereafter. The practical effect of this regime is that over the life of the project, the Contractor will receive between 51% and 54% of gross revenue, out of which it is responsible for all operating and capital costs. Based on the early scoping economics, unrisked FD&A costs could be as low as $2.40/Bbl over the entire project life. Using an average chance of success of 20%, the risked FD&A costs would be $12.00/Bbl. This is probably too high since the probability of success in the subsequent development drilling should be much higher.”
Since the capital costs associated with exploring these concession is very high, CGX has engaged “Jeffries Randall & Dewey to solicit interest in a joint venture arrangement on the Corentyne block. A large joint venture partner is a good, and likely necessary step in exploring and exploiting the Guyana assets. There are two major reasons for this: The first is that the costs associated with the project are immense. Total capital expenditures before production and revenue commence range from approximately $900 million (for success in either Eagle Turbidite or Eagle Deep West), to $1.26 billion for developing both. The seismic and a dry hole are expected to cost approximately $121 million. These are very high costs for a company the size of CGX to bear alone. The second reason is that a large partner will have better access to difficult-to-obtain equipment and services such as drilling rigs and, eventually, a Floating Production Storage Offloading facility (“FPSO”). The successful partner will likely take a majority working interest and operatorship. The exact terms have yet to be established through negotiations, but we expect that CGX will end up with a working interest between 10% and 30%, and be carried for its share of the capital costs on the upcoming 3D seismic program and one or two wells. We are using a mid-point in our valuation, with CGX having a 20% working interest and being carried on the seismic and the first well. The marketing process is expected to finish during the second quarter of 2008, and the final agreement executed later in the year.”
CGX is currently concentrating on the “Eagle, Wishbone and Eagle Deep prospects with intent to be able to drill in 2009. To achieve that, the Company is concentrating its efforts on two strategies:
1) Acquire new 3D seismic data across the prospects to better define them.
2) Seek out a joint venture partner with whom to share the risk and expense of exploiting these assets.”
“The Company is collaborating with Repsol on shooting new 3D seismic over both Corentyne and Georgetown. Total cost of the program is expected to be approximately $30 million, half to each block. Absent a joint venture partner, CGX will pay its working interests of 100% of the cost over Corentyne, and 25% on Georgetown, for a total of $18.75 million. We expect data acquisition will occur this summer, with processing and interpretation taking the rest of the year. The first location should be ready to drill in 2009, pending rig and services availability.
We view this seismic as critical to the process. Gustavson has assigned probabilities of success to the Eagle Turbidite and Eagle Deep West prospects of 23.79% and 19.75%, respectively, but given the experience of the dry hole at the Horseshoe-1 location in 2000, we believe the extra definition from the new data is required to justify those odds.”
Events Calendar
Q1 - Q2 2008 - Repsol to drill a well on Block 30 offshore Suriname. This well is on trend with the plays in the Corentyne and Georgetown blocks. If successful, it would provide some validation to the geologic and seismic model on CGX’s Corentyne block.
Q2 – Q3 2008 - Results from marketing process with respect to securing a joint venture partner.
Summer 2008 - Shoot 3D seismic program over Corentyne and Georgetown.
Second Half 2008 - Processing and interpretation of 3D seismic.
Mid 2009 – early 2010 - Drill first exploration well.
Valuation and Price Target
Chornoboy bases his $12.00/sh target on 3 key assumptions: CGX will have a 20% working interest in a joint venture, The 3D seismic substantially verifies the resource estimates and risk factors in the Gustavson resource report, CGX will fund its share of development expenses leading up to the expected production start with a 50/50 mix of debt and new equity. With the stock currently trading at $3.22, Chornoboy thinks “the market seems to be discounting a much more conservative combination of those factors. For instance, our model would produce an ExNAV of $3.25/sh using a 10% chance of success for all four Corentyne prospects and a post deal working interest of 10%. We have examined the variation in ExNAV with working interest and probability of exploration success in the table below.
Unrisked Potential
Based on the Gustavson report, Chornoboy estimates “the unrisked value of the four prospects on the Corentyne block at $45 billion for a 100% working interest. At the 20% working interest we assume that CGX will retain, its share would be $9 billion or $63 per share (FD, assuming that the development funds will be raised at $12/sh after the first discovery). This assigns only land value at $10/acre to the Georgetown block, giving no credit for the plays that have been developed. If those prospects have similar potential to the four in Corentyne, those could be worth another $15/sh in the event of success.
We have given only land value to the Corentyne Annex and Pomeroon concessions. The Annex gets into some of the deepest waters and will therefore be much more expensive again to drill. It could be some years after the easier targets in Corentyne and Georgetown are developed before serious efforts are made there. Pomeroon lies in waters disputed with Venezuela, and work has been suspended pending resolution. As Venezuela is also claiming 75% of the land area of Guyana, it seems unlikely that an agreement will be reached in any foreseeable timeframe.”
Keep in mind, while “Gustavson prepared estimates of present value for each of the Eagle Turbidite and Eagle Deep West plays, it also used an expected value methodology in its report to arrive at a value for the two prospects. We believe that this is a highly appropriate approach in light of CGX’s absolute dependence upon exploration success. A probability tree using the Company’s chance of success results in an expected value of $4.8 billion. At a 10% chance of success, the EV falls to $2.2 billion.”
Under his valuation scenario (20% working interest plus carry on the seismic and first well), Chornoboy estimates that “CGX could have a maximum capital exposure prior to production of between $155 million and $227 million. The facilities and some of the development drilling would likely be eligible for debt financing but clearly, the Company will have to raise additional capital. This leads to something of a circular calculation – new money would be raised at a price based at least partly on the ExNAV/sh of the Company, but the ExNAV/share depends on how many new shares need to be issued to fund development costs. We have made the following assumptions:
1) The Company would finance the facilities and engineering and 25% of the development drilling, which amounts to half of the net exposure, with project debt. To be conservative (perhaps painfully so), we also assume the maximum capital requirement of $227 million, so the debt and equity portions would each be $113.5 million.
2) The new money would be raised at our current estimate of ExNAV of $12.00/sh. We view that as a conservative assumption - the money would not be raised unless the well was successful in at least one horizon and in that case, the new ExNAV would be significantly higher again.
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
CGX Energy Inc. is a junior E&P company with four concession blocks offshore of Guyana in the highly prospective but unexplored Guyana-Suriname Basin.
Event
In a note entitled “EXPLORING FOR BILLION BARREL FIELDS IN OFFSHORE GUYANA” Chornoboy explains the reasons behind his Speculative Buy rating and C$12.00 target.
Takeaways From The Event
Chornoboy writes “CGX has interests in four offshore and one onshore block in Guyana totaling 9.5 million gross acres (7.2 million net). A resource assessment by Gastavson and Associates has estimated potentially recoverable P50 resources of 2.7 billion Bbl in just the Corentyne block (one of the four concessions). The P90 and P10 volumes from this block are 1.1 and 6.2 billion Bbl. The Company is also working on five other prospects on a second block (Georgetown). It has 100% interests in and operates three of the offshore blocks. The fourth is operated by Repsol, and the Company owns 25%. The onshore lands, held through a subsidiary, comprise less than 7% of the total lands.”
“Water depths on CGX’s concessions vary from a few feet to 1,000 metres. The areas of the Corentyne and Georgetown blocks with defined prospects are in water depths of 200 metres or less. The targets lie as deep as 5,600 metres, so costs will be high – preliminary estimates put the total cost of a 3D seismic program and the first exploration well at $121 million. The rewards are equally high – initial production rates could be 8,000 Bbl/d for shallow wells, and 25,000 Bbl/d for deep ones, and recoveries up to 10 MMBbl per well.”
With regards to the profit sharing agreements, “concession agreements with Guyana provide very favourable profit sharing and cost recovery terms: Up to 75% of the gross revenue for the first three years; 65% thereafter. The practical effect of this regime is that over the life of the project, the Contractor will receive between 51% and 54% of gross revenue, out of which it is responsible for all operating and capital costs. Based on the early scoping economics, unrisked FD&A costs could be as low as $2.40/Bbl over the entire project life. Using an average chance of success of 20%, the risked FD&A costs would be $12.00/Bbl. This is probably too high since the probability of success in the subsequent development drilling should be much higher.”
Since the capital costs associated with exploring these concession is very high, CGX has engaged “Jeffries Randall & Dewey to solicit interest in a joint venture arrangement on the Corentyne block. A large joint venture partner is a good, and likely necessary step in exploring and exploiting the Guyana assets. There are two major reasons for this: The first is that the costs associated with the project are immense. Total capital expenditures before production and revenue commence range from approximately $900 million (for success in either Eagle Turbidite or Eagle Deep West), to $1.26 billion for developing both. The seismic and a dry hole are expected to cost approximately $121 million. These are very high costs for a company the size of CGX to bear alone. The second reason is that a large partner will have better access to difficult-to-obtain equipment and services such as drilling rigs and, eventually, a Floating Production Storage Offloading facility (“FPSO”). The successful partner will likely take a majority working interest and operatorship. The exact terms have yet to be established through negotiations, but we expect that CGX will end up with a working interest between 10% and 30%, and be carried for its share of the capital costs on the upcoming 3D seismic program and one or two wells. We are using a mid-point in our valuation, with CGX having a 20% working interest and being carried on the seismic and the first well. The marketing process is expected to finish during the second quarter of 2008, and the final agreement executed later in the year.”
CGX is currently concentrating on the “Eagle, Wishbone and Eagle Deep prospects with intent to be able to drill in 2009. To achieve that, the Company is concentrating its efforts on two strategies:
1) Acquire new 3D seismic data across the prospects to better define them.
2) Seek out a joint venture partner with whom to share the risk and expense of exploiting these assets.”
“The Company is collaborating with Repsol on shooting new 3D seismic over both Corentyne and Georgetown. Total cost of the program is expected to be approximately $30 million, half to each block. Absent a joint venture partner, CGX will pay its working interests of 100% of the cost over Corentyne, and 25% on Georgetown, for a total of $18.75 million. We expect data acquisition will occur this summer, with processing and interpretation taking the rest of the year. The first location should be ready to drill in 2009, pending rig and services availability.
We view this seismic as critical to the process. Gustavson has assigned probabilities of success to the Eagle Turbidite and Eagle Deep West prospects of 23.79% and 19.75%, respectively, but given the experience of the dry hole at the Horseshoe-1 location in 2000, we believe the extra definition from the new data is required to justify those odds.”
Events Calendar
Q1 - Q2 2008 - Repsol to drill a well on Block 30 offshore Suriname. This well is on trend with the plays in the Corentyne and Georgetown blocks. If successful, it would provide some validation to the geologic and seismic model on CGX’s Corentyne block.
Q2 – Q3 2008 - Results from marketing process with respect to securing a joint venture partner.
Summer 2008 - Shoot 3D seismic program over Corentyne and Georgetown.
Second Half 2008 - Processing and interpretation of 3D seismic.
Mid 2009 – early 2010 - Drill first exploration well.
Valuation and Price Target
Chornoboy bases his $12.00/sh target on 3 key assumptions: CGX will have a 20% working interest in a joint venture, The 3D seismic substantially verifies the resource estimates and risk factors in the Gustavson resource report, CGX will fund its share of development expenses leading up to the expected production start with a 50/50 mix of debt and new equity. With the stock currently trading at $3.22, Chornoboy thinks “the market seems to be discounting a much more conservative combination of those factors. For instance, our model would produce an ExNAV of $3.25/sh using a 10% chance of success for all four Corentyne prospects and a post deal working interest of 10%. We have examined the variation in ExNAV with working interest and probability of exploration success in the table below.
Unrisked Potential
Based on the Gustavson report, Chornoboy estimates “the unrisked value of the four prospects on the Corentyne block at $45 billion for a 100% working interest. At the 20% working interest we assume that CGX will retain, its share would be $9 billion or $63 per share (FD, assuming that the development funds will be raised at $12/sh after the first discovery). This assigns only land value at $10/acre to the Georgetown block, giving no credit for the plays that have been developed. If those prospects have similar potential to the four in Corentyne, those could be worth another $15/sh in the event of success.
We have given only land value to the Corentyne Annex and Pomeroon concessions. The Annex gets into some of the deepest waters and will therefore be much more expensive again to drill. It could be some years after the easier targets in Corentyne and Georgetown are developed before serious efforts are made there. Pomeroon lies in waters disputed with Venezuela, and work has been suspended pending resolution. As Venezuela is also claiming 75% of the land area of Guyana, it seems unlikely that an agreement will be reached in any foreseeable timeframe.”
Keep in mind, while “Gustavson prepared estimates of present value for each of the Eagle Turbidite and Eagle Deep West plays, it also used an expected value methodology in its report to arrive at a value for the two prospects. We believe that this is a highly appropriate approach in light of CGX’s absolute dependence upon exploration success. A probability tree using the Company’s chance of success results in an expected value of $4.8 billion. At a 10% chance of success, the EV falls to $2.2 billion.”
Under his valuation scenario (20% working interest plus carry on the seismic and first well), Chornoboy estimates that “CGX could have a maximum capital exposure prior to production of between $155 million and $227 million. The facilities and some of the development drilling would likely be eligible for debt financing but clearly, the Company will have to raise additional capital. This leads to something of a circular calculation – new money would be raised at a price based at least partly on the ExNAV/sh of the Company, but the ExNAV/share depends on how many new shares need to be issued to fund development costs. We have made the following assumptions:
1) The Company would finance the facilities and engineering and 25% of the development drilling, which amounts to half of the net exposure, with project debt. To be conservative (perhaps painfully so), we also assume the maximum capital requirement of $227 million, so the debt and equity portions would each be $113.5 million.
2) The new money would be raised at our current estimate of ExNAV of $12.00/sh. We view that as a conservative assumption - the money would not be raised unless the well was successful in at least one horizon and in that case, the new ExNAV would be significantly higher again.
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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Thursday, March 13, 2008
Buy, Sell or Hold Azimut Exploration (AZM: TSX-V)
On March 12th /08 Blackmont Capital analyst George Topping initiated coverage on Azimut Exploration Inc. (AZM: TSX-V).
Company Profile
Azimut is a publicly traded Canadian mineral exploration company that uses a proprietary targeting methodology combined with considerable exploration know-how to discover major deposits. It focuses on regional-scale mineral potential modeling based on advanced data processing, which leads to the acquisition of a few select targets; the high quality of the initial targeting process minimizes the exploration risk. The company’s business model integrates partnership development at an early stage; this provides Azimut’s partners with attractive targets while reducing Azimut’s business risk. Uranium, gold and nickel in Quebec, although other commodities and regions are under review.
Event
In a note entitled “Regional Sized Uranium Potential In Quebec” Topping explains the reasons behind his Speculative Buy rating and $6.40 target.
Takeaways From The Event
Topping writes “The company’s strategy is to identify prospective targets and attract JV partners to fund exploration. The company has numerous targets and JVs, including the North and South Rae uranium targets and the Opinaca gold targets.” After reviewing management’s proprietary data based exploration techniques, Topping is “confident that major discoveries lie ahead. This is supported by initial surface work, which has been very positive. We believe drilling at the North Rae deposit will validate management’s proprietary database exploration technique.”
Due to Azimut’s Quebec focus, the company should have ready access to exploration funding when required due to attractive federal and provincial exploration credits.
Projects
North Rae Uranium – This project is a joint venture with Northwestern Minerals whereby Northwestern can earn up to 65% for C$2.9 million in exploration costs and a feasibility study. Topping writes “Airborne radiometrics have so far returned 17 priority anomalies on what appears to be a regional-scale anomaly. Surface sampling has backed up a portion of the radiometric data with high-grade samples from multiple trends of +1km. The 2008 drilling programme is planned for this summer as soon as the snow clears.”
Opinaca Gold Properties – This property is located in the James Bay area, where Azimut has staked “geochemical anomalies around Virginia’s Eleonore discovery. The JV partners, Eastmain, Goldcorp, and Everton, have budgeted C$3.7 million for drilling in 2008 out of a total work commitment of $15 million.”
South Rae - This project is a joint venture with Majescor Resources whereby Majescor can earn up to 65% for C$4.6 million in exploration costs and a feasibility study. “A 30km long mineralized corridor has been identified through radiometric surveys and backed up by subsequent surface sampling. Drilling is expected to commence this summer.”
Management Experience
CEO Dr. Jean-Marc Lulin has a Masters Degree in Applied Geology. He was the Chief Geologist for SOQUEM, the Quebec Government’s mineral investment vehicle, from 1992 to 1995. From 1996 to 2001, he held management positions at Channel Resources (CHU-TVX). He re-activated Azimut in 2003.
Joint Venture Partners
“Azimut has had success in attracting quality JV partners such as Kennecott and Goldcorp (G:TSX) as well as a host of junior explorers such as, Everton (EVR-TVX) and Northwestern Minerals (NWT: TSX-V). These partners have agreed to spend C$65 million in total to explore 19 of Azimut’s properties, of which C$12 million is earmarked for 2008.”
Valuation and Price Target
Topping writes “Deriving a target price is problematic due to the early stage of exploration (as the company currently has no resource to value). However, we note Azimut’s historically high correlation (R2 of more than 90%) to the uranium spot price. Based on this historical relationship, we calculate a target price of $6.40 per share for Azimut at our 2009 uranium price of $110/lb. Additional upside from the drilling of North Rae this summer should, if successful as we expect, allow the stock to break out from its direct correlation with the uranium price.
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Azimut is a publicly traded Canadian mineral exploration company that uses a proprietary targeting methodology combined with considerable exploration know-how to discover major deposits. It focuses on regional-scale mineral potential modeling based on advanced data processing, which leads to the acquisition of a few select targets; the high quality of the initial targeting process minimizes the exploration risk. The company’s business model integrates partnership development at an early stage; this provides Azimut’s partners with attractive targets while reducing Azimut’s business risk. Uranium, gold and nickel in Quebec, although other commodities and regions are under review.
Event
In a note entitled “Regional Sized Uranium Potential In Quebec” Topping explains the reasons behind his Speculative Buy rating and $6.40 target.
Takeaways From The Event
Topping writes “The company’s strategy is to identify prospective targets and attract JV partners to fund exploration. The company has numerous targets and JVs, including the North and South Rae uranium targets and the Opinaca gold targets.” After reviewing management’s proprietary data based exploration techniques, Topping is “confident that major discoveries lie ahead. This is supported by initial surface work, which has been very positive. We believe drilling at the North Rae deposit will validate management’s proprietary database exploration technique.”
Due to Azimut’s Quebec focus, the company should have ready access to exploration funding when required due to attractive federal and provincial exploration credits.
Projects
North Rae Uranium – This project is a joint venture with Northwestern Minerals whereby Northwestern can earn up to 65% for C$2.9 million in exploration costs and a feasibility study. Topping writes “Airborne radiometrics have so far returned 17 priority anomalies on what appears to be a regional-scale anomaly. Surface sampling has backed up a portion of the radiometric data with high-grade samples from multiple trends of +1km. The 2008 drilling programme is planned for this summer as soon as the snow clears.”
Opinaca Gold Properties – This property is located in the James Bay area, where Azimut has staked “geochemical anomalies around Virginia’s Eleonore discovery. The JV partners, Eastmain, Goldcorp, and Everton, have budgeted C$3.7 million for drilling in 2008 out of a total work commitment of $15 million.”
South Rae - This project is a joint venture with Majescor Resources whereby Majescor can earn up to 65% for C$4.6 million in exploration costs and a feasibility study. “A 30km long mineralized corridor has been identified through radiometric surveys and backed up by subsequent surface sampling. Drilling is expected to commence this summer.”
Management Experience
CEO Dr. Jean-Marc Lulin has a Masters Degree in Applied Geology. He was the Chief Geologist for SOQUEM, the Quebec Government’s mineral investment vehicle, from 1992 to 1995. From 1996 to 2001, he held management positions at Channel Resources (CHU-TVX). He re-activated Azimut in 2003.
Joint Venture Partners
“Azimut has had success in attracting quality JV partners such as Kennecott and Goldcorp (G:TSX) as well as a host of junior explorers such as, Everton (EVR-TVX) and Northwestern Minerals (NWT: TSX-V). These partners have agreed to spend C$65 million in total to explore 19 of Azimut’s properties, of which C$12 million is earmarked for 2008.”
Valuation and Price Target
Topping writes “Deriving a target price is problematic due to the early stage of exploration (as the company currently has no resource to value). However, we note Azimut’s historically high correlation (R2 of more than 90%) to the uranium spot price. Based on this historical relationship, we calculate a target price of $6.40 per share for Azimut at our 2009 uranium price of $110/lb. Additional upside from the drilling of North Rae this summer should, if successful as we expect, allow the stock to break out from its direct correlation with the uranium price.
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Tuesday, March 11, 2008
Don Coxe Basic Points February 2008
Basic Points: The Music of the Metal Markets (February 19th, 2008)
To download Mr. Don Coxe's February 2008 Edition of Basic Points click here
(Courtesy J’s Global Analysis Blog)
To read the PDF transcript of Mr. Don Coxe’s conference call from the BMO Global Metal & Mining Conference in Hollywood on February 25/2008, click here (Courtesy BeEarly.com)
The conference call is entirely about the bullish future for commodities (metals and agricultural) and the case for investing in resource stocks.
Monday, March 10, 2008
Sector Outlook – Energy Perspectives – Oil and Gas
Maison Monthly - February 26, 2008
Event
In a note entitled “Natural Gas Prices Have Bottomed. Now Up Up and Away!” Josef Schachter explains the reasons behind his bullish thesis for Natural Gas prices moving forward.
Starting of with his outlook for crude oil, Schachter writes “We expect to see a moderate correction during the spring shoulder season down to the ~$85/barrel level as inventories build into the summer driving season. Even with a ~15% correction to ~$85/barrel, the economics surrounding conventional oil production remain amazing with the oil price significantly above our current $70/barrel model price. It is our belief that many stock prices have not yet fully discounted our $70/barrel model price and are still representing considerable value even following strong upward moves in their stock prices. With global oil supply and demand currently balanced on a knives edge, and U.S. and OECD inventories at the bottom end of “normal” levels, we believe that there is strong potential for a material run up above the $100/barrel level during the summer driving season when global usage will exceed supply and we will witness significant storage draw downs.”
Moving on, Schachter focuses his attention on the natural gas sector. He writes “Since mid-2007 we have witnessed a strong recovery in natural gas pricing with NYMEX prices rallying from $5 to $9.25/mcf. The excess storage overhang which plagued the natural gas market for the past two years has essentially been eaten through and with the cold weather in Eastern North America the possibility for above normal withdrawals until the end of the winter is high. In this scenario we may see prices spike past the $12/mcf level for a short duration. We are expecting total inventories to be taken to the 1.4 Tcf level before the injection season begins in April which should help support the current $9/mcf pricing. The comfortable storage level in combination with the dramatically reduced natural gas drilling levels and reduced deliverability should continue to support the $9/mcf price level and set the stage for strong winter natural gas prices in 2008/2009.”
Furthermore, he adds “The ratio of oil to natural gas pricing is now 11x versus the 13.5x record high we saw in 2007. We expect the ratio to continue declining to the 8x level as natural gas prices appreciate faster than oil prices. For the 8x ratio to be obtained natural gas pricing will have to appreciate to the ~$12/mcf level if oil prices remain stable. In financial reporting and on an energy equivalent basis (btu equivalence) a 6x ratio is the defacto standard. With the current 11x ratio their remains a strong incentive for utilities, industrial and home users to switch to natural gas for their heating/process needs from relatively expensive oil based sources.”
Top Picks
Delphi Energy (DEE: TSX)
Schachter has a $3.50/sh target on the stock and likes Delphi due to its high correlation of cash flow, earnings share performance to natural gas prices. He “expect[s] the stock to perform well now that natural gas prices have broken through the key $9/mcf level.” He goes on to say that “Delphi has met their 2007 exit production rate of 5,800 boe/d, and we expect the company to meet or exceed their current 2008 guidance of 6,000 to 6,200 boe/d.” The company has a very large drilling inventory (including both oil and natural gas targets in convenient locations with infrastructure) and a disciplined capital program that can be ramped up as natural gas prices firm up. Current debt is at $100 million, which is 1.3x Schachter’s modelled Q1/09 annualized cash flow.
Schachter writes, the reason to buy the stock is because “The company was able to grow volumes, decrease debt in a poor gas price environment and we expect disciplined, low cost growth in the current strengthening price environment.” Furthermore, “The stock is cheap; trading at only 2.3 x 2008 cash flow levels (based on modelled depressed commodity prices and activity rates which should ramp up as natural gas prices have improved).”
Oilexco (OIL:TSX)
Schachter has a $25.00/sh target on the stock and likes Oilexco because of its strong base production and attractive growth profile from existing development projects. The company is currently producing ~2,000 to 24,000 b/d. However, based on their devleopemtns projects in the pipeline, Schachter expects early 2010 production to be >100,000 b/d. He writes “With the Balmoral facilities acquisition OIL has established dominance in their Central North Sea core area In 2008 OIL will drill 2 wells at Brenda, 2 at Balmoral and 1 at Nicol, which should add an additional 13,000 b/d of production and more than offset any declines from the Brenda field.” Oilexco also has some high impact exploration prospects at Huntington, where it has a 40% working interest that will complement their development pipeline. “Large exploration success with recent appraisal wells encountering >450ft of oil column off the crest of the structure, Huntington will be a major company focus over the coming years. Recent encouraging results in the area around Huntington at Morro/Coronado and Mallory have helped expand the play. Additionally, it also has the Moth prospect; a deep Fulmar test with the potential for a large oil and gas condensate discovery.”
Schachter likes the stock because it has the growth profile of a junior stock (>100% growth year over year), “projects of size and magnitude to attract large institutional investors, bank partners as well as competitors attention. The stock is liquid, trading high volumes in both Canada and the U.K. and currently has a cheap 2 x Q4/09 annualized cash flow valuation. Very cheap!”
Click Here To Watch A Video Interview With Josef Schachter On BNN – March 07, 2008
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Event
In a note entitled “Natural Gas Prices Have Bottomed. Now Up Up and Away!” Josef Schachter explains the reasons behind his bullish thesis for Natural Gas prices moving forward.
Starting of with his outlook for crude oil, Schachter writes “We expect to see a moderate correction during the spring shoulder season down to the ~$85/barrel level as inventories build into the summer driving season. Even with a ~15% correction to ~$85/barrel, the economics surrounding conventional oil production remain amazing with the oil price significantly above our current $70/barrel model price. It is our belief that many stock prices have not yet fully discounted our $70/barrel model price and are still representing considerable value even following strong upward moves in their stock prices. With global oil supply and demand currently balanced on a knives edge, and U.S. and OECD inventories at the bottom end of “normal” levels, we believe that there is strong potential for a material run up above the $100/barrel level during the summer driving season when global usage will exceed supply and we will witness significant storage draw downs.”
Moving on, Schachter focuses his attention on the natural gas sector. He writes “Since mid-2007 we have witnessed a strong recovery in natural gas pricing with NYMEX prices rallying from $5 to $9.25/mcf. The excess storage overhang which plagued the natural gas market for the past two years has essentially been eaten through and with the cold weather in Eastern North America the possibility for above normal withdrawals until the end of the winter is high. In this scenario we may see prices spike past the $12/mcf level for a short duration. We are expecting total inventories to be taken to the 1.4 Tcf level before the injection season begins in April which should help support the current $9/mcf pricing. The comfortable storage level in combination with the dramatically reduced natural gas drilling levels and reduced deliverability should continue to support the $9/mcf price level and set the stage for strong winter natural gas prices in 2008/2009.”
Furthermore, he adds “The ratio of oil to natural gas pricing is now 11x versus the 13.5x record high we saw in 2007. We expect the ratio to continue declining to the 8x level as natural gas prices appreciate faster than oil prices. For the 8x ratio to be obtained natural gas pricing will have to appreciate to the ~$12/mcf level if oil prices remain stable. In financial reporting and on an energy equivalent basis (btu equivalence) a 6x ratio is the defacto standard. With the current 11x ratio their remains a strong incentive for utilities, industrial and home users to switch to natural gas for their heating/process needs from relatively expensive oil based sources.”
Top Picks
Delphi Energy (DEE: TSX)
Schachter has a $3.50/sh target on the stock and likes Delphi due to its high correlation of cash flow, earnings share performance to natural gas prices. He “expect[s] the stock to perform well now that natural gas prices have broken through the key $9/mcf level.” He goes on to say that “Delphi has met their 2007 exit production rate of 5,800 boe/d, and we expect the company to meet or exceed their current 2008 guidance of 6,000 to 6,200 boe/d.” The company has a very large drilling inventory (including both oil and natural gas targets in convenient locations with infrastructure) and a disciplined capital program that can be ramped up as natural gas prices firm up. Current debt is at $100 million, which is 1.3x Schachter’s modelled Q1/09 annualized cash flow.
Schachter writes, the reason to buy the stock is because “The company was able to grow volumes, decrease debt in a poor gas price environment and we expect disciplined, low cost growth in the current strengthening price environment.” Furthermore, “The stock is cheap; trading at only 2.3 x 2008 cash flow levels (based on modelled depressed commodity prices and activity rates which should ramp up as natural gas prices have improved).”
Oilexco (OIL:TSX)
Schachter has a $25.00/sh target on the stock and likes Oilexco because of its strong base production and attractive growth profile from existing development projects. The company is currently producing ~2,000 to 24,000 b/d. However, based on their devleopemtns projects in the pipeline, Schachter expects early 2010 production to be >100,000 b/d. He writes “With the Balmoral facilities acquisition OIL has established dominance in their Central North Sea core area In 2008 OIL will drill 2 wells at Brenda, 2 at Balmoral and 1 at Nicol, which should add an additional 13,000 b/d of production and more than offset any declines from the Brenda field.” Oilexco also has some high impact exploration prospects at Huntington, where it has a 40% working interest that will complement their development pipeline. “Large exploration success with recent appraisal wells encountering >450ft of oil column off the crest of the structure, Huntington will be a major company focus over the coming years. Recent encouraging results in the area around Huntington at Morro/Coronado and Mallory have helped expand the play. Additionally, it also has the Moth prospect; a deep Fulmar test with the potential for a large oil and gas condensate discovery.”
Schachter likes the stock because it has the growth profile of a junior stock (>100% growth year over year), “projects of size and magnitude to attract large institutional investors, bank partners as well as competitors attention. The stock is liquid, trading high volumes in both Canada and the U.K. and currently has a cheap 2 x Q4/09 annualized cash flow valuation. Very cheap!”
Click Here To Watch A Video Interview With Josef Schachter On BNN – March 07, 2008
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Sunday, March 09, 2008
Marc Faber Video Interview - March 6th, 2008
“Central banks around the world have no other option but to print money and this will lead to a further depreciation in the value of paper money against precious metals.
… But when we consider the upside potential of gold compared to its downside risk the biggest mistake an investor could make is not to own any gold at all.”(Note: Nothing goes up in a straight line and, therefore, investors need to be aware that gold could still correct to around $750 or so).”
Words of Marc Faber in his Market Commentary for March 2008, available at http://www.gloomboomdoom.com/
… But when we consider the upside potential of gold compared to its downside risk the biggest mistake an investor could make is not to own any gold at all.”(Note: Nothing goes up in a straight line and, therefore, investors need to be aware that gold could still correct to around $750 or so).”
Words of Marc Faber in his Market Commentary for March 2008, available at http://www.gloomboomdoom.com/
Friday, March 07, 2008
Buy, Sell or Hold Sherwood Copper Corp. (SWC:TSX-V)
On March 07th /08 Haywood Securities analyst Stefan Ioannou releases an update on Sherwood Copper Corp. (SWC:TSX-V).
Company Profile
Sherwood Copper Corp. (SWC:TSX-V) is a public company whose primary focus is the production of copper-gold concentrates from the Company's 100% owned high-grade Minto copper-gold mine located in the Yukon, Canada. Commercial production of the Minto Mine commenced on October 1, 2007 with regular shipments of copper-gold concentrates from the Port of Skagway, Alaska commencing later that same month. In parallel with its operating activities, Sherwood's 2007 exploration program yielded significant success with multiple discoveries of high grade copper-gold mineralization being made across its Minto Mine property. These discoveries could potentially add to Sherwood's high grade resource and reserve base and support increased production.
Event
In a note entitled “Wasting No Time to Pursue Growth Initiatives” Ioannou explains the reasons behind his Sector Outperform rating and $8.00 target.
Takeaways From The Event
Sherwood has successfully evolved from an explorer to producer and now provides investors with “immediate exposure to currently buoyant copper prices and associated strong cash flow. The Company’s 100% owned Minto mine in the Yukon is ramping up to about +50 million pounds of annual payable copper production over a remaining 8-year open-pit mine life. Project risk is mitigated through the use of standard off-the-shelf froth flotation technology, coupled with a strong management team that boasts a track record of successful project development in northern Canada. The mine achieved ‘commercial’ production in early October, and [Ioannou] look[s] to near-term operational optimization including a Phase III mill expansion through Q1/09 and significant exploration upside to unlock Minto’s true value.”
Ioannou writes “Sherwood began copper concentrate production at its 100% owned Minto mine last May, reaching this key milestone ahead of schedule and essentially on budget ($100.2 million actual versus $98.1 million estimated). First concentrate shipments to port facilities in Skagway, Alaska followed in July. A US$9.9 million refurbishment of these facilities through October, funded in part by the Alaska Industrial Development and Export Authority (AIDEA), set the stage for Minto’s first overseas concentrate shipment in late October—a 6,615-tonne (wet) shipment bound for Asia. In December 2007, Sherwood announced the completion of a Phase II mill expansion to 2,400 tonnes per day from 1,563 tonnes per day—again, ahead of (an already accelerated) schedule. Commissioning of this Phase II expansion is expected to be complete by the end of Q1/08. The expansion included the installation of a second ball mill and additional flotation cells with capacity to handle up to 3,500 tonnes per day.
In December 2007, Sherwood also announced the results of a prefeasibility study completed by SRK Consulting for a Phase III expansion at Minto designed to boost the project’s mill capacity to 3,500 tonnes per day (from 2,400 tonnes per day currently) and include resources defined at the adjacent Area 2 deposit. Key project parameters include an open-pit operation producing approximately 50+ million pounds of payable copper and 20,000+ ounces of gold annually over a 9-year mine life (8 years of mining and 1 additional year of stockpile processing). Average life-of-mine copper cash costs (on site) net of credits and royalties are estimated at US$0.81 per pound (contract mining; diesel fuel priced at $0.85 per litre delivered to site).
Total capital costs for the project are now estimated at $151 million, including life-of-mine sustaining capital costs (15% contingency on construction costs). This estimate includes $100.2 million already spent to build the base-case Phase I project. The Phase III mill expansion includes $3.2 million for the purchase of new equipment, including a pebble crusher, regrind mill, and paste thickener. The new capital-cost estimate also includes $16 million for grid power. At an average copper price of US$2.16 per pound and an average gold price of US$592.12 per ounce, which include forward sales contracts currently in place, the SRK prefeasibility study generates an after-tax project NAV7.5% of $126 million and IRR of 35% (C$/US$ foreign exchange rate of 1.13).”
Ioannou adds “With these project enhancements outlined above and detailed in SRK’s Phase III/Area 2 prefeasibility study, coupled with Haywood’s current commodity price forecasts, which include long-term (2012+) copper and gold priced at US$2.00 per pound and US$650 per ounce respectively, Minto now generates a US$261 million after-tax project NAV10% (2008 forward basis; $3.49 per fully diluted share) and a 29% IRR in our formal valuation. At a forecast copper price of US$3.00 per pound and a forecast gold price of US$820 per ounce, Minto also generates approximately US$1.45 in 2008E CFPS based on 55 million pounds of payable copper and 24,000 ounces of gold production at an average total copper cash cost of US$1.00 per pound net of credits this year in our formal valuation.”
He also commends Sherwood on their growth till date. “We applaud Sherwood’s progress to date at Minto. The Company acquired the project in June 2005 for $8.4 million and proceeded to re-drill the deposit to modern reserve standards, conduct a bankable feasibility study, finance and build a $100 million open-pit copper-gold mine, and achieve ‘commercial’ production, all within a 29-month time frame—on schedule and essentially on budget—a rarity in today’s mining industry. This track record demonstrates management’s ability to deliver value quickly, and we anticipate that a number of additional growth initiatives will bear fruit over the near to medium term. The recent completion of the Phase III/Area 2 prefeasibility study at Minto further demonstrates Sherwood’s capabilities, taking an exploration concept at Area 2 and developing it into a reserve that supports a 45% increase in mill throughput and a 43% increase in total copper and gold production—all within 20 months!”
Additionally, in late November 2007, Sherwood announced a friendly takeover of Western Keltic Mines (WKM: TSX-V) by issuing 0.08 shares of Sherwood for each share of Western Keltic (79.8 million outstanding). “Based on Sherwood’s previous-day closing price (November 23, 2007), the offer equated to $0.47 per Western Keltic share or $37 million—a 53% premium to market. This transaction was formally closed yesterday afternoon with 93% of Western Keltic’s shares acquired. In total, Sherwood will issue approximately 6.4 million shares, equivalent to about 12.5% of Sherwood’s pro forma outstanding share capital at the time the deal was announced.
The key asset in Western Keltic’s project portfolio is the 100% owned Kutcho Creek deposit, a volcanogenic massive sulphide (VMS) copper-zinc-gold-silver deposit located in northwest British Columbia. The deposit includes a 17.1 million-tonne reserve that was the focus of a prefeasibility study completed by Wardrop Engineering in September 2007. Key metrics in this study include a combined open pit (Main) and underground (Esso) operation producing 75.5 million pounds of copper and 93.5 million pounds of zinc annually over a relatively short 8-year mine life. Initial capital costs were estimated at $299 million, which include a 6,000-tonne-per-day mill producing separate copper and zinc concentrates. At US$2.30 per pound copper, US$1.09 per pound zinc, US$537 per ounce gold, and US$9.86 per ounce silver the prefeasibility study generated a pre-tax project NAV8% of $154 million, an internal rate of return (IRR) of 23%, and a payback period of 2.6 years.”
Ioannou anticipates that “Sherwood will complete scoping work at Kutcho creek by early Q3/08, which will set the stage for the completion of a full feasibility study in mid-2009. In the meantime, our preliminary modelling is based on a smaller open-pit-only operation focused on higher grade mineralization, with production beginning in (early) 2011 and averaging approximately 40 million pounds of payable copper and 50 million pounds of payable zinc production annually over a 10-year mine life. Our preliminary valuation includes a lower initial capital cost, on the order of US$175 million, which is based on the construction of a smaller mill (3,000 tonnes per day) and sulphide flotation facility.”
“At Haywood’s formal commodity price forecast (refer to Radar Screen, January 15, 2008), which includes long-term pricing (2012+) of US$2.00 per pound copper, US$0.75 per pound zinc, US$650 per ounce gold, and US$10.50 per ounce silver, Kutcho Creek, as defined by our preliminary modelling, generates a US$40 million after-tax project NAV12% and a 21% IRR, assuming (early) 2011 production start-up—a modest premium to the $37 million Sherwood paid for Western Keltic. For comparative purposes, at a 10% discount rate our preliminary NAV valuation would increase to US$54 million. Our formal valuation assumes that Kutcho Creek’s modelled US$175 million initial capital cost is funded though a 50:50 debt:equity structure in 2009, with the equity component priced at $8.00 per share (11.0 million new shares issued; 17% dilution). Hence the project carries a fully financed NAV12% of US$127 million or $1.70 per fully diluted share in our formal valuation.”
Valuation and Price Target
Ioannou bases his $8.00/share target on a 5.5x multiple to Sherwood’s 2008E CFPS of US$1.45, in line with valuation metrics currently commanded by the company’s peer group. His valuation is based on “Haywood’s copper price forecast, which includes US$3.00 per pound in 2008, US$2.75 per pound in 2009, US$2.50 per pound in 2010, US$2.25 per pound in 2011, and US$2.00 per pound thereafter. Sherwood’s valuation also includes a fully financed after tax corporate NAV (10-12%) of $5.29/share which is based on:
- $3.49 per share attributable to the Minto mine (discounted at 10%).
- $1.70 per share attributable to the Kutcho Creek project (discounted at 12%).
- $1.47 per share attributable to resource and exploration upside at the Minto and Kutcho Creek projects.
- ($1.37) per share attributable to corporate adjustments.”
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.
Click Here To Watch A Video Interview With Sherwood’s President & CEO Stephen Quin On BNN – October 30, 2007
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Company Profile
Sherwood Copper Corp. (SWC:TSX-V) is a public company whose primary focus is the production of copper-gold concentrates from the Company's 100% owned high-grade Minto copper-gold mine located in the Yukon, Canada. Commercial production of the Minto Mine commenced on October 1, 2007 with regular shipments of copper-gold concentrates from the Port of Skagway, Alaska commencing later that same month. In parallel with its operating activities, Sherwood's 2007 exploration program yielded significant success with multiple discoveries of high grade copper-gold mineralization being made across its Minto Mine property. These discoveries could potentially add to Sherwood's high grade resource and reserve base and support increased production.
Event
In a note entitled “Wasting No Time to Pursue Growth Initiatives” Ioannou explains the reasons behind his Sector Outperform rating and $8.00 target.
Takeaways From The Event
Sherwood has successfully evolved from an explorer to producer and now provides investors with “immediate exposure to currently buoyant copper prices and associated strong cash flow. The Company’s 100% owned Minto mine in the Yukon is ramping up to about +50 million pounds of annual payable copper production over a remaining 8-year open-pit mine life. Project risk is mitigated through the use of standard off-the-shelf froth flotation technology, coupled with a strong management team that boasts a track record of successful project development in northern Canada. The mine achieved ‘commercial’ production in early October, and [Ioannou] look[s] to near-term operational optimization including a Phase III mill expansion through Q1/09 and significant exploration upside to unlock Minto’s true value.”
Ioannou writes “Sherwood began copper concentrate production at its 100% owned Minto mine last May, reaching this key milestone ahead of schedule and essentially on budget ($100.2 million actual versus $98.1 million estimated). First concentrate shipments to port facilities in Skagway, Alaska followed in July. A US$9.9 million refurbishment of these facilities through October, funded in part by the Alaska Industrial Development and Export Authority (AIDEA), set the stage for Minto’s first overseas concentrate shipment in late October—a 6,615-tonne (wet) shipment bound for Asia. In December 2007, Sherwood announced the completion of a Phase II mill expansion to 2,400 tonnes per day from 1,563 tonnes per day—again, ahead of (an already accelerated) schedule. Commissioning of this Phase II expansion is expected to be complete by the end of Q1/08. The expansion included the installation of a second ball mill and additional flotation cells with capacity to handle up to 3,500 tonnes per day.
In December 2007, Sherwood also announced the results of a prefeasibility study completed by SRK Consulting for a Phase III expansion at Minto designed to boost the project’s mill capacity to 3,500 tonnes per day (from 2,400 tonnes per day currently) and include resources defined at the adjacent Area 2 deposit. Key project parameters include an open-pit operation producing approximately 50+ million pounds of payable copper and 20,000+ ounces of gold annually over a 9-year mine life (8 years of mining and 1 additional year of stockpile processing). Average life-of-mine copper cash costs (on site) net of credits and royalties are estimated at US$0.81 per pound (contract mining; diesel fuel priced at $0.85 per litre delivered to site).
Total capital costs for the project are now estimated at $151 million, including life-of-mine sustaining capital costs (15% contingency on construction costs). This estimate includes $100.2 million already spent to build the base-case Phase I project. The Phase III mill expansion includes $3.2 million for the purchase of new equipment, including a pebble crusher, regrind mill, and paste thickener. The new capital-cost estimate also includes $16 million for grid power. At an average copper price of US$2.16 per pound and an average gold price of US$592.12 per ounce, which include forward sales contracts currently in place, the SRK prefeasibility study generates an after-tax project NAV7.5% of $126 million and IRR of 35% (C$/US$ foreign exchange rate of 1.13).”
Ioannou adds “With these project enhancements outlined above and detailed in SRK’s Phase III/Area 2 prefeasibility study, coupled with Haywood’s current commodity price forecasts, which include long-term (2012+) copper and gold priced at US$2.00 per pound and US$650 per ounce respectively, Minto now generates a US$261 million after-tax project NAV10% (2008 forward basis; $3.49 per fully diluted share) and a 29% IRR in our formal valuation. At a forecast copper price of US$3.00 per pound and a forecast gold price of US$820 per ounce, Minto also generates approximately US$1.45 in 2008E CFPS based on 55 million pounds of payable copper and 24,000 ounces of gold production at an average total copper cash cost of US$1.00 per pound net of credits this year in our formal valuation.”
He also commends Sherwood on their growth till date. “We applaud Sherwood’s progress to date at Minto. The Company acquired the project in June 2005 for $8.4 million and proceeded to re-drill the deposit to modern reserve standards, conduct a bankable feasibility study, finance and build a $100 million open-pit copper-gold mine, and achieve ‘commercial’ production, all within a 29-month time frame—on schedule and essentially on budget—a rarity in today’s mining industry. This track record demonstrates management’s ability to deliver value quickly, and we anticipate that a number of additional growth initiatives will bear fruit over the near to medium term. The recent completion of the Phase III/Area 2 prefeasibility study at Minto further demonstrates Sherwood’s capabilities, taking an exploration concept at Area 2 and developing it into a reserve that supports a 45% increase in mill throughput and a 43% increase in total copper and gold production—all within 20 months!”
Additionally, in late November 2007, Sherwood announced a friendly takeover of Western Keltic Mines (WKM: TSX-V) by issuing 0.08 shares of Sherwood for each share of Western Keltic (79.8 million outstanding). “Based on Sherwood’s previous-day closing price (November 23, 2007), the offer equated to $0.47 per Western Keltic share or $37 million—a 53% premium to market. This transaction was formally closed yesterday afternoon with 93% of Western Keltic’s shares acquired. In total, Sherwood will issue approximately 6.4 million shares, equivalent to about 12.5% of Sherwood’s pro forma outstanding share capital at the time the deal was announced.
The key asset in Western Keltic’s project portfolio is the 100% owned Kutcho Creek deposit, a volcanogenic massive sulphide (VMS) copper-zinc-gold-silver deposit located in northwest British Columbia. The deposit includes a 17.1 million-tonne reserve that was the focus of a prefeasibility study completed by Wardrop Engineering in September 2007. Key metrics in this study include a combined open pit (Main) and underground (Esso) operation producing 75.5 million pounds of copper and 93.5 million pounds of zinc annually over a relatively short 8-year mine life. Initial capital costs were estimated at $299 million, which include a 6,000-tonne-per-day mill producing separate copper and zinc concentrates. At US$2.30 per pound copper, US$1.09 per pound zinc, US$537 per ounce gold, and US$9.86 per ounce silver the prefeasibility study generated a pre-tax project NAV8% of $154 million, an internal rate of return (IRR) of 23%, and a payback period of 2.6 years.”
Ioannou anticipates that “Sherwood will complete scoping work at Kutcho creek by early Q3/08, which will set the stage for the completion of a full feasibility study in mid-2009. In the meantime, our preliminary modelling is based on a smaller open-pit-only operation focused on higher grade mineralization, with production beginning in (early) 2011 and averaging approximately 40 million pounds of payable copper and 50 million pounds of payable zinc production annually over a 10-year mine life. Our preliminary valuation includes a lower initial capital cost, on the order of US$175 million, which is based on the construction of a smaller mill (3,000 tonnes per day) and sulphide flotation facility.”
“At Haywood’s formal commodity price forecast (refer to Radar Screen, January 15, 2008), which includes long-term pricing (2012+) of US$2.00 per pound copper, US$0.75 per pound zinc, US$650 per ounce gold, and US$10.50 per ounce silver, Kutcho Creek, as defined by our preliminary modelling, generates a US$40 million after-tax project NAV12% and a 21% IRR, assuming (early) 2011 production start-up—a modest premium to the $37 million Sherwood paid for Western Keltic. For comparative purposes, at a 10% discount rate our preliminary NAV valuation would increase to US$54 million. Our formal valuation assumes that Kutcho Creek’s modelled US$175 million initial capital cost is funded though a 50:50 debt:equity structure in 2009, with the equity component priced at $8.00 per share (11.0 million new shares issued; 17% dilution). Hence the project carries a fully financed NAV12% of US$127 million or $1.70 per fully diluted share in our formal valuation.”
Valuation and Price Target
Ioannou bases his $8.00/share target on a 5.5x multiple to Sherwood’s 2008E CFPS of US$1.45, in line with valuation metrics currently commanded by the company’s peer group. His valuation is based on “Haywood’s copper price forecast, which includes US$3.00 per pound in 2008, US$2.75 per pound in 2009, US$2.50 per pound in 2010, US$2.25 per pound in 2011, and US$2.00 per pound thereafter. Sherwood’s valuation also includes a fully financed after tax corporate NAV (10-12%) of $5.29/share which is based on:
- $3.49 per share attributable to the Minto mine (discounted at 10%).
- $1.70 per share attributable to the Kutcho Creek project (discounted at 12%).
- $1.47 per share attributable to resource and exploration upside at the Minto and Kutcho Creek projects.
- ($1.37) per share attributable to corporate adjustments.”
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.
Click Here To Watch A Video Interview With Sherwood’s President & CEO Stephen Quin On BNN – October 30, 2007
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Thursday, March 06, 2008
Buy, Sell or Hold Paladin Energy (PDN:TSX)
On March 06th /08 Dundee Securities analyst David A. Talbot initiates coverage on Paladin Energy (PDN:TSX).
Company Profile
Paladin Energy is an Australian-domiciled company focused on uranium production, development and exploration with projects in Namibia, Malawi and Australia. Its flagship Langer Heinrich mine is expected to produce 2.6 million pounds U3O8 in 2008. Kayelekera construction is scheduled for completion at the end of this year.
Event
In a note entitled “Providing Paladin's New Energy” Talbot explains the reasons behind his Buy rating and C$7.75 target.
Takeaways From The Event
Talbot introduces Paladin by writing “Paladin is the ideal uranium investment. It is a pure play producer that boasts world class deposits and a large resource base. It operates in friendly jurisdictions and remains largely un-hedged. Paladin has all the hallmarks of a solid uranium developer and producer. Yet it appears as if the face of this company may change dramatically going forward.
Enter "Paladin Nuclear" as it takes over the sales and marketing, M&A and perhaps exploration functions. PDN is convinced that we should expect fundamental changes in the way nuclear fuel is transacted. It proposes to facilitate uranium trading as an alternative to the current spot and term markets. Traditional commodity marketing groups have demonstrated that as deal volume increases, improved contract optimization is recognized. PDN seeks to take advantage of this. Meanwhile, we speculate that this venture will likely require an initial supply base for its traders…we anticipate M&A activity.”
“While Paladin Energy with Managing Director John Borshoff will continue to operate the executive, production and mine development sides of the business, Paladin Nuclear is expected to take over the uranium sales and marketing, mergers and acquisitions, and perhaps to some extent, exploration.
Paladin Nuclear is to be based in Denver, Colorado with Dustin Garrow as Managing Director. To get closer to its customers, offices are scheduled to be opened in Europe mid-2008 and in Asia in 2009. Paladin plans to target customers who seek flexible and variable contractual and sales proposals that extend beyond the traditional term contracts and spot sales transactions. In essence, Paladin proposes to facilitate trading of uranium as an alternative to the current spot and term markets. Paladin Nuclear is being designed to manage Paladin’s uranium inventory (and revenue) though traditional commodity trading groups – it would be free to buy, sell, lend and borrow the commodity. Paladin Nuclear should function differently than the existing “physical uranium supply warehouses”, namely Uranium Participation Corporation (U-T:C$11.88) and Nufcor Uranium Limited (NU-L: £2.90). While management indicates that it is not interested in stockpiling uranium, the marketing arm will likely require an initial supply base for its traders. We remind investors that Paladin has not committed the majority of its future production. As its mines approach ~7 million pounds U3O8 annually in the next 12 months, its remaining contracts only amount to about one year of future production."
The company also has one of the fastest growing production profiles in the Uranium sector. Talbot elaborates this point by saying “Langer Heinrich achieved design capacity last December, and we look towards initial Kayelekera production and Langer Heinrich expansion to provide the 7 million pounds U3O8 forecast for 2009. Meanwhile, the prospects for further resource expansion at both operations are considerable, and potentially may support further production expansions.”
“Paladin’s 100%-owned Langer Heinrich uranium mine is located in Namibia, Southern Africa. Uranium is hosted within a series of at least seven calcrete-type deposits along a 15km palaeo-channel system. Resources total 105.6 million pounds U3O8 comprised of 37.1 million tonnes grading 0.06% U3O8 for 49.7 million pounds Measured and Indicated, and 43.0 million tonnes grading 0.06% for 55.9 million pounds Inferred. Inclusive of the M&I resources are reserves totalling 25.4 million tonnes grading 0.07% for 37.6 million pounds. All mineralization is located within 50m of surface.
Feasibility contemplated a 1.5 Mtpa operation with 11 years of mining and 15 years of processing life. Head feed grades were estimated at 0.0875% U3O8 over the first 11 years, followed by another four years processing from a low grade stockpile grading 0.032% U3O8. Operating costs for the reserves we expected to average $14.18/lb U3O8 life of mine, including $12.20/lb in the first six years. Projected capital costs were $92MM. Langer Heinrich currently sells production into three contracts that were arranged in conjunction with early project financing. These contracts total only ~7 million pounds representing a small fraction of the current 106 million pound resource. The three contracts all consist of floor prices with escalation clauses for both floors and ceilings. Two of the contracts have +50% upside riders attached and this is calculated using a formula based on a combination of both spot and term prices. Paladin holds this information tightly.”
“The 85%-owned Kayelekera uranium deposit is located in Malawi, Eastern Africa. Uranium is hosted within a series of arkose and mudstone units (Figure 3). Resources total 34.5 million pounds U3O8 on a 100% basis, comprised of 15.3 million tonnes grading 0.09% U3O8 for 30.0 million pounds Measured and Indicated, and 3.4 million tonnes grading 0.06% for 4.5 million pounds Inferred. Inclusive of the M&I resources are reserves totalling 10.5 million tonnes grading 0.11% for 25.1 million pounds.
A Bankable Feasibility Study and Malawi Development Agreement were both approved in 2007. The Development Agreement provides a 10 year stability regime. A 15% free carried equity was transferred to Malawi in exchange for a lower corporate tax rate (to 27.5% from 30.0%), lower resource rent tax (nil from 10%), and lower NSR (1.5% for years one to three and 3% thereafter, down from 5%). There is also no import VAT or duty during the stability period, 100% capital write-off for tax purposes and requirements to provide social infrastructure.
Feasibility contemplates an 11 year mine life with 3.3 million pounds of production expected annually in years one through seven, and 1.17 million pounds annually thereafter. Throughput design is a conventional 1.5 Mtpa acid leach plant with head feed grade of 0.11% U3O8 and 90% recovery. Capex was estimated at $185 million with most of this to be spent during F2008/F2009. Operating costs are anticipated at $19 per pound in years one through seven and $23 per pound LOM. Paladin believes there is excellent potential to extend mine life. Meanwhile, definition drilling continues to define the limits of the deposit and to upgrade inferred resources. An updated resource and reserve estimation is scheduled for March 2008.
“The Mt. Isa JV is a 50:50 Joint Venture between Mt. Isa Uranium and Summit Resources. PDN’s 90.9% interest is a result of a combination of its 100% ownership of Mt. Isa Uranium and its ~81.9% ownership of Summit Resources. The JV comprises of eight uranium (+ vanadium) deposits and a minimum of 15 target areas. Dundee visited the Mt. Isa JV Valhalla and Skal uranium-vanadium deposits on November 12, 2007. Summit Resources has an interest in other deposits including Andersons and Watta, in which Paladin would have an effective 81.9% interest.
Intensive resource and expansion drilling at Valhalla and Skal continues as part of an A$8MM program. Metallurgical and environmental baseline studies are underway as part of a pre-feasibility study anticipated by year end 2008. It is likely Paladin would consider in the order of 4 to 5 million pounds U3O8 annual production from this operation. A Feasibility Study will likely be completed prior to a Queensland mining ban resolution.
Valhalla is hosted within sheared volcanic rocks. The main zone strikes for 800m and extends to 660m at depth where it remains open down plunge. The deposit appears to hold together quite well down to 400m where it still measures over 100m in true thickness. A previous Indicated and Inferred resource estimated ~57 million lbs U3O8 (100% basis) and graded 0.08%. A systematic 50,000m RC and diamond drill program continues.
An initial Skal resource is expected within Q1/CY08. Mapping and drilling support a new re-interpretation that suggests the presence of several en echelon plunging shoots. An historic resource totals ~11 MM lbs U3O8 (100% basis) at grades of 0.10% to 0.13%.
Skal and Valhalla appear to be part of Paladin‘s long term plan – projects that would not only extend its production profile forward, but also give Paladin production outside of Africa. While uranium mining continues to be banned in Queensland, we believe it is likely just a matter of time before this policy is rescinded at the state level as it has been at the Commonwealth level.”
Paladin recently purchased the Angela deposit which is slated for production by 2012, which as Talbot says should lessen “any potential impact of any delay at Mt. Isa as a result of the Queensland uranium mining ban. A rumoured desire to purchase an existing mine, perhaps in North America or Asia, could also provide an additional and immediate bump in production.”
“Paladin recently announced that it and Cameco were selected from a group of 37 applicants to develop the Angela and Pamela deposits in Northern Territory, Australia. The purchase price was zero. The two companies will form a 50:50 joint venture that is committed to spend A$5 million on initial exploration and another A$5 to $10 million through a bankable feasibility and environmental impact assessment. Past work at Angela and Pamela by Uranerz suggests historical resources of between 26.5 million and 28.7 million lbs U3O8 and grades around 0.10% to 0.13% U3O8. Uranium has been identified regionally where the redox boundary moves locally to lower or higher stratigraphic levels, analogous to sandstone-type deposits in the western United States. These steps have been known to be remarkably consistent down plunge. The Angela deposit remains open at depth and Paladin is confident that it can grow its size. Paladin’s alkaline leach experience. Northern Territory does not prohibit uranium mining as does Queensland. This is particularly important given the timeline uncertainty attached to Paladin’s Mt. Isa JV’s Valhalla and Skal projects. Paladin’s production goal for Angela-Pamela is before 2012, with Skal and Valhalla slated to enter production thereafter.”
Talbot ends by saying “We believe Paladin Energy Ltd. to be one of the most exciting and innovative companies in the uranium industry. We anticipate Paladin’s presence on the uranium scene to grow significantly through a blend of organic growth, project development, and M&A activity. We expect its generative group to find new opportunities using its proprietary database. This provides Paladin an advantage to target prospects that may not be widely familiar.
Paladin is likely to become a focus for investors looking for steady cash flow and strong growth prospects as the remaining uranium producers seem to take turns in the penalty box in a sector that is somewhat devoid of blue chip stocks. The ideal just got better.”
Valuation and Price Target
Talbot bases his 12-month share price target of C$7.75 on a 10% DCF valuation, while adding per share value for additional resources, equity investments and year-end cash to derive its NAV per share. Talbot also mentions that Paladin’s NAV is equal to its target price since he does not use NAV or DCF multiples in his Paladin valuation.
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Paladin Energy is an Australian-domiciled company focused on uranium production, development and exploration with projects in Namibia, Malawi and Australia. Its flagship Langer Heinrich mine is expected to produce 2.6 million pounds U3O8 in 2008. Kayelekera construction is scheduled for completion at the end of this year.
Event
In a note entitled “Providing Paladin's New Energy” Talbot explains the reasons behind his Buy rating and C$7.75 target.
Takeaways From The Event
Talbot introduces Paladin by writing “Paladin is the ideal uranium investment. It is a pure play producer that boasts world class deposits and a large resource base. It operates in friendly jurisdictions and remains largely un-hedged. Paladin has all the hallmarks of a solid uranium developer and producer. Yet it appears as if the face of this company may change dramatically going forward.
Enter "Paladin Nuclear" as it takes over the sales and marketing, M&A and perhaps exploration functions. PDN is convinced that we should expect fundamental changes in the way nuclear fuel is transacted. It proposes to facilitate uranium trading as an alternative to the current spot and term markets. Traditional commodity marketing groups have demonstrated that as deal volume increases, improved contract optimization is recognized. PDN seeks to take advantage of this. Meanwhile, we speculate that this venture will likely require an initial supply base for its traders…we anticipate M&A activity.”
“While Paladin Energy with Managing Director John Borshoff will continue to operate the executive, production and mine development sides of the business, Paladin Nuclear is expected to take over the uranium sales and marketing, mergers and acquisitions, and perhaps to some extent, exploration.
Paladin Nuclear is to be based in Denver, Colorado with Dustin Garrow as Managing Director. To get closer to its customers, offices are scheduled to be opened in Europe mid-2008 and in Asia in 2009. Paladin plans to target customers who seek flexible and variable contractual and sales proposals that extend beyond the traditional term contracts and spot sales transactions. In essence, Paladin proposes to facilitate trading of uranium as an alternative to the current spot and term markets. Paladin Nuclear is being designed to manage Paladin’s uranium inventory (and revenue) though traditional commodity trading groups – it would be free to buy, sell, lend and borrow the commodity. Paladin Nuclear should function differently than the existing “physical uranium supply warehouses”, namely Uranium Participation Corporation (U-T:C$11.88) and Nufcor Uranium Limited (NU-L: £2.90). While management indicates that it is not interested in stockpiling uranium, the marketing arm will likely require an initial supply base for its traders. We remind investors that Paladin has not committed the majority of its future production. As its mines approach ~7 million pounds U3O8 annually in the next 12 months, its remaining contracts only amount to about one year of future production."
The company also has one of the fastest growing production profiles in the Uranium sector. Talbot elaborates this point by saying “Langer Heinrich achieved design capacity last December, and we look towards initial Kayelekera production and Langer Heinrich expansion to provide the 7 million pounds U3O8 forecast for 2009. Meanwhile, the prospects for further resource expansion at both operations are considerable, and potentially may support further production expansions.”
“Paladin’s 100%-owned Langer Heinrich uranium mine is located in Namibia, Southern Africa. Uranium is hosted within a series of at least seven calcrete-type deposits along a 15km palaeo-channel system. Resources total 105.6 million pounds U3O8 comprised of 37.1 million tonnes grading 0.06% U3O8 for 49.7 million pounds Measured and Indicated, and 43.0 million tonnes grading 0.06% for 55.9 million pounds Inferred. Inclusive of the M&I resources are reserves totalling 25.4 million tonnes grading 0.07% for 37.6 million pounds. All mineralization is located within 50m of surface.
Feasibility contemplated a 1.5 Mtpa operation with 11 years of mining and 15 years of processing life. Head feed grades were estimated at 0.0875% U3O8 over the first 11 years, followed by another four years processing from a low grade stockpile grading 0.032% U3O8. Operating costs for the reserves we expected to average $14.18/lb U3O8 life of mine, including $12.20/lb in the first six years. Projected capital costs were $92MM. Langer Heinrich currently sells production into three contracts that were arranged in conjunction with early project financing. These contracts total only ~7 million pounds representing a small fraction of the current 106 million pound resource. The three contracts all consist of floor prices with escalation clauses for both floors and ceilings. Two of the contracts have +50% upside riders attached and this is calculated using a formula based on a combination of both spot and term prices. Paladin holds this information tightly.”
“The 85%-owned Kayelekera uranium deposit is located in Malawi, Eastern Africa. Uranium is hosted within a series of arkose and mudstone units (Figure 3). Resources total 34.5 million pounds U3O8 on a 100% basis, comprised of 15.3 million tonnes grading 0.09% U3O8 for 30.0 million pounds Measured and Indicated, and 3.4 million tonnes grading 0.06% for 4.5 million pounds Inferred. Inclusive of the M&I resources are reserves totalling 10.5 million tonnes grading 0.11% for 25.1 million pounds.
A Bankable Feasibility Study and Malawi Development Agreement were both approved in 2007. The Development Agreement provides a 10 year stability regime. A 15% free carried equity was transferred to Malawi in exchange for a lower corporate tax rate (to 27.5% from 30.0%), lower resource rent tax (nil from 10%), and lower NSR (1.5% for years one to three and 3% thereafter, down from 5%). There is also no import VAT or duty during the stability period, 100% capital write-off for tax purposes and requirements to provide social infrastructure.
Feasibility contemplates an 11 year mine life with 3.3 million pounds of production expected annually in years one through seven, and 1.17 million pounds annually thereafter. Throughput design is a conventional 1.5 Mtpa acid leach plant with head feed grade of 0.11% U3O8 and 90% recovery. Capex was estimated at $185 million with most of this to be spent during F2008/F2009. Operating costs are anticipated at $19 per pound in years one through seven and $23 per pound LOM. Paladin believes there is excellent potential to extend mine life. Meanwhile, definition drilling continues to define the limits of the deposit and to upgrade inferred resources. An updated resource and reserve estimation is scheduled for March 2008.
“The Mt. Isa JV is a 50:50 Joint Venture between Mt. Isa Uranium and Summit Resources. PDN’s 90.9% interest is a result of a combination of its 100% ownership of Mt. Isa Uranium and its ~81.9% ownership of Summit Resources. The JV comprises of eight uranium (+ vanadium) deposits and a minimum of 15 target areas. Dundee visited the Mt. Isa JV Valhalla and Skal uranium-vanadium deposits on November 12, 2007. Summit Resources has an interest in other deposits including Andersons and Watta, in which Paladin would have an effective 81.9% interest.
Intensive resource and expansion drilling at Valhalla and Skal continues as part of an A$8MM program. Metallurgical and environmental baseline studies are underway as part of a pre-feasibility study anticipated by year end 2008. It is likely Paladin would consider in the order of 4 to 5 million pounds U3O8 annual production from this operation. A Feasibility Study will likely be completed prior to a Queensland mining ban resolution.
Valhalla is hosted within sheared volcanic rocks. The main zone strikes for 800m and extends to 660m at depth where it remains open down plunge. The deposit appears to hold together quite well down to 400m where it still measures over 100m in true thickness. A previous Indicated and Inferred resource estimated ~57 million lbs U3O8 (100% basis) and graded 0.08%. A systematic 50,000m RC and diamond drill program continues.
An initial Skal resource is expected within Q1/CY08. Mapping and drilling support a new re-interpretation that suggests the presence of several en echelon plunging shoots. An historic resource totals ~11 MM lbs U3O8 (100% basis) at grades of 0.10% to 0.13%.
Skal and Valhalla appear to be part of Paladin‘s long term plan – projects that would not only extend its production profile forward, but also give Paladin production outside of Africa. While uranium mining continues to be banned in Queensland, we believe it is likely just a matter of time before this policy is rescinded at the state level as it has been at the Commonwealth level.”
Paladin recently purchased the Angela deposit which is slated for production by 2012, which as Talbot says should lessen “any potential impact of any delay at Mt. Isa as a result of the Queensland uranium mining ban. A rumoured desire to purchase an existing mine, perhaps in North America or Asia, could also provide an additional and immediate bump in production.”
“Paladin recently announced that it and Cameco were selected from a group of 37 applicants to develop the Angela and Pamela deposits in Northern Territory, Australia. The purchase price was zero. The two companies will form a 50:50 joint venture that is committed to spend A$5 million on initial exploration and another A$5 to $10 million through a bankable feasibility and environmental impact assessment. Past work at Angela and Pamela by Uranerz suggests historical resources of between 26.5 million and 28.7 million lbs U3O8 and grades around 0.10% to 0.13% U3O8. Uranium has been identified regionally where the redox boundary moves locally to lower or higher stratigraphic levels, analogous to sandstone-type deposits in the western United States. These steps have been known to be remarkably consistent down plunge. The Angela deposit remains open at depth and Paladin is confident that it can grow its size. Paladin’s alkaline leach experience. Northern Territory does not prohibit uranium mining as does Queensland. This is particularly important given the timeline uncertainty attached to Paladin’s Mt. Isa JV’s Valhalla and Skal projects. Paladin’s production goal for Angela-Pamela is before 2012, with Skal and Valhalla slated to enter production thereafter.”
Talbot ends by saying “We believe Paladin Energy Ltd. to be one of the most exciting and innovative companies in the uranium industry. We anticipate Paladin’s presence on the uranium scene to grow significantly through a blend of organic growth, project development, and M&A activity. We expect its generative group to find new opportunities using its proprietary database. This provides Paladin an advantage to target prospects that may not be widely familiar.
Paladin is likely to become a focus for investors looking for steady cash flow and strong growth prospects as the remaining uranium producers seem to take turns in the penalty box in a sector that is somewhat devoid of blue chip stocks. The ideal just got better.”
Valuation and Price Target
Talbot bases his 12-month share price target of C$7.75 on a 10% DCF valuation, while adding per share value for additional resources, equity investments and year-end cash to derive its NAV per share. Talbot also mentions that Paladin’s NAV is equal to its target price since he does not use NAV or DCF multiples in his Paladin valuation.
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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Canadian Portfolio Strategy Outlook - CIBC
March 5th, 2008 CIBC World Markets Canadian Portfolio Strategy Outlook
Excerpt:
“We remain overweight materials stocks as well, both the base metals and gold components. US economic weakness has little impact on demand growth in most major metals markets including nickel, copper, zinc and aluminum while the Federal Reserve Board’s pursuit of a sub-2% federal funds rate will weaken the greenback and send bullion prices to over US$1,100 per ounce.”
To Download Jeff Rubin's March 5th, 2008 Canadian Portfolio Strategy Outlook Click Here
Jeff Rubin Bio - Chief Economist and Chief Strategist, Managing Director, CIBC World Markets Jeffrey Rubin has been the top-ranked economist in Canadian financial markets over the last decade. Prior to joining CIBC World Markets in 1988, Mr. Rubin was a Senior Policy Advisor at the Ontario Ministry of Finance where he oversaw economic forecasting. Throughout his career, Mr. Rubin's work has often been the subject of national headlines and has been instrumental in raising key issues to the national spotlight. The largest fund managers in North America, Europe and the Far East value his expertise in Canadian debt and equity markets. He frequently appears as a network commentator on the economy, financial markets, and federal budgets.
Excerpt:
“We remain overweight materials stocks as well, both the base metals and gold components. US economic weakness has little impact on demand growth in most major metals markets including nickel, copper, zinc and aluminum while the Federal Reserve Board’s pursuit of a sub-2% federal funds rate will weaken the greenback and send bullion prices to over US$1,100 per ounce.”
To Download Jeff Rubin's March 5th, 2008 Canadian Portfolio Strategy Outlook Click Here
Jeff Rubin Bio - Chief Economist and Chief Strategist, Managing Director, CIBC World Markets Jeffrey Rubin has been the top-ranked economist in Canadian financial markets over the last decade. Prior to joining CIBC World Markets in 1988, Mr. Rubin was a Senior Policy Advisor at the Ontario Ministry of Finance where he oversaw economic forecasting. Throughout his career, Mr. Rubin's work has often been the subject of national headlines and has been instrumental in raising key issues to the national spotlight. The largest fund managers in North America, Europe and the Far East value his expertise in Canadian debt and equity markets. He frequently appears as a network commentator on the economy, financial markets, and federal budgets.
Wednesday, March 05, 2008
Industry Outlook - Junior Golds Explorers and Developers
On March 04th /08 RBC Capital Markets analyst Michael Curran released an update on Junior Gold Explorers and Developers.
Event
In a note entitled “Jr. Golds - Explorers and Developers...Even Later To The Party Than Usual” Curran highlights two plausible scenarios that could lead to a turnaround for Junior Gold stocks.
Takeaways From The Event
Curran writes “For the past couple of years, we have tracked some 40-50 non-producing gold companies in terms of their Adjusted Market Capitalization Per Total Resource Ounce (AMC/oz). The group average has hovered between $50-$75/oz, with the current $51/oz average about 10% higher than our last update in January, but well below where we might have speculated valuations would be given a $980/oz gold spot price.”
He expresses disappointment” to see the lack of participation in the recent gold price move from the Jr Gold space. While most of the larger producers have made new 52-week highs in January, and again in recent days, the majority of our Jr. Gold universe have to look back to Spring 2007 to see their 52-week highs.”
Curran highlights 2 scenarios that could lead to a turnaround for Junior Gold stocks: “a gold price-driven late rally or an increase in M&A activity.
1. Gold Price-driven Rally - we believe a further leg up in spot gold, perhaps breaching the $1,000/oz level could be the catalyst for increased interest into the smaller cap Jr. Golds, providing some catch up to the larger cap names which have dominated market activity over the past few quarters. This boost could come as either an increase in money flows into resource/precious metal funds, or as an increase in allocation for precious metal equities within non-specialist (generalist) funds.
2. Increased M&A Activity - we also believe that if mid & senior gold equities continue to outperform the Jr. Golds, the elevated valuation levels of the larger caps will make acquisition of the smaller cap laggards very compelling/accretive, leading to increased M&A activity in the group. We expect the initial focus of M&A activity to be on Jr. Golds which control larger resources (say +5MMoz gold deposits). Tier I, II and III gold producers currently trade at an average AMC/oz of $192/oz, $286/oz, and $166/oz, respectively, thus many of the Jr. Golds could be paid a premium and still be accretive to the producers, in our view.”
Favourite Junior Golds
“Anatolia Minerals is a Top Pick, Speculative Risk-rated emerging producer active in Turkey. Andean (Chile), Banro (DRC), Gold Reserve (Venezuela), Greystar (Colombia), and Osisko (Quebec) are Outperform, Speculative Risk-rated gold explorers.”
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Event
In a note entitled “Jr. Golds - Explorers and Developers...Even Later To The Party Than Usual” Curran highlights two plausible scenarios that could lead to a turnaround for Junior Gold stocks.
Takeaways From The Event
Curran writes “For the past couple of years, we have tracked some 40-50 non-producing gold companies in terms of their Adjusted Market Capitalization Per Total Resource Ounce (AMC/oz). The group average has hovered between $50-$75/oz, with the current $51/oz average about 10% higher than our last update in January, but well below where we might have speculated valuations would be given a $980/oz gold spot price.”
He expresses disappointment” to see the lack of participation in the recent gold price move from the Jr Gold space. While most of the larger producers have made new 52-week highs in January, and again in recent days, the majority of our Jr. Gold universe have to look back to Spring 2007 to see their 52-week highs.”
Curran highlights 2 scenarios that could lead to a turnaround for Junior Gold stocks: “a gold price-driven late rally or an increase in M&A activity.
1. Gold Price-driven Rally - we believe a further leg up in spot gold, perhaps breaching the $1,000/oz level could be the catalyst for increased interest into the smaller cap Jr. Golds, providing some catch up to the larger cap names which have dominated market activity over the past few quarters. This boost could come as either an increase in money flows into resource/precious metal funds, or as an increase in allocation for precious metal equities within non-specialist (generalist) funds.
2. Increased M&A Activity - we also believe that if mid & senior gold equities continue to outperform the Jr. Golds, the elevated valuation levels of the larger caps will make acquisition of the smaller cap laggards very compelling/accretive, leading to increased M&A activity in the group. We expect the initial focus of M&A activity to be on Jr. Golds which control larger resources (say +5MMoz gold deposits). Tier I, II and III gold producers currently trade at an average AMC/oz of $192/oz, $286/oz, and $166/oz, respectively, thus many of the Jr. Golds could be paid a premium and still be accretive to the producers, in our view.”
Favourite Junior Golds
“Anatolia Minerals is a Top Pick, Speculative Risk-rated emerging producer active in Turkey. Andean (Chile), Banro (DRC), Gold Reserve (Venezuela), Greystar (Colombia), and Osisko (Quebec) are Outperform, Speculative Risk-rated gold explorers.”
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Tuesday, March 04, 2008
Buy, Sell or Hold Pacific Energy Resources (PFE:TSX)
On March 04th /08 Wellington West Capital analyst Malcolm Shaw released an update on Pacific Energy Resources.
Company Profile
Pacific Energy is an oil exploration and production company based out of Long Beach, California. The company has core areas in California, Alaska, and Wyoming. The company has a large, established, long life reserve base that is currently producing ~8,000 boepd. The company plans to ramp up production by redeveloping proven producing fields, while drilling selected high impact exploration plays on existing lands.
Event
In a note entitled “Beta Unit to Play Big Role in Pacific Energy’s Production Growth Plans” Shaw explains the reasons behind his Buy rating and $3.00 target.
Takeaways From The Event
Shaw expects Pacific Energy’s production to increase from ~8,000boepd to ~13,000 boepd by the end of 2008 as “the company restores production from the Eureka platform offshore California and carries out select recompletions and infill drilling.”
California Update
The company is planning to begin a development program off their Ellen platofrim in 23-4 motnhs, which is “expected to raise Ellen’s production to ~3,600 bopd from the current ~2,000 bopd by Q4 2008. Before development at their 100%-owned offshore Beta Unit can begin, the Company must complete some minor rig upgrades, which are expected to begin shortly and total US$2M in capital expenditures. Pacific Energy plans to drill four development wells and perform nine re-drills/recompletions off their Ellen platform with the bulk of the development being carried out in Q3. Each of the four planned development wells are expected to come onstream at an initial rate of 300–400 bopd with an additional 600 bopd in combined production expected from the re-drills and recompletions.”
“An early production solution may restore as much as 2,000 bopd of Eureka production in Q2 while the company continues to work towards restoring full production (4,000–5,000 bopd) by Q4.” The company recently confirmed the integrity of an existing “6" water line and plans to restore 1,000–2,000 bopd from the Eureka platform in April. Current plans call for a 12" water line to be sleeved by the end of Q3, which is expected to handle up to 5,000 bopd. This milestone is expected to result in the reclassification of some reserves into the proved developed producing (PDP) classification from the proved developed non-production (PDNP) group, which should ultimately improve Pacific Energy’s 1st lien borrowing capability.”
Pacific Energy is also maintaining its plans to drill 2 horizontal wells connecting the 2 platforms, Ellen and Eureka, as a longer term solution for transporting crude from the Eureka platform. Once, the “wellbores have connected, the company plans to run a production liner along the full length of the borehole to be used as an inter-platform pipeline. The total cost of the “wellbore connect” project is expected to be ~US$20 million. We model Beta Unit production averaging 7,000 bopd in 2009.
“Pacific Energy is preparing to drill five infill wells in their 100%-owned onshore Wilmington field and expects to have a rig available to begin drilling within the next month. Based on results from last year’s development drilling program, we believe each of the Wilmington wells can come online at an initial rate of 50 bopd, which would put them on-track to meet our 2008 exit rate of ~1,600 bopd for onshore California. Each of the Wilmington wells are expected to cost US$1.3M and pay back in two and a half years at ~US$70 WTI.”
Additionally, the “Drilling of three exploration wells on the company’s San Joaquin Basin fields is expected to commence following the Wilmington development program. The three targets are imaged on 3D seismic and per well potential ranges from one to ten million barrels.”
Alaska Update
“Pacific Energy’s current plans call for a five-well infill/re-drill program to start at their 100%-owned Redoubt Shoal field in July 2008. New wells are expected to produce at initial rates of 400–500 bopd and will target undeveloped reserves in undrained portions of the Redoubt Shoal field.” Shaw expects net exit production rates of ~5,000 boepd and ~6,000 boepd from Alaska in 2008 and 2009 respectively. He assumes “two of the five development wells planned at Redoubt Shoal produce 400–500 bopd per well (and are onstream in 2008) and that the installation of submersible pumps offsets part of the field’s natural production decline.”
“The 100%-owned Corsair prospect remains one of the company’s highest priority exploration targets and is expected to be drilled in mid-2009. The prospect is in shallow water depths and requires a jack-up rig for drilling, which Pacific Energy hopes to secure by April of this year. Corsair is believed to be prospective for 500 Bcf of gas and up to 137 million barrels of oil in two deeper zones.”
“With ~7,000 bopd of net production targeted from their offshore Beta Unit, ~6,200 boepd of net production targeted from Alaska and ~2,000 bopd from the company’s onshore assets, Shaw believes Pacific Energy has the potential to be producing ~15,200 bopd by the end of 2009.” H expects his 2009 production estimate to drive cash flow pre share of ~0.32 at ~US$70 WTI on a pre-tax basis.
Valuation and Price Target
“Pacific Energy’s balance sheet remains highly leveraged with long-term debt of ~US$480M (Debt/2009E cash flow of ~6.8x) following their acquisition of Forest Alaska Operating LLC for US$457.5M. The acquisition was successfully orchestrated by Pacific Energy by taking on two separate term loans from Goldman Sachs that totaled US$425M. The two term loans, term loan A and term loan B, carried values of US$108M (@ 7.75% interest) and US$317M (@ 19.5% interest), respectively.” Shaw assumes that the company paid down US$40 million of term loan B in November 2007 through a private placement for US$65 million. He models “Pacific Energy generating an average loss of ~US$2.1M in free cashflow per quarter in 2008 after covering their quarterly interest payments, which we estimate to be US$18.7M. The bulk of the company’s quarterly interest payments come from term loan A (~US$2.1M), term loan B (~US$13.5M) and the senior credit facility (~US$2.2M).”
“Near-term opportunities to reduce the debt load and/or provide working capital include: 1) the potential disposition of onshore producing oil properties and 2) the potential for the release of approximately ½ of the ~$100 million reclamation bond currently posted for the Beta Unit when the Eureka platform comes online.” Shaw goes on to say that “divestiture of Pacific Energy’s non-core onshore California assets remains a viable option. Based on [his] 2008 target exit rate estimate of 1,635 bopd, [h]e believe[s] Pacific Energy’s onshore California portfolio could garner upwards of US$100M (@ US$60,000 per flowing barrel) given the long reserve life (>25 years) of the fields. If Pacific Energy were to execute on the two debt reduction options [h]e lay[s] out, [h]e expect[s] the company could free-up US$150M in cash in 2008 that could help pay down a portion of the ~US$480M in outstanding long-term debt and/or fund this year’s capital expenditure program.
Shaw remains “bullish on Pacific Energy and believe[s] the company is well-positioned to meet [his] production growth estimates and improve the corporate balance sheet. The three main drivers of our production estimates over the next 12 months are: 1) the re-establishment of production from the Eureka platform in the Beta field, offshore California (shut in at 4,400 boepd in 1999), 2) the drilling of four successful development wells off Beta Unit’s Ellen platform, and 3) successful implementation of the Redoubt Shoal development/optimization plan in Alaska. With the increase in production planned through 2009, [h]e expect[s] operating costs to fall to US$20/bbl in Q4 2009 from [his] current estimate of US$35/bbl.”
Shaw’s $3.00 target is driven by his 2009E projected CFPS of 0.32/sh and risked NPV/sh estimate of $2.45, both of which are weighted equally at 35% in his blended valuation. His “EMV/sh estimate of $6.37 (20% weighting) and acquisition value of $1.95 (10% weighting – based on risked resource potential) rounds out the remaining components of our $3.00 target price for Pacific Energy.” Components of his risked NPV/sh estimates are outlined in the figure below.
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards
Company Profile
Pacific Energy is an oil exploration and production company based out of Long Beach, California. The company has core areas in California, Alaska, and Wyoming. The company has a large, established, long life reserve base that is currently producing ~8,000 boepd. The company plans to ramp up production by redeveloping proven producing fields, while drilling selected high impact exploration plays on existing lands.
Event
In a note entitled “Beta Unit to Play Big Role in Pacific Energy’s Production Growth Plans” Shaw explains the reasons behind his Buy rating and $3.00 target.
Takeaways From The Event
Shaw expects Pacific Energy’s production to increase from ~8,000boepd to ~13,000 boepd by the end of 2008 as “the company restores production from the Eureka platform offshore California and carries out select recompletions and infill drilling.”
California Update
The company is planning to begin a development program off their Ellen platofrim in 23-4 motnhs, which is “expected to raise Ellen’s production to ~3,600 bopd from the current ~2,000 bopd by Q4 2008. Before development at their 100%-owned offshore Beta Unit can begin, the Company must complete some minor rig upgrades, which are expected to begin shortly and total US$2M in capital expenditures. Pacific Energy plans to drill four development wells and perform nine re-drills/recompletions off their Ellen platform with the bulk of the development being carried out in Q3. Each of the four planned development wells are expected to come onstream at an initial rate of 300–400 bopd with an additional 600 bopd in combined production expected from the re-drills and recompletions.”
“An early production solution may restore as much as 2,000 bopd of Eureka production in Q2 while the company continues to work towards restoring full production (4,000–5,000 bopd) by Q4.” The company recently confirmed the integrity of an existing “6" water line and plans to restore 1,000–2,000 bopd from the Eureka platform in April. Current plans call for a 12" water line to be sleeved by the end of Q3, which is expected to handle up to 5,000 bopd. This milestone is expected to result in the reclassification of some reserves into the proved developed producing (PDP) classification from the proved developed non-production (PDNP) group, which should ultimately improve Pacific Energy’s 1st lien borrowing capability.”
Pacific Energy is also maintaining its plans to drill 2 horizontal wells connecting the 2 platforms, Ellen and Eureka, as a longer term solution for transporting crude from the Eureka platform. Once, the “wellbores have connected, the company plans to run a production liner along the full length of the borehole to be used as an inter-platform pipeline. The total cost of the “wellbore connect” project is expected to be ~US$20 million. We model Beta Unit production averaging 7,000 bopd in 2009.
“Pacific Energy is preparing to drill five infill wells in their 100%-owned onshore Wilmington field and expects to have a rig available to begin drilling within the next month. Based on results from last year’s development drilling program, we believe each of the Wilmington wells can come online at an initial rate of 50 bopd, which would put them on-track to meet our 2008 exit rate of ~1,600 bopd for onshore California. Each of the Wilmington wells are expected to cost US$1.3M and pay back in two and a half years at ~US$70 WTI.”
Additionally, the “Drilling of three exploration wells on the company’s San Joaquin Basin fields is expected to commence following the Wilmington development program. The three targets are imaged on 3D seismic and per well potential ranges from one to ten million barrels.”
Alaska Update
“Pacific Energy’s current plans call for a five-well infill/re-drill program to start at their 100%-owned Redoubt Shoal field in July 2008. New wells are expected to produce at initial rates of 400–500 bopd and will target undeveloped reserves in undrained portions of the Redoubt Shoal field.” Shaw expects net exit production rates of ~5,000 boepd and ~6,000 boepd from Alaska in 2008 and 2009 respectively. He assumes “two of the five development wells planned at Redoubt Shoal produce 400–500 bopd per well (and are onstream in 2008) and that the installation of submersible pumps offsets part of the field’s natural production decline.”
“The 100%-owned Corsair prospect remains one of the company’s highest priority exploration targets and is expected to be drilled in mid-2009. The prospect is in shallow water depths and requires a jack-up rig for drilling, which Pacific Energy hopes to secure by April of this year. Corsair is believed to be prospective for 500 Bcf of gas and up to 137 million barrels of oil in two deeper zones.”
“With ~7,000 bopd of net production targeted from their offshore Beta Unit, ~6,200 boepd of net production targeted from Alaska and ~2,000 bopd from the company’s onshore assets, Shaw believes Pacific Energy has the potential to be producing ~15,200 bopd by the end of 2009.” H expects his 2009 production estimate to drive cash flow pre share of ~0.32 at ~US$70 WTI on a pre-tax basis.
Valuation and Price Target
“Pacific Energy’s balance sheet remains highly leveraged with long-term debt of ~US$480M (Debt/2009E cash flow of ~6.8x) following their acquisition of Forest Alaska Operating LLC for US$457.5M. The acquisition was successfully orchestrated by Pacific Energy by taking on two separate term loans from Goldman Sachs that totaled US$425M. The two term loans, term loan A and term loan B, carried values of US$108M (@ 7.75% interest) and US$317M (@ 19.5% interest), respectively.” Shaw assumes that the company paid down US$40 million of term loan B in November 2007 through a private placement for US$65 million. He models “Pacific Energy generating an average loss of ~US$2.1M in free cashflow per quarter in 2008 after covering their quarterly interest payments, which we estimate to be US$18.7M. The bulk of the company’s quarterly interest payments come from term loan A (~US$2.1M), term loan B (~US$13.5M) and the senior credit facility (~US$2.2M).”
“Near-term opportunities to reduce the debt load and/or provide working capital include: 1) the potential disposition of onshore producing oil properties and 2) the potential for the release of approximately ½ of the ~$100 million reclamation bond currently posted for the Beta Unit when the Eureka platform comes online.” Shaw goes on to say that “divestiture of Pacific Energy’s non-core onshore California assets remains a viable option. Based on [his] 2008 target exit rate estimate of 1,635 bopd, [h]e believe[s] Pacific Energy’s onshore California portfolio could garner upwards of US$100M (@ US$60,000 per flowing barrel) given the long reserve life (>25 years) of the fields. If Pacific Energy were to execute on the two debt reduction options [h]e lay[s] out, [h]e expect[s] the company could free-up US$150M in cash in 2008 that could help pay down a portion of the ~US$480M in outstanding long-term debt and/or fund this year’s capital expenditure program.
Shaw remains “bullish on Pacific Energy and believe[s] the company is well-positioned to meet [his] production growth estimates and improve the corporate balance sheet. The three main drivers of our production estimates over the next 12 months are: 1) the re-establishment of production from the Eureka platform in the Beta field, offshore California (shut in at 4,400 boepd in 1999), 2) the drilling of four successful development wells off Beta Unit’s Ellen platform, and 3) successful implementation of the Redoubt Shoal development/optimization plan in Alaska. With the increase in production planned through 2009, [h]e expect[s] operating costs to fall to US$20/bbl in Q4 2009 from [his] current estimate of US$35/bbl.”
Shaw’s $3.00 target is driven by his 2009E projected CFPS of 0.32/sh and risked NPV/sh estimate of $2.45, both of which are weighted equally at 35% in his blended valuation. His “EMV/sh estimate of $6.37 (20% weighting) and acquisition value of $1.95 (10% weighting – based on risked resource potential) rounds out the remaining components of our $3.00 target price for Pacific Energy.” Components of his risked NPV/sh estimates are outlined in the figure below.
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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Sunday, March 02, 2008
Buy, Sell or Hold Capstone Mining Corp (CS:TSX)
On February 28th /08 PI Financial analyst John Kiernan released an update on Capstone Mining Corp.
Company Profile
Capstone Mining Corp. (T-CS) is a publicly traded Canadian mining company whose primary focus is to operate, expand and explore the company’s 100% owned Cozamin copper-silver-zinc-lead mine located in Mexico. Capstone’s objective is to become an intermediate player in the base metals sector covering the Americas. The company is currently working on an expansion plan for a 3000 tpd operation and is expected to produce 30 million pounds of copper, 11 million pounds of zinc, 5 million pounds of lead and 1.4 million ounces of silver for 2008.
Event
In a note entitled “Mining In Mexico: Treasures Of The Sierra Madre” Kiernan explains the reasons behind his Speculative Buy rating and $5.10 target.
Takeaways From The Event
Kiernan is very positive on Mexico as a mining jurisdiction and writes “given the country’s mining “culture and pedigree,” mining friendly laws, easy permitting procedures, and low political risk, we believe that Mexico offers an exceptional operating environment for mining.”
With regards to the management team, Kiernan is impressed by Darren Pylot, John Wright and their team. He favourably views their demonstrated execution record and believes they are focused on additional potential accretive acquisitions. Kiernan writes “After striking a six property deal with Compania Minera Bacis, S.A. de C.V. (Bacis) and spinning off five exploration properties (Copala, Claudia, Promontorio, Montoros, and Martha) to Silverstone (V-SST), Capstone embarked on a successful development and expansion project on its remaining Cozamin Mine property. Management has put in place an excellent operating team capable of delivering current production requirements, as well as the planned expansion levels.”
Capstone has currently embarked on a $9.5 million mine expansion program to increase throughput at their Cozamin mine from 2200 tpd to 3000 tpd. These developmental changes are expected to be completed in the fall of 2008. Kiernan opines that “in today’s world of capex blow-outs and increased financing risk, Capstone’s Cozamin mine is already operating profitably which provides the company with the ability to internally fund ongoing exploration and expansion projects without capital markets exposure. We expect Capstone to generate revenues of US$130.7M in FY2008 (up significantly from US$67.5M based on our CY07 estimates) with earnings of US$57.4M and EPS of US$0.70.”
Furthermore, Capstone is currently mining on the Mala Noche vein which only covers 1.5km of a projected >5km long surface expression. The company presently has a $4.5 million exploration program intended for 2008, focussing on looking at depth in the mine and along strike on surface. Kiernan believes “that this program and follow-up infill drilling has the potential to double the existing mine resource.”
Lastly, Capstone owns 22.6% of a company called Silverstone (SST: TSX-V), i.e 26.6 million shares worth approximately C$91.9 million or C$1.04/share at the close of February 27th. “This share ownership gives Capstone exposure to higher silver multiples plus upside related to any future silver streams that Silverstone may negotiate.”
Catalysts
“Completion of the expansion to 3000 tpd and indication of successful production ramp up – This is the most significant catalyst and we expect the expansion to be completed in the fall of 2008. To reach the targeted production level will require a coordinated effort on both the mill and the mine fronts, involving the following major components:
- Ramp development - 1400 linear metres
- Crusher installation below level 11
- Mill upgrades
- Electrical supply line construction
Reporting on exploration results – Completion of the planned exploration program both near-mine at depth and further along strike on the property, will 1) allow conversion of existing resources to reserves 2) provide additional inferred resources and 3) provide indications of on-strike mineralization possibly contributing to an extended mine life.
Possibility of management completing a deal with a low-cost base metal producer or near producer – Cozamin is in operation and producing cash flow, should there be near-term softness in metal prices leading to difficulties in obtaining debt-based mine financing by other operators or developers, Capstone may be able to make an acquisition or form a joint-venture on favourable terms.
Leverage to strong silver prices – Capstone has benefited from its share ownership in Silverstone (V-SST) with its initial investment more than doubling from ~ $38M to ~ $78M over the past year. Given that silver prices are trading at new all time highs and Silverstone is actively pursuing new silver streams, we would expect this investment to continue growing.
Valuation and Price Target
Kiernan expects Capstone to “generate copper sales of 30.5M lbs in 2008 and 38.6M lbs in 2009 with revenues of $130.7M from all metals in 2008 and EPS of $0.70, growing to $157.4M in 2009 and EPS of $0.80.”
Based on a total of 88.7 shares (fully diluted) and an applied discount of 8% to Kiernan’s Cozamin DCF model, he derives an NPV of $379.7 million. After taking into account the value of the Silverstone Resource Corp. (SST- TSX-V) ownership and corporate adjustments, he drives a total NAV of $487.9 million or $5.50/share. This would mean that Capstone is currently trading at a discount to its NAV. “Historically, copper producers trade in a range of 0.8x to 1.0x NAV, with the lower range being higher risk development stage companies, and the higher range reflecting the reduced risk associated with established producers. Given Capstone’s production history, successful expansion, and location in Mexico, we believe that Capstone warrants a multiple of 0.9 times, which translates into a NAV of $450.0M or $5.07 on a per share basis.”
Kiernan figures that Capstone is still trading at a discount to its peer group because “the company is still relatively unknown and up until this initiating report has had no analyst coverage. [H]e expect[s] that as people become aware of Capstone’s recent successes and future potential, the company will be rewarded with a higher valuation.”
“We believe Capstone is undervalued and offers investors a unique investment opportunity to purchase a profitable, well managed based metal company with significant upside potential.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
Company Profile
Capstone Mining Corp. (T-CS) is a publicly traded Canadian mining company whose primary focus is to operate, expand and explore the company’s 100% owned Cozamin copper-silver-zinc-lead mine located in Mexico. Capstone’s objective is to become an intermediate player in the base metals sector covering the Americas. The company is currently working on an expansion plan for a 3000 tpd operation and is expected to produce 30 million pounds of copper, 11 million pounds of zinc, 5 million pounds of lead and 1.4 million ounces of silver for 2008.
Event
In a note entitled “Mining In Mexico: Treasures Of The Sierra Madre” Kiernan explains the reasons behind his Speculative Buy rating and $5.10 target.
Takeaways From The Event
Kiernan is very positive on Mexico as a mining jurisdiction and writes “given the country’s mining “culture and pedigree,” mining friendly laws, easy permitting procedures, and low political risk, we believe that Mexico offers an exceptional operating environment for mining.”
With regards to the management team, Kiernan is impressed by Darren Pylot, John Wright and their team. He favourably views their demonstrated execution record and believes they are focused on additional potential accretive acquisitions. Kiernan writes “After striking a six property deal with Compania Minera Bacis, S.A. de C.V. (Bacis) and spinning off five exploration properties (Copala, Claudia, Promontorio, Montoros, and Martha) to Silverstone (V-SST), Capstone embarked on a successful development and expansion project on its remaining Cozamin Mine property. Management has put in place an excellent operating team capable of delivering current production requirements, as well as the planned expansion levels.”
Capstone has currently embarked on a $9.5 million mine expansion program to increase throughput at their Cozamin mine from 2200 tpd to 3000 tpd. These developmental changes are expected to be completed in the fall of 2008. Kiernan opines that “in today’s world of capex blow-outs and increased financing risk, Capstone’s Cozamin mine is already operating profitably which provides the company with the ability to internally fund ongoing exploration and expansion projects without capital markets exposure. We expect Capstone to generate revenues of US$130.7M in FY2008 (up significantly from US$67.5M based on our CY07 estimates) with earnings of US$57.4M and EPS of US$0.70.”
Furthermore, Capstone is currently mining on the Mala Noche vein which only covers 1.5km of a projected >5km long surface expression. The company presently has a $4.5 million exploration program intended for 2008, focussing on looking at depth in the mine and along strike on surface. Kiernan believes “that this program and follow-up infill drilling has the potential to double the existing mine resource.”
Lastly, Capstone owns 22.6% of a company called Silverstone (SST: TSX-V), i.e 26.6 million shares worth approximately C$91.9 million or C$1.04/share at the close of February 27th. “This share ownership gives Capstone exposure to higher silver multiples plus upside related to any future silver streams that Silverstone may negotiate.”
Catalysts
“Completion of the expansion to 3000 tpd and indication of successful production ramp up – This is the most significant catalyst and we expect the expansion to be completed in the fall of 2008. To reach the targeted production level will require a coordinated effort on both the mill and the mine fronts, involving the following major components:
- Ramp development - 1400 linear metres
- Crusher installation below level 11
- Mill upgrades
- Electrical supply line construction
Reporting on exploration results – Completion of the planned exploration program both near-mine at depth and further along strike on the property, will 1) allow conversion of existing resources to reserves 2) provide additional inferred resources and 3) provide indications of on-strike mineralization possibly contributing to an extended mine life.
Possibility of management completing a deal with a low-cost base metal producer or near producer – Cozamin is in operation and producing cash flow, should there be near-term softness in metal prices leading to difficulties in obtaining debt-based mine financing by other operators or developers, Capstone may be able to make an acquisition or form a joint-venture on favourable terms.
Leverage to strong silver prices – Capstone has benefited from its share ownership in Silverstone (V-SST) with its initial investment more than doubling from ~ $38M to ~ $78M over the past year. Given that silver prices are trading at new all time highs and Silverstone is actively pursuing new silver streams, we would expect this investment to continue growing.
Valuation and Price Target
Kiernan expects Capstone to “generate copper sales of 30.5M lbs in 2008 and 38.6M lbs in 2009 with revenues of $130.7M from all metals in 2008 and EPS of $0.70, growing to $157.4M in 2009 and EPS of $0.80.”
Based on a total of 88.7 shares (fully diluted) and an applied discount of 8% to Kiernan’s Cozamin DCF model, he derives an NPV of $379.7 million. After taking into account the value of the Silverstone Resource Corp. (SST- TSX-V) ownership and corporate adjustments, he drives a total NAV of $487.9 million or $5.50/share. This would mean that Capstone is currently trading at a discount to its NAV. “Historically, copper producers trade in a range of 0.8x to 1.0x NAV, with the lower range being higher risk development stage companies, and the higher range reflecting the reduced risk associated with established producers. Given Capstone’s production history, successful expansion, and location in Mexico, we believe that Capstone warrants a multiple of 0.9 times, which translates into a NAV of $450.0M or $5.07 on a per share basis.”
Kiernan figures that Capstone is still trading at a discount to its peer group because “the company is still relatively unknown and up until this initiating report has had no analyst coverage. [H]e expect[s] that as people become aware of Capstone’s recent successes and future potential, the company will be rewarded with a higher valuation.”
“We believe Capstone is undervalued and offers investors a unique investment opportunity to purchase a profitable, well managed based metal company with significant upside potential.”
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.
If you like this post, please take a moment to suscribe to my feed or Stumble/Digg it using the appropriate links at the bottom of this post! You can also post a link to it on relevant forums/bullboards.
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