BRAZAURO RESOURCES CORP BZO
December 14, 2009 - 4:13pm EST by
john771
2009 2010
Price: 0.61 EPS -$0.04 -$0.04
Shares Out. (in M): 93 P/E NM NM
Market Cap (in $M): 53 P/FCF NM NM
Net Debt (in $M): -6 EBIT -4 -4
TEV ($): 47 TEV/EBIT NM NM

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Description

Brazauro has a 2.3 million ounce gold deposit in the Brazilian Amazon. Eldorado Gold has options to acquire up to 75% in exchange for a series of payments totaling $90-$100mm. I believe the value of the project exceeds the option price and that Brazauro shares are a bargain regardless of whether or not Eldorado exercises its options.

 

BASIC FACTS

 

 

Symbol

TSE:BZO

OTCBB:BZOFF

Basic Shares Outstanding

92.8 million

Options

4.55mm in-the-money with strike prices from C$0.50-C$0.59

 

3.37mm out-of-the-money with strike prices from C$0.70-C$2.00

Warrants

4.63mm at C$1.00 expiring 3/22/10

4.4mm at C$1.00 expiring 1/24/11

7.66mm at C$1.00 expiring 5/3/11

Market Cap

US$53mm = C$57mm

Average Daily Volume

79,424 shares (last 3 months)

Net Cash

US$6mm

Enterprise Value

US$47mm

Major Shareholders

15% Eldorado Gold

9% JP Morgan Asset Mgmt

5% Insiders

Website

http://www.brazauroresources.com/

Investor Contact

CEO - Mark Jones

Tel: (281) 579-3400

info@brazauro.com

 

TOCANTINZINHO PROJECT (TZ)

 

Brazauro's corporate presentation does a good job of explaining the background and appeal of the project. The financial projections in that report were from an independent Preliminary Economic Assessment released in December 2007. The key facts were:

 

  • 123,000 ounce/year production for 13 year mine life

  • $367/ounce cash operating cost

  • $128mm initial capex

 

Some additional points worth noting:

  1. The deposit has a consistently attractive grade. At a cut-off of 0.2 g/t, the indicated resource was 24.4MT holding 1,047,000 ounces of gold. At a cut-off of 1.0 g/t, the indicated resource was 13.8MT holding 819,000 ounces of gold. Most of the ore has a grade over 1 g/t, currently worth $36/tonne.

     

  2. The PEA conservatively assumed that Brazauro would have to spend $10mm on building 82km of roads and bridges to reach the project, even though only 10km costing $1.7mm would actually be on Brazauro's property. Since 2007 logging roads have reached closer to the property, meaning less overall new work is required. It is also probable that the state government would assume some responsibility for the infrastructure.

     

  3. The PEA conservatively assumed that Brazauro would spend $19mm building a 201km power line to the property. A private company has announced a hydro project that would provide all season power from 2012 only 65km from the property. This would reduce the cost of the power line by about $13mm and it is probable that the state government would assume some responsibility for this infrastructure.

     

  4. The power plant would also be connected to the national grid providing Brazauro with the option to increase the production rate, shorten the mine life, and generate faster payback.

 

Based on these developments I updated the economic model in the 2007 study using these assumptions:

 

  • 25% inflation of operating costs for mining and milling. This is in line with industry averages, but hopefully will be proven conservative.

     

  • 10% increase in capex. I assume that some inflation is offset by lower infrastructure requirements.

     

  • 0% increase in life of mine production. Drilling in the past two years has better defined the resource (now nearly all Measured & Indicated), but has not significantly expanded it. The mine plan could incorporate more deep resources if they were willing to steepen the pit wall from 50% to 55%, but I'm not sure if that's going to happen.

 

This generated the following pretax NPVs at various gold prices and discount rates:

 

TONCANTINZINHO NPV IN $MMs

 

Gold Price

Discount Rate

800

900

1000

1100

1200

10%

111

179

249

317

387

8%

145

224

304

384

463

5%

212

312

413

514

615

0%

392

547

702

858

1013

 

 

 

I believe that $1000 gold and 5% discount rate best conforms to the way gold stocks are currently valued in the market.

 

Alternatively, the Total Cost of Acquisition provides another metric for evaluating gold projects:

 

 

 

Feasibility Stage

Spot Gold Price per ounce

$1,120

Valuation

70%

Gross Project Value per ounce

$784

Life of Mine Gold Production

1,597,000 ounces

Life of Mine Capex

$171mm

Capex/ounce

$107

Cash Operating Cost/ounce

$419

Total Cost per ounce

$526

Net Project Value per ounce (gross value - costs)

$258

Net Project Value (recoverable ounces x value per ounce)

$412mm

Project Value per basic Share

C$4.67

 

So $413mm by NPV or $412mm by TCA. That's some pretty neat bean counting...

 

While both valuation approaches indicated a value just over $400mm, Eldorado Gold has options to purchase up to 75% of the project for $90-$100mm. If my numbers are right then Eldorado should exercise those options.

 

THE ELDORADO TRANSACTION

 

Eldorado signed a two-year option agreement for the Tocantinzinho project in July 2008 (press release). Eldorado has met or exceeded all its obligations under the agreement.

 

  • Eldorado committed to spend $9.5mm on exploration and development. Eldorado has already spent $10.2mm and continues to fund 100% of drilling and other work at the property.

     

  • Eldorado purchased 8.8mm shares of BZO when the agreement closed in July 2008. Shortly thereafter Eldorado purchased an additional 3.5mm shares in the open market. Eldorado recently purchased an additional 1.0mm shares in Brazauro's October secondary offering.

     

  • Eldorado has included Tocantinzinho as part of its development plans in all presentations made to investors. (see page 21 of presentation)

 

  • Eldorado has an experienced Brazilian management team supervising its efforts at Tocantinzinho. After closing its Brazilian open pit Sao Bento mine in 2007, Eldorado retained its senior staff and searched extensively for a new project within the country, eventually selecting Tocantinzinho.

 

However, Eldorado has not yet committed to exercise its options. At September's Denver Gold Forum, CEO Paul Wright said:

 

"Turning to Brazil,

 

We have an option agreement with a company called Brazauro in Para State in the Tapajos region. This is a project that we've selected having looked at a number of different projects in this region. And we are of the opinion that this is the project that has the best chance of being developed in the region giving the remoteness and given the necessity to have a project of size.

 

The owner, when they operated the property, stated a resource of approximately 2 million ounces, the bulk of which was in an inferred category at the time of their classifications. The work that we have done to date, I think has largely verified that 2 million ounces and certainly upgraded the nature of those ounces. Our view is that for a project in this locale to be developed, really you need to have a resource closer to 3 million ounces. We feel that's attainable and we're continuing to drill to satisfy that objective. I think that realistically we're probably another six months away from having a reasonable handle as to whether this project is going to go to the next step."

 

At this point it's clear that the resource (12/08/09 update) is not getting closer to 3mm ounces. So what are they thinking?

 

  • It's possible that Eldorado could conclude that a 2mm ounce Brazilian deposit was no longer a good strategic fit following its big and successful expansions in China and Turkey.

     

  • It's also possible that Eldorado could conclude that the remainder of the TZ property is likely to provide sufficient extra ounces to reach its target. The remainder of the property has had aerial surveys and soil sampling, but no drilling.

     

  • It's possible that Eldorado could conclude that 2mm ounces of $1000 gold are at least as good as the original goal of 3mm ounces of $800 gold.

     

  • It's possible that Eldorado would prefer not to define 3mm ounces of gold because that would increase the total price of the option agreement from $90mm to $95mm or $100mm (depending on how many ounces are discovered).

     

  • It's possible that Eldorado does not want to increase interest in Brazauro shares prior to a potential Eldorado acquisition offer in 2010

 

  • It's possible that Eldorado could exercise its first and cheapest option to acquire 60% for $40mm, then slow down development. The project might become more attractive in future years if gold prices rise or regional infrastructure improves.

 

Ultimately I believe that Eldorado is likely to exercise the options, but Brazauro shares are undervalued even if that does not happen. If Eldorado exercises its options and intends to develop the project then I believe it makes sense for them to acquire the whole company.

 

VALUATION SCENARIOS

 

IF ELDORADO EXERCISES ITS OPTIONS TO FORM A JV

 

1st Option Only

1st & 2nd Options

1st 2nd & 3rd Options

Comments

Eldorado Stake

60%

70%

75%

Deal Terms

Brazauro Stake

40%

30%

25%

 

 

 

 

 

 

Cash payment for ELD Stake $mms

$40

$70

$90

Assumes only 2mm ounce resource

Implied Value of BZO stake $mms

$27

$90

$100

Implied Value based on last option exercised

Net Cash (11/09) $mms

$6

$6

$6

Estimated from 9/30 cash plus Oct Placement less expenditures

Tapajos Exploration $mms

$10

$20

$30

A mine at TZ would increase the value of BZO's nearby concessions

Total Asset Value $mms

$83

$186

$226

 

 

 

 

 

 

Basic Shares

93

93

93

 

 

 

 

 

 

Asset Value/Share

C$0.95

C$2.12

C$2.57

CAD = 0.95 USD

 

 

 

IF BRAZAURO DEVELOPS TZ ON ITS OWN

 

50% debt / 50% Equity

100% Equity

100% Equity

Comments

Pre-production capex $mms

$140

$140

$140

 

Debt Financing $mms

$70

$0

$0

12%, repaid in 2 years

 

 

 

 

 

TZ NPV - net of interest $mms

$394

$413

$413

 

BZO Exploration value $mms

$20

$20

$20

 

Total Asset Value $mms

$414

$433

$433

 

 

 

 

 

 

Equity Financing $mms

$70

$140

$140

 

Placement Price

C$0.50

C$0.50

C$0.75

 

New Shares Issued mms

147

295

196

 

Shares Outstanding mms

240

388

289

 

 

 

 

 

 

Asset Value / Share

C$1.81

C$1.18

C$1.57

 

 

The current enterprise value of $47mm really only reflects the optionality value of a 2mm ounce gold resource. Under nearly any development scenario the shares have significant appreciation potential, although they are quite leveraged to the price at which Brazauro ends up raising equity.

 

I believe that Brazauro shares have been held back by two factors:

 

  1. for the time being Brazauro's main asset is under the control of another company (Eldorado)

  2. It's tough to get analyst coverage in Canada if you're not raising money and doing deals. Brazauro is covered by a small firm (M Partners) that placed some of the $5mm October financing.

 

RISKS

 

The biggest risk in these valuation numbers is that they are derived from a Preliminary Economic Assessment. The consultant used benchmark costs from other mines in the region rather than conducting a more detailed (and expensive) feasibility study that would estimate the exact cost of operating this particular mine in this particular location.

 

INSIDER ACTIVITY

 

Aside from Eldorado's recent participation in Brazauro's October placement, insider buying has been notable.

 

BRAZAURO INSIDER BUYING

Insider

Trade Date

Quantity

Share Price

CEO Mark Jones

10/13/09

19000

0.62 C$

CEO Mark Jones

10/13/09

9000

0.60 C$

CEO Mark Jones

10/21/09

30000

0.57 C$

CEO Mark Jones

10/26/09

21000

0.55 U$

CEO Mark Jones

10/27/09

8000

0.55 U$

CEO Mark Jones

10/28/09

1000

0.54 U$

CEO Mark Jones

11/03/09

200000

0.65 C$

DIR John Segner

10/27/09

10000

0.58 U$

DIR John Segner

10/27/09

72250

0.57 U$

DIR John Segner

11/02/09

20000

0.55 U$

DIR John Segner

11/03/09

100000

0.65 C$

DIR John Segner

12/02/09

50000

0.66 U$

DIR John Segner

12/04/09

17000

0.64 U$

DIR John Segner

12/04/09

3000

0.63 C$

 

 

It seems particularly interesting that Director John Segner has raised his stake to 750,000 shares.

 

Mr. Segner is a former Managing Director and Global Partner of Invesco PLC where he worked from 1997 until 2009. During his time at Invesco, he was the lead manager of the Invesco Energy Fund, AIM Energy Fund, AIM Gold and Previous Metals Fund, AIM Utilities Fund and co-manager of the AIM Multi-Sector Fund. Mr Segner has received numerous industry related awards for the consistent performance of his funds. When he left Invesco in January 2009 he was managing approximately $2 Billion (US).

 

Catalysts

 

  1. An updated economic assessment will be released by Brazauro in January

  2. Ongoing news of development work by Eldorado (exploration and infrastructure)

  3. Option decision by Eldorado (by July 2010)

  4. Financing & Development of the Tocantinzinho project

 

Catalyst

 

  1. An updated economic assessment will be released by Brazauro in January

  2. Ongoing news of development work by Eldorado (exploration and infrastructure)

  3. Option decision by Eldorado (by July 2010)

  4. Financing & Development of the Tocantinzinho project

 

    sort by   Expand   New

    Description

    Brazauro has a 2.3 million ounce gold deposit in the Brazilian Amazon. Eldorado Gold has options to acquire up to 75% in exchange for a series of payments totaling $90-$100mm. I believe the value of the project exceeds the option price and that Brazauro shares are a bargain regardless of whether or not Eldorado exercises its options.

     

    BASIC FACTS

     

     

    Symbol

    TSE:BZO

    OTCBB:BZOFF

    Basic Shares Outstanding

    92.8 million

    Options

    4.55mm in-the-money with strike prices from C$0.50-C$0.59

     

    3.37mm out-of-the-money with strike prices from C$0.70-C$2.00

    Warrants

    4.63mm at C$1.00 expiring 3/22/10

    4.4mm at C$1.00 expiring 1/24/11

    7.66mm at C$1.00 expiring 5/3/11

    Market Cap

    US$53mm = C$57mm

    Average Daily Volume

    79,424 shares (last 3 months)

    Net Cash

    US$6mm

    Enterprise Value

    US$47mm

    Major Shareholders

    15% Eldorado Gold

    9% JP Morgan Asset Mgmt

    5% Insiders

    Website

    http://www.brazauroresources.com/

    Investor Contact

    CEO - Mark Jones

    Tel: (281) 579-3400

    info@brazauro.com

     

    TOCANTINZINHO PROJECT (TZ)

     

    Brazauro's corporate presentation does a good job of explaining the background and appeal of the project. The financial projections in that report were from an independent Preliminary Economic Assessment released in December 2007. The key facts were:

     

     

    Some additional points worth noting:

    1. The deposit has a consistently attractive grade. At a cut-off of 0.2 g/t, the indicated resource was 24.4MT holding 1,047,000 ounces of gold. At a cut-off of 1.0 g/t, the indicated resource was 13.8MT holding 819,000 ounces of gold. Most of the ore has a grade over 1 g/t, currently worth $36/tonne.

       

    2. The PEA conservatively assumed that Brazauro would have to spend $10mm on building 82km of roads and bridges to reach the project, even though only 10km costing $1.7mm would actually be on Brazauro's property. Since 2007 logging roads have reached closer to the property, meaning less overall new work is required. It is also probable that the state government would assume some responsibility for the infrastructure.

       

    3. The PEA conservatively assumed that Brazauro would spend $19mm building a 201km power line to the property. A private company has announced a hydro project that would provide all season power from 2012 only 65km from the property. This would reduce the cost of the power line by about $13mm and it is probable that the state government would assume some responsibility for this infrastructure.

       

    4. The power plant would also be connected to the national grid providing Brazauro with the option to increase the production rate, shorten the mine life, and generate faster payback.

     

    Based on these developments I updated the economic model in the 2007 study using these assumptions:

     

     

    This generated the following pretax NPVs at various gold prices and discount rates:

     

    TONCANTINZINHO NPV IN $MMs

     

    Gold Price

    Discount Rate

    800

    900

    1000

    1100

    1200

    10%

    111

    179

    249

    317

    387

    8%

    145

    224

    304

    384

    463

    5%

    212

    312

    413

    514

    615

    0%

    392

    547

    702

    858

    1013

     

     

     

    I believe that $1000 gold and 5% discount rate best conforms to the way gold stocks are currently valued in the market.

     

    Alternatively, the Total Cost of Acquisition provides another metric for evaluating gold projects:

     

     

     

    Feasibility Stage

    Spot Gold Price per ounce

    $1,120

    Valuation

    70%

    Gross Project Value per ounce

    $784

    Life of Mine Gold Production

    1,597,000 ounces

    Life of Mine Capex

    $171mm

    Capex/ounce

    $107

    Cash Operating Cost/ounce

    $419

    Total Cost per ounce

    $526

    Net Project Value per ounce (gross value - costs)

    $258

    Net Project Value (recoverable ounces x value per ounce)

    $412mm

    Project Value per basic Share

    C$4.67

     

    So $413mm by NPV or $412mm by TCA. That's some pretty neat bean counting...

     

    While both valuation approaches indicated a value just over $400mm, Eldorado Gold has options to purchase up to 75% of the project for $90-$100mm. If my numbers are right then Eldorado should exercise those options.

     

    THE ELDORADO TRANSACTION

     

    Eldorado signed a two-year option agreement for the Tocantinzinho project in July 2008 (press release). Eldorado has met or exceeded all its obligations under the agreement.

     

     

     

    However, Eldorado has not yet committed to exercise its options. At September's Denver Gold Forum, CEO Paul Wright said:

     

    "Turning to Brazil,

     

    We have an option agreement with a company called Brazauro in Para State in the Tapajos region. This is a project that we've selected having looked at a number of different projects in this region. And we are of the opinion that this is the project that has the best chance of being developed in the region giving the remoteness and given the necessity to have a project of size.

     

    The owner, when they operated the property, stated a resource of approximately 2 million ounces, the bulk of which was in an inferred category at the time of their classifications. The work that we have done to date, I think has largely verified that 2 million ounces and certainly upgraded the nature of those ounces. Our view is that for a project in this locale to be developed, really you need to have a resource closer to 3 million ounces. We feel that's attainable and we're continuing to drill to satisfy that objective. I think that realistically we're probably another six months away from having a reasonable handle as to whether this project is going to go to the next step."

     

    At this point it's clear that the resource (12/08/09 update) is not getting closer to 3mm ounces. So what are they thinking?

     

     

     

    Ultimately I believe that Eldorado is likely to exercise the options, but Brazauro shares are undervalued even if that does not happen. If Eldorado exercises its options and intends to develop the project then I believe it makes sense for them to acquire the whole company.

     

    VALUATION SCENARIOS

     

    IF ELDORADO EXERCISES ITS OPTIONS TO FORM A JV

     

    1st Option Only

    1st & 2nd Options

    1st 2nd & 3rd Options

    Comments

    Eldorado Stake

    60%

    70%

    75%

    Deal Terms

    Brazauro Stake

    40%

    30%

    25%

     

     

     

     

     

     

    Cash payment for ELD Stake $mms

    $40

    $70

    $90

    Assumes only 2mm ounce resource

    Implied Value of BZO stake $mms

    $27

    $90

    $100

    Implied Value based on last option exercised

    Net Cash (11/09) $mms

    $6

    $6

    $6

    Estimated from 9/30 cash plus Oct Placement less expenditures

    Tapajos Exploration $mms

    $10

    $20

    $30

    A mine at TZ would increase the value of BZO's nearby concessions

    Total Asset Value $mms

    $83

    $186

    $226

     

     

     

     

     

     

    Basic Shares

    93

    93

    93

     

     

     

     

     

     

    Asset Value/Share

    C$0.95

    C$2.12

    C$2.57

    CAD = 0.95 USD

     

     

     

    IF BRAZAURO DEVELOPS TZ ON ITS OWN

     

    50% debt / 50% Equity

    100% Equity

    100% Equity

    Comments

    Pre-production capex $mms

    $140

    $140

    $140

     

    Debt Financing $mms

    $70

    $0

    $0

    12%, repaid in 2 years

     

     

     

     

     

    TZ NPV - net of interest $mms

    $394

    $413

    $413

     

    BZO Exploration value $mms

    $20

    $20

    $20

     

    Total Asset Value $mms

    $414

    $433

    $433

     

     

     

     

     

     

    Equity Financing $mms

    $70

    $140

    $140

     

    Placement Price

    C$0.50

    C$0.50

    C$0.75

     

    New Shares Issued mms

    147

    295

    196

     

    Shares Outstanding mms

    240

    388

    289

     

     

     

     

     

     

    Asset Value / Share

    C$1.81

    C$1.18

    C$1.57

     

     

    The current enterprise value of $47mm really only reflects the optionality value of a 2mm ounce gold resource. Under nearly any development scenario the shares have significant appreciation potential, although they are quite leveraged to the price at which Brazauro ends up raising equity.

     

    I believe that Brazauro shares have been held back by two factors:

     

    1. for the time being Brazauro's main asset is under the control of another company (Eldorado)

    2. It's tough to get analyst coverage in Canada if you're not raising money and doing deals. Brazauro is covered by a small firm (M Partners) that placed some of the $5mm October financing.

     

    RISKS

     

    The biggest risk in these valuation numbers is that they are derived from a Preliminary Economic Assessment. The consultant used benchmark costs from other mines in the region rather than conducting a more detailed (and expensive) feasibility study that would estimate the exact cost of operating this particular mine in this particular location.

     

    INSIDER ACTIVITY

     

    Aside from Eldorado's recent participation in Brazauro's October placement, insider buying has been notable.

     

    BRAZAURO INSIDER BUYING

    Insider

    Trade Date

    Quantity

    Share Price

    CEO Mark Jones

    10/13/09

    19000

    0.62 C$

    CEO Mark Jones

    10/13/09

    9000

    0.60 C$

    CEO Mark Jones

    10/21/09

    30000

    0.57 C$

    CEO Mark Jones

    10/26/09

    21000

    0.55 U$

    CEO Mark Jones

    10/27/09

    8000

    0.55 U$

    CEO Mark Jones

    10/28/09

    1000

    0.54 U$

    CEO Mark Jones

    11/03/09

    200000

    0.65 C$

    DIR John Segner

    10/27/09

    10000

    0.58 U$

    DIR John Segner

    10/27/09

    72250

    0.57 U$

    DIR John Segner

    11/02/09

    20000

    0.55 U$

    DIR John Segner

    11/03/09

    100000

    0.65 C$

    DIR John Segner

    12/02/09

    50000

    0.66 U$

    DIR John Segner

    12/04/09

    17000

    0.64 U$

    DIR John Segner

    12/04/09

    3000

    0.63 C$

     

     

    It seems particularly interesting that Director John Segner has raised his stake to 750,000 shares.

     

    Mr. Segner is a former Managing Director and Global Partner of Invesco PLC where he worked from 1997 until 2009. During his time at Invesco, he was the lead manager of the Invesco Energy Fund, AIM Energy Fund, AIM Gold and Previous Metals Fund, AIM Utilities Fund and co-manager of the AIM Multi-Sector Fund. Mr Segner has received numerous industry related awards for the consistent performance of his funds. When he left Invesco in January 2009 he was managing approximately $2 Billion (US).

     

    Catalysts

     

    1. An updated economic assessment will be released by Brazauro in January

    2. Ongoing news of development work by Eldorado (exploration and infrastructure)

    3. Option decision by Eldorado (by July 2010)

    4. Financing & Development of the Tocantinzinho project

     

    Catalyst

     

    1. An updated economic assessment will be released by Brazauro in January

    2. Ongoing news of development work by Eldorado (exploration and infrastructure)

    3. Option decision by Eldorado (by July 2010)

    4. Financing & Development of the Tocantinzinho project

     

    Messages


    SubjectRE: comments
    Entry12/14/2009 09:30 PM
    Memberjohn771

    Thanks.  You make some good points, however I see the situation somewhat differently.

    My thesis is not that Brazauro is a bargain solely because Eldorado will buy the project or the company.  My thesis is that Brazauro is also cheap if Eldorado does not buy it.  The current valuation of $24/ounce of resource is typical of an optionality story, not a development story.  As you suggest, Brazauro might be an attractive fit for other potential developers who could be interested in a deal if Eldorado exits.

    While it is obvious to you that Eldorado will not purchase this asset, it seems less obvious to them because they are still spending money on it beyond their contractual commitment.

    I agree that Brazauro management is thin, however they recently hired a new President/COO with development experience:

    http://www.brazauroresources.com/100109.pdf

    Insiders have been buying the stock.  I think the downside risk at the current price is limited.

     

     


    SubjectRE: RE: comments
    Entry12/14/2009 11:06 PM
    Memberhkup881

    I suppose, but whether or not eldorado buys them, ounces in the ground are worth 75-125$ in take-out, historically, during the most recent buying sprees when gold was at 900 an ounce. This asset is nearer the bottom of the range. So your max upside is a triple. Other more likely scenarios are: continued dilution, a medium scenario outcome, or just sort of twisting in the wind. so a likely outcome is mediocre, and you have definite capped upside, with no cash flow. I think a better risk reward is available in the space, either through a well funded exploration stock with great mgmt or with mid tier producers.

     


    SubjectRE: canplats
    Entry12/26/2009 01:22 PM
    Memberjohn771

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    Value per ounce of resource can be misleading so I greatly prefer “Total Cost of Acquisition” as noted in the writeup. Canplats has a substantial number of ounces, however the grade is not that high and silver recoveries are very low. The total cost of acquisition calculation is:

     

    Recoverable gold-equivalent ounces = 2.25mm (1.71mm gold plus 34.2mm silver converted at 63:1)

     

    Life of mine capex $174.9 million

     

    Capex/GEounce = $78

     

    Life of Mine Operating cost = $1,026.5mm ($564.8mm plus silver credits of 34.2mm ounces at $13.50 per ounce)

     

    Opex/GEounce = $456

     

    Total costs per recoverable gold-equivalent ounce = $533

     

    Acquisition value/share = US$4.19

     

    Fully diluted shares = 66.2mm

     

    Fully diluted cash = $18mm (assume 1mm cash on hand +17mm from exercise of options and warrants)

     

    Acquisition value = US$259.3mm (66mm shares times $4.19/share minus $18mm)

     

    Acquisition value per recoverable gold-equivalent ounce = $115

     

    Total cost of acquisition = $648 (533 plus 115)

     

    TCA as a % of spot gold = 59%

     

    As noted in the writeup, 70% of spot gold is a good benchmark for acquisition value of feasibility stage projects. By that standard the price being paid for Canplats is a bargain. The price being paid does not change my opinion about Brazauro.

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