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FitzGerald - By Barry FitzGerald

31st March 2017

Shining a light on Capricorn

Plus, Goldmans on the majors’ falling gold inventories, pennies to flow for Empire and Macquarie talks up Metals X

Last year’s crack down by the regulators on what can be said about the scope of a project based on inferred resources – i.e. pretty much nothing - was frustrating stuff for the industry.

It was always going to lead to the mispricing of stocks, even if that is counter intuitive to what the smarties at ASIC and ASX hoped they were going to achieve.

But there is good news in all that for investors prepared to keep an eagle eye on things. They can move in to mis-priced situations ahead of the pack, with the pack having to take their cues from compliant announcements when they duly arrive on the platform.

Capricorn Metals (ASX:CMM) is an example. It is working towards a development of its Karlawinda gold project in the Pilbara, 65 kms south-east of Newman.

It has an inferred resource of 25.5m tonnes grading 1.1 grams of gold a tonne for 914,000 ounces. According to a recent presentation from the company, a resource upgrade is due any day now, and it won’t surprise stock watchers that growth beyond 1 million ounces of the yellow stuff has been achieved, with plenty of upside yet to be chased down.

The upgraded resource estimate should lead to a maiden ore reserve estimate by the end of April, and a definitive feasibility study by the end of June. Take most of calendar 2017 to secure funding, and project construction would kick off by year end. All those dates are from a recently ASX-lodged company presentation.

What wasn’t in the presentation was the potential scope of Karlawinda. The maiden ore reserve and the DFS will have the answers. But in the meantime it can be said the market expectation is that the project is shaping up as a 100,000 ounce-a-year operation after capex of about $120m.

An initial life of 8.5 years is on the cards with a simple 3mtpa CIL treatment plant likely to pump out the gold at an all-in-sustaining cost of a little more than $A1000 an ounce.

Assuming those sorts of figures are confirmed later this year, it can be said that Capricorn’s share price of 13c for a market cap of $70m is on the mean side of things, but only because the scope of the project is not broadly understood by the market.

As that current darkness clears in the months ahead, Capricorn will re-rate. Euroz has a 21c price target on the stock. Unusually for a company of its size, directors and management have a lot of skin in the game.

Following them on the register with their combined 25 per cent holding is the eagle-eyed private equity group Hawkes’ Point Holdings (10 per cent after a recent placement at 11.7c a share), Australia’s premier open-cut operator Regis Resources (8 per cent), and the savvy Acorn Capital (5 per cent).

 

Show us the gold

From the equities desk of Goldman Sachs comes the assessment that of the 39 mines owned by the world’s four biggest gold miners – Barrick, Newmont, Goldcorp and our own Newcrest – only 9 have a mine life of 10 years.

The research note was ostensibly a cheer for Newcrest as stripping the figures down further, it owns two (Cadia and Lihir) of the four mines held by the big four that have mine lifes of more than 20 years.

“Although mining companies are increasingly ticking the low-cost box, asset life is an area, especially in the gold sector, that is becoming a key differentiator, Goldmans said.

All well and good for Newcrest. But what of the broader implications for the gold sector if the current sales pitch from the Big Four is largely a 10-year story and not much else. That is particularly so when the pullback in exploration and lack of success in the endeavour in recent times suggests a critical issue is only going to be become more critical.

There is a quick fix to all that – merger and acquisition activity. It’s why seasoned campaigners reckon that the back half of this year will see M & A activity step up markedly at the big end of town, including in Australia.

 

Pennies to flow for Empire

Now it’s fair to say Empire Resources (ASX:ERL) doesn’t have the pressure to secure a long mine life to justify a monster market cap like the world’s biggest producers do.

After all, at a shade under $10m (2.4c a share), little Empire is set to match its market cap in the year ahead with free cashflow from its 60 per cent share of the Penny’s Find mine near Kalgoorlie where ore from the initial open-cut development is to be toll treated.

Bulldozers are now on site to get moving on the open-cut which will mine a 21,700 ounce mining reserve in 11 months. If that was the end of the story, Empire’s market cap would be on the full side of things.

But a bigger and higher grade underground resource which is amenable to gravity separation rather than being sent for toll treatment has been outlined and could be good for another couple of years of operation. And the deposit remains open at depth beyond 250m.

Again it could be argued until that underground potential is confirmed, Empire is priced just about right. But that would be ignoring the bigger footprint Empire has secured up in the Murchison at its Yuinmery copper/gold project.

There is already a handy sized resource outlined and should it be doubled with drilling on newly secured ground, the resource could become of interest to the hungry Golden Grove and Jaguar operations owned by others in the same region. 

 

Macquarie talks up Metals X

Metals X (ASX:MLX) chairman Peter “Talky’’ Newton must be chuffed. After the hard slog of the last 12 years, there’s finally recognition from the big end of town for the $430m tin and copper producer, with Macquarie’s research desk slapping an ‘outperform’’ on the stock and a 12-month price target of $1.

That compares with Thursday’s closing price of 71c. Initiating coverage of MLX, Macquarie reckons that after the recent demerger of its gold assets, the company is better placed to unlock the “significant organic growth potential within its asset portfolio.’’

Specifically, Macquarie reckons MLX could boost copper production at Nifty (copper in WA) by 30 per cent, and tin production at Renison (tin in Tasmania) by 25 per cent in the next 2-3 years.

It is a production profile its peers do not enjoy, not yet at any rate.

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