CGA MINING LTD CGA
October 09, 2009 - 2:17pm EST by
hkup881
2009 2010
Price: 1.80 EPS $0.00 $0.35
Shares Out. (in M): 282 P/E N/A 5.0x
Market Cap (in M): 508 P/FCF N/A 5.0x
Net Debt (in M): 70 EBIT 0 100
TEV: 578 TEV/EBIT N/A 5.8x

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Description

CGA Mining is a 50 Cent Dollar any way you slice it. Valuing mid-tier gold mining companies is a fairly simple exercise: compute cash flow, compute market cap, adjust for any risks, and put on a peer group multiple. Do this with CGA Mining, and you will find a compelling investment.

Background

CGA Mining acquired the Masbate project from a financially distressed gold miner for $51M in March 2007. The project is located on Masbate Island in the northern Philippines. Since then, management has delivered resource definition, resource expansion, project feasibility studies, project financing through debt/equity, full construction with 0 lost time incidents, its first gold pour, and--hopefully--consistent gold production at below-average cash costs starting with 4Q CY09.

 The Masbate project previously produced gold for roughly 8 years, delivering about $1M oz before production ended due to low gold prices. When CGA inherited the project, Masbate showed a 6.7Moz resource including reserves of 2Moz. The resource currently stands at over 10M oz including 3Moz of reserves. Most of the resource is contained in measured and indicated ounces--proven to be there.

This time around

The team has spent $180M on constructing a plant with 4mtpa nameplate capacity, which is already running at 5mpta (610tph). Forecast run rate production of 200k oz per year based on 4mtpa should be comfortably met and exceeded. An optimized feasibility study released in 2007 estimated cash costs of $336 per oz using oil prices at $68 per barrel. The company intends to build coal-driven power generation during the next year to further reduce costs ($40/oz savings) and allow fixed energy costing. Since the release of this optimization study, LOM grades have been adjusted from 1.63g/t avg to 1.51g/t due to rescheduling of the mine sequencing. This is intended to smooth out grade distribution. Previously grade was somewhat more tilted towards the early years of the mine life. However, this reduction is grade will impact cash costs, as will increases in mining costs incurred since the 2007 study. Cash costs are now expected to be closer to $420/oz during the first 8 years of production. We believe these numbers are conservative.

First gold pour at Masbate was May 12th, and at Sept 18th 1 tonne of gold had been shipped (32k oz). By Sept 21st, the plant had ramped to full capacity, 610tph, roughly 5mpta. The ramp up took a long time as the company had a few technical hiccups to fix along the way to start-up. The main issue was a somewhat flawed refurb job on the main SAG mill. This mechanical error cost the company 5 weeks. Also, one of the 5 gen sets currently being used also needed to be switched out, resulting in more time lost. This is fairly typical in mining.

Resources

The project currently boasts 2.3M oz of reserves grading 1.51g/t at a cut-off grade of 0.7g/t, using a $700/oz gold price. As such, true reserves ounces at 1.51g/t are likely in the area of 3M oz, pointing towards significant expansion of throughput.

 Mining

 The Masate project is an open-pit project using a conventional grind to CIL circuit to process oxide ore. All mining is done through an EPC (fixed cost) contract with Leighton, the world's largest contract miner.

Hedges

The company has bought puts for 50,000 oz in yr 1 and has sold forward 50k oz of gold in each of years 2-5 at $860/oz.

Taxes

In its agreement with the Phillipine Governemnt, CGA will pay no taxes for the first 6 years of production. We value cash flow using a weighted tax rate of 10% to account for 35% income tax after year 6.

 

Next Steps

Ramp-up

The company is currently performing a myriad of optimization and expansion studies. First off, throughput is expected to soon be increased to 6.5mpta. This will most likely require the addition of a crusher and more CIL tanks, at a cost of roughly $5-10M all in. However, the company has been experimenting with additives to its CIL mix that have, on a bench level, reduced required gestation time for current Masbate ore (106 micron grind) from 24 hours to 6 hours. If this were to transfer to production-scale processes, no new tanks would be required and reagent use would drop dramatically, lowering costs.

Also, management on site believes the existing crushing circuit is capable of achieving 6.5mtpa capacity (nameplate capacity is 5.5mtpa). So, existing infrastructure might be sufficient. The installed power base of 30MW more than covers current power requirements of 18MW, so any expansion would be easy, possibly requiring a small upgrade to the gen sets.

After this, final ramp up of the project should see the full circuit processing 7.5mtpa, which is the permitted capacity of the project. This will likely necessitate incremental cap-ex of $10-15M.

Lastly, the aforementioned coal-fired gen system should come online within 18 months.

Exploration

The company has done very little exploration to date, as the focus has been 100% on getting to production. Going forward the company plans aggressive work building out both the reserves and the recent high-grade finds at Masbate. We believe there is serious potential for upside here, since recent exploration directly near the plant site has shown tonnage at significantly higher grades than the mine plan.

 

Management

The company is lead by Mark Savage, an American investment banker; Michael Carrick, a veteran mine builder; and Justine Magee, also a deal-maker. The team assembled to build and operate Masbate has worked together on projects around the world for the better part of 10 years, often under Carrick in various capacities.

The transaction to gain the asset was a distressed asset play engineered by Savage, and then the team was built around it. It is very much our belief that should an appropriate offer come, they would not hesitate to sell. In the meantime, they are looking for attractive late-stage projects that could benefit from their development acumen and be acquired cheaply. We also believe them to be open to accretive mergers.

Valuation

We model the valuation based on a multiple of cash flow, which is a fairly consistent metric among mid tier miners, ranging from roughly 14-20x. NAV is also a routinely used metric--however, multiples of NAV change rapidly depending on gold equity market sentiment. We think cash flow is more tangible. We include an NAV model with conservative estimates below. Once run rate production hits, we expect to see initial production of 200k oz/yr at $400 cash cost, with a ramp up to 280k oz/yr coming over the next 2 yrs, for 10yr average production of roughly 270k oz per year at cash costs of $400-450/oz. We believe higher throughput numbers and other optimization efforts will sustain cash costs in this range, if not lower them.

Using $1000/oz gold, 10% avg tax rate (first 6 years production will not be taxed), $8M for SG&A (conservative), $10M for exploration, $5M for interest (yr 1 interest payment closer to $9M, however debt will be paid off within 2yrs), $7M for maintenance capex, and $425 cash cost, we arrive at 10yr average free cash flow of roughly $110M. We believe a 10x multiple is more than fair, and applying it yields a valuation of roughly $1.1Bn, or double the current quote. The NAV (8%) at a 1.2X multiple, less net debt, is roughly double the current quote using fairly conservative estimates. During the recent bull market mid tier producers all traded above 2X NAV.

For additional research, we recommend Haywood Securities or BMO.

Comps

A cursory look at mid tier gold companies with similar production profiles shows CGA to be extremely undervalued in terms of multiples of cash flow and metrics like EV/oz of production. For example, try JAG, CEE, NGD, AGI.

One of the reasons for this discrepancy is the comparative lack of institutional following for CGA, which as done comparatively little capital raising (read paying for order flow) and has therefore garnered less interest. The company intends to start full scale promotion over the next 2 quarters as commercial production has now been achieved. The valuation gap will not last.

Risks/Assumptions

It is fair to note that this valuation assumes further addition of existing resources to reserves, and the determination that these will fit the mine plan. It assumes $1000/oz gold-we are gold bulls and think this to be conservative, so please take this fwiw. However, we think a 10x multiple is quite conservative. We also believe assumptions on cash cost are somewhat conservative.

CGA only has one major asset, though its two secondary assets definitely have value-we peg this at $30-50M. Also, Masbate is in the Phillippines, and some people have reservations about investing there.

In order to be re-valued, CGA will need to show consistent production over the next 1-2 quarters. Therefore, the timeline for this investment is to expect roughly a double within 5-8 months. Overall, we see the company as an excellent acquisition target for a large mid-tied producer with a diverse portfolio of mines that would eliminate the country risk carried by CGA.

We also believe that simply on its own merits the company is significantly undervalued.

CGA Mining                              
  Sep-09                            
Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
                               
Grade 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.40 1.40 1.30 1.20 1.20 1.20
Tpa 5000 6000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000
Recovery 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82%
OZ 200 240 280 280 280 280 280 280 280 259 259 241 222 222 222
                               
Cost/oz $400 $410 $420 $430 $440 $450 $460 $460 $460 $470 $470 $480 $500 $500 $500
Tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
SGA $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000
Interest $9,000 $4,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Exploration $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000
Main. Capex $0 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000
                               
Gold price $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
FCF $92,826 $112,394 $137,164 $134,368 $131,572 $128,776 $81,887 $81,887 $81,887 $73,053 $73,053 $65,110 $55,963 $55,963 $55,963
                               
NAV 8% $841,940                            
                               
Multiple of NAV 1.20                            
Gross Value $1,010,328                            
Less Debt $70,000                            
Net Value $940,328                            

 

 

Catalyst

Increased promotion

Commercial Production

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    Description

    CGA Mining is a 50 Cent Dollar any way you slice it. Valuing mid-tier gold mining companies is a fairly simple exercise: compute cash flow, compute market cap, adjust for any risks, and put on a peer group multiple. Do this with CGA Mining, and you will find a compelling investment.

    Background

    CGA Mining acquired the Masbate project from a financially distressed gold miner for $51M in March 2007. The project is located on Masbate Island in the northern Philippines. Since then, management has delivered resource definition, resource expansion, project feasibility studies, project financing through debt/equity, full construction with 0 lost time incidents, its first gold pour, and--hopefully--consistent gold production at below-average cash costs starting with 4Q CY09.

     The Masbate project previously produced gold for roughly 8 years, delivering about $1M oz before production ended due to low gold prices. When CGA inherited the project, Masbate showed a 6.7Moz resource including reserves of 2Moz. The resource currently stands at over 10M oz including 3Moz of reserves. Most of the resource is contained in measured and indicated ounces--proven to be there.

    This time around

    The team has spent $180M on constructing a plant with 4mtpa nameplate capacity, which is already running at 5mpta (610tph). Forecast run rate production of 200k oz per year based on 4mtpa should be comfortably met and exceeded. An optimized feasibility study released in 2007 estimated cash costs of $336 per oz using oil prices at $68 per barrel. The company intends to build coal-driven power generation during the next year to further reduce costs ($40/oz savings) and allow fixed energy costing. Since the release of this optimization study, LOM grades have been adjusted from 1.63g/t avg to 1.51g/t due to rescheduling of the mine sequencing. This is intended to smooth out grade distribution. Previously grade was somewhat more tilted towards the early years of the mine life. However, this reduction is grade will impact cash costs, as will increases in mining costs incurred since the 2007 study. Cash costs are now expected to be closer to $420/oz during the first 8 years of production. We believe these numbers are conservative.

    First gold pour at Masbate was May 12th, and at Sept 18th 1 tonne of gold had been shipped (32k oz). By Sept 21st, the plant had ramped to full capacity, 610tph, roughly 5mpta. The ramp up took a long time as the company had a few technical hiccups to fix along the way to start-up. The main issue was a somewhat flawed refurb job on the main SAG mill. This mechanical error cost the company 5 weeks. Also, one of the 5 gen sets currently being used also needed to be switched out, resulting in more time lost. This is fairly typical in mining.

    Resources

    The project currently boasts 2.3M oz of reserves grading 1.51g/t at a cut-off grade of 0.7g/t, using a $700/oz gold price. As such, true reserves ounces at 1.51g/t are likely in the area of 3M oz, pointing towards significant expansion of throughput.

     Mining

     The Masate project is an open-pit project using a conventional grind to CIL circuit to process oxide ore. All mining is done through an EPC (fixed cost) contract with Leighton, the world's largest contract miner.

    Hedges

    The company has bought puts for 50,000 oz in yr 1 and has sold forward 50k oz of gold in each of years 2-5 at $860/oz.

    Taxes

    In its agreement with the Phillipine Governemnt, CGA will pay no taxes for the first 6 years of production. We value cash flow using a weighted tax rate of 10% to account for 35% income tax after year 6.

     

    Next Steps

    Ramp-up

    The company is currently performing a myriad of optimization and expansion studies. First off, throughput is expected to soon be increased to 6.5mpta. This will most likely require the addition of a crusher and more CIL tanks, at a cost of roughly $5-10M all in. However, the company has been experimenting with additives to its CIL mix that have, on a bench level, reduced required gestation time for current Masbate ore (106 micron grind) from 24 hours to 6 hours. If this were to transfer to production-scale processes, no new tanks would be required and reagent use would drop dramatically, lowering costs.

    Also, management on site believes the existing crushing circuit is capable of achieving 6.5mtpa capacity (nameplate capacity is 5.5mtpa). So, existing infrastructure might be sufficient. The installed power base of 30MW more than covers current power requirements of 18MW, so any expansion would be easy, possibly requiring a small upgrade to the gen sets.

    After this, final ramp up of the project should see the full circuit processing 7.5mtpa, which is the permitted capacity of the project. This will likely necessitate incremental cap-ex of $10-15M.

    Lastly, the aforementioned coal-fired gen system should come online within 18 months.

    Exploration

    The company has done very little exploration to date, as the focus has been 100% on getting to production. Going forward the company plans aggressive work building out both the reserves and the recent high-grade finds at Masbate. We believe there is serious potential for upside here, since recent exploration directly near the plant site has shown tonnage at significantly higher grades than the mine plan.

     

    Management

    The company is lead by Mark Savage, an American investment banker; Michael Carrick, a veteran mine builder; and Justine Magee, also a deal-maker. The team assembled to build and operate Masbate has worked together on projects around the world for the better part of 10 years, often under Carrick in various capacities.

    The transaction to gain the asset was a distressed asset play engineered by Savage, and then the team was built around it. It is very much our belief that should an appropriate offer come, they would not hesitate to sell. In the meantime, they are looking for attractive late-stage projects that could benefit from their development acumen and be acquired cheaply. We also believe them to be open to accretive mergers.

    Valuation

    We model the valuation based on a multiple of cash flow, which is a fairly consistent metric among mid tier miners, ranging from roughly 14-20x. NAV is also a routinely used metric--however, multiples of NAV change rapidly depending on gold equity market sentiment. We think cash flow is more tangible. We include an NAV model with conservative estimates below. Once run rate production hits, we expect to see initial production of 200k oz/yr at $400 cash cost, with a ramp up to 280k oz/yr coming over the next 2 yrs, for 10yr average production of roughly 270k oz per year at cash costs of $400-450/oz. We believe higher throughput numbers and other optimization efforts will sustain cash costs in this range, if not lower them.

    Using $1000/oz gold, 10% avg tax rate (first 6 years production will not be taxed), $8M for SG&A (conservative), $10M for exploration, $5M for interest (yr 1 interest payment closer to $9M, however debt will be paid off within 2yrs), $7M for maintenance capex, and $425 cash cost, we arrive at 10yr average free cash flow of roughly $110M. We believe a 10x multiple is more than fair, and applying it yields a valuation of roughly $1.1Bn, or double the current quote. The NAV (8%) at a 1.2X multiple, less net debt, is roughly double the current quote using fairly conservative estimates. During the recent bull market mid tier producers all traded above 2X NAV.

    For additional research, we recommend Haywood Securities or BMO.

    Comps

    A cursory look at mid tier gold companies with similar production profiles shows CGA to be extremely undervalued in terms of multiples of cash flow and metrics like EV/oz of production. For example, try JAG, CEE, NGD, AGI.

    One of the reasons for this discrepancy is the comparative lack of institutional following for CGA, which as done comparatively little capital raising (read paying for order flow) and has therefore garnered less interest. The company intends to start full scale promotion over the next 2 quarters as commercial production has now been achieved. The valuation gap will not last.

    Risks/Assumptions

    It is fair to note that this valuation assumes further addition of existing resources to reserves, and the determination that these will fit the mine plan. It assumes $1000/oz gold-we are gold bulls and think this to be conservative, so please take this fwiw. However, we think a 10x multiple is quite conservative. We also believe assumptions on cash cost are somewhat conservative.

    CGA only has one major asset, though its two secondary assets definitely have value-we peg this at $30-50M. Also, Masbate is in the Phillippines, and some people have reservations about investing there.

    In order to be re-valued, CGA will need to show consistent production over the next 1-2 quarters. Therefore, the timeline for this investment is to expect roughly a double within 5-8 months. Overall, we see the company as an excellent acquisition target for a large mid-tied producer with a diverse portfolio of mines that would eliminate the country risk carried by CGA.

    We also believe that simply on its own merits the company is significantly undervalued.

    CGA Mining                              
      Sep-09                            
    Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
                                   
    Grade 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.40 1.40 1.30 1.20 1.20 1.20
    Tpa 5000 6000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000 7000
    Recovery 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82% 82%
    OZ 200 240 280 280 280 280 280 280 280 259 259 241 222 222 222
                                   
    Cost/oz $400 $410 $420 $430 $440 $450 $460 $460 $460 $470 $470 $480 $500 $500 $500
    Tax 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
    SGA $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000
    Interest $9,000 $4,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
    Exploration $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000
    Main. Capex $0 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000 $7,000
                                   
    Gold price $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000
    FCF $92,826 $112,394 $137,164 $134,368 $131,572 $128,776 $81,887 $81,887 $81,887 $73,053 $73,053 $65,110 $55,963 $55,963 $55,963
                                   
    NAV 8% $841,940                            
                                   
    Multiple of NAV 1.20                            
    Gross Value $1,010,328                            
    Less Debt $70,000                            
    Net Value $940,328                            

     

     

    Catalyst

    Increased promotion

    Commercial Production

    Messages


    SubjectUpdate, increase to target
    Entry11/22/2009 10:44 AM
    Memberhkup881

    CGA posted production numbers for the month of October: 14,000 OZ at $437 cash cost. Head grade was 1.30g/t, getting close to the 1.51g/t grades expected for the life of mine. Ths low grade starter ore is now almost exhausted, so either november or december should see full grades of 1.51g/t and full production of about 17,000 oz. This implies cash cost of less than $400/oz, since a 10% increase in grade implies a 10% decrease in cash cost. This puts CGA about $100 below industry average cost.

    Considering gold's recent run, CGA is now producing at a run rate of over 200,000 oz per year at a margin of $750/oz, or $150M of cash flow from ops. After SGA, exploration, and maintenace capex, CGA trades at 4x Free Cash Flow, with a ramp up over the next few years. Using peak output, CGA trades at 3X Free Cash Flow.

    Peers in this space trade at 15X Free Cash Flow. Once a mine of this type (a large, continuous deposit) has achieved near full production without negative surprises, it is very rare for something to go wrong with ore mining or processing after that point. As such, we see very low risk right now, and think a triple from current prices would still leave the company materially undervalued. This rerating will likely not happen for a couple more months, since institutional investors are slow, although it could happen any day.


    SubjectRE: Update, increase to target
    Entry11/22/2009 11:04 PM
    Memberjamal
    hkup, It sounds like a 2 quarters of solid production and well...we're golden. har har... I'm not an expert on the name or the industry, but when you mention "[CGA] has achieved near full production without negative surprises", what exactly are some of the negative surprises and how likely do you see them occurring?

    SubjectRE: RE: Update, increase to target
    Entry11/24/2009 11:11 AM
    Memberhkup881

    CGA is now basically at full production. I think the chances of negative surprises are pretty low at this point.

    I cannot even begin to describe all that can  go wrong with a mine as you bring it online. The thing is that once it's producing at a steady state--it rarely has issues going forward as it's just a cash flow stream. Getting to that point is the hard part. Hence the revaluation when it reaches that point.

    Most common issues with mines in production are mechanica failure, unexpected changes in ore grade, unexpected metallurgy issues, power issues, water issues (either too little or flash floods), employee problems, political issues, etc. the it just goes on and on. As you produce cash flow, you can do more technical work that slowly illiminates these issues or you get additional redundancies.

    As you ramp up, you have significantly more problems that crop up and many of them are more difficult to overcome.

    Based on the most recent press release, the mill is now producing way over capacity both for total production and grind size which means that recoveries should increase on a fixed cost basis. This is all good news--and better than many expected.

     

     


    SubjectProduction update, 11/23 - increase to estimate
    Entry11/24/2009 05:14 PM
    Memberhkup881

    CGA announced record hourly throughput through its now fully comission crush/grind circuit. A rate of 713dt/h was reported at a grind of 106 microns, vs feasibility study assumptions of 500dt/h and 150 micron grind. This is significant for two reasons: finer grind results in higher recovery, and higher throughput results in greater tonnage of ore leached. Both of these result in higher amounts of gold produced and lower cash costs per ounce produced.

    It now appears that CGA has already achieved the 6Mtpa run rate that we modelled for YR2 in our cash flow/NAV scenario. This bodes well for an increase to 7.5Mtpa during the first circuit upgrade, which we discuss in the write-up.

    The take-away from this is that total gold ounces produced in YR1 1 of full production could be closer to 240k oz, vs our estimate of 200k oz, an increase of $30M/yr in free cash flow, or roughly $0.12 per share. Of course, we will have to wait and see if this materializes when earnings are reported.


    Subjecthkup881
    Entry01/05/2010 12:41 PM
    Membertyler939

    I know this is a difficult question to answer, but it seems to me that our biggest risk is simply profit taking from some of the major sellers.  Do you by any chance have any insite into this issue?


    Subjectproduction levels
    Entry01/28/2010 12:22 PM
    Membermiser861

    your model has 200,000 oz in 09 and 240 in 2010.  run rate (q4) looks to be about 145.  is there a seasonal component here or do you think your production targets are a bit high?


    SubjectRE: production levels
    Entry01/28/2010 01:24 PM
    Membermajic06

    In the press release they said they exited Q4 at "near steady state".

    "The operation has made significant progress during the December quarter, nearing steady state by the end of December."

    It's not correct to runrate Q4 as they were ramping the entire time.

     

     


    Subjecthkup, anything further on timing of the raise?
    Entry02/04/2010 08:46 AM
    Membertyler939

    hkup, as there been any further elaboration from the company on why do the equity raise at this time?  One thought that occurred to me was that it is being done to position a prominet shareholder, such as Paulson.


    SubjectAny updated thoughts on this name?
    Entry03/15/2010 12:46 PM
    Membertyler939

    I notice you didn't reference it along with your other previous writeups in the gld writeup.


    SubjectRE: Any updated thoughts on this name?
    Entry03/15/2010 07:22 PM
    Memberhkup881

    I just feel that for someone looking strictly for gold exposure, EGD and AQL are better picks as they're a bit more generalist. CGA is a play on a single asset. CGA is so cheap that a move in gold really shouldn't do too much to the valuation of it.


    SubjectRE: hkup
    Entry05/16/2010 06:45 PM
    Memberhkup881
    Majic, Sorry for the VERY delayed response. I have been on the road and so has my analyst who knows this better than me.
     

    The quarterly numbers looked good, no surprises at all. The 454 cash cost number is acceptable during ramp up.

    The latest release showing record throughput is encouraging. Although they do not give the number of oz produced, we can infer that based on 6mtpa and similar recoveries, production should reach steady state of close to 240k oz/yr once the rom pad is cleared of lower grade ore. 

    The throughput number given is 7mtpa but i would not annuallize this as record daily numbers are misleading. But 6mtpa should be achievable. One should recognize that 20ktpd is a massive milling operation for a gold only circuit, one of the largest in the world, and it takes time to optimize. The original write up suggested this would take 5 to 8 months, making june the target. It looks like they have now reached this milestone and i expect the q2 numbers to show this, with the q3 numbers even better.

    Gold is now 200$ higher, and the numbers look even better using this figure. The company is known to be an m&a target in the industry, but at the right price. I think fair value is easily in the 5's and revaluation should be swift once sustained performance is shown.

     Even at 454 cash cost (which should come down), quarterly free cash flow is over 30$m at todays gold prices (240k oz run rate). At a free cash flow multiple of 15 (bottom of peer group, top of peer group is alamos at 30x) the company is worth 1.8bn. In addition the company now has a net cash position.

     It is cheap, but I've made something of a decision to not own any more gold miners going forward. I spoke a bit about this in my GLD post. It's just a bad business to be in. I'd rather just own gold futures and the exploration services companies. If you look at my record on VIC at mining stocks, it's dismal. It's a VERY tough way to make money. CGA is one of the best in terms of valuation, but there's the tradeoff that management continues to dilute for no reason. What will happen to the cash flow? Will, it all disappear into a Nigerian drilling play? In summary, I hate this industry. Gun to the head, I'd own this one over almost any other name thoguh. With that, I intend to close this thread. Not b/c the investment is bad--I just want nothing more to do with mining. This pick does show a small gain.

    Once again, sorry for being so slow to get back. I wanted to get the right info. I still own a few, but I no longer feel like the upside compensates me for the risks involved in mining. If you have to own a mining play, own AAG CN. At least if right, it's got a whole lot of upside. That's the only one I still own in size.


    Subjecthkup, any updated thoughts.
    Entry09/15/2010 09:21 AM
    Membertyler939
    I am not sure if you are still following this name.  If so, any thoughts?  I got the impression you were still holding it, but did not have enough confidence on any of the junior miners to recommend the to anyone else.  Thanks in advance.

    SubjectRE: hkup, any updated thoughts.
    Entry09/20/2010 11:02 PM
    Memberhkup881
    Tyler-- Look at the share price. I guess we sold too soon. I'm not following any longer. I put all the proceeds from my jr mining sales into shares of Energold (EGD CN) and am content to express most of my mining view by just that name. I still own all of my AAG CN position which I wrote up a while ago (mainly b/c my analyst joined the company as vp corp development and I trust him not to let anything crazy happen), but in general, I just hate jr mining. It's not really a business and even in situations like CGA where they actually have a business, they treat it like a science experiment and use proceeds to drill holes instead of returning capital to shareholders. It makes no sense. I'd rather just own the guy drilling all the holes.
    I haven't been following lately. Sorry. Wish I could help more.

    SubjectRE: RE: hkup, any updated thoughts.
    Entry09/21/2010 01:36 AM
    Membertyler939
    Much appreciated.
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