catalpa contemplates its next move

March 23, 2010

Catalpa Contemplates Its Next Move, As Construction At The 100,000 Ounce Per Year Edna May Gold Mine Nears Completion.

By Our Man in Oz / www.minesite.com

Smooth sailing is what you would expect from a gold mining company named after a boat, and that's exactly what Catalpa Resources is doing, on the surface. But as the construction work at the almost complete 100,000 ounce a year Edna May mine in Western Australia continues, there are signs in deeper waters that future growth plans are being hatched. Clues include a modest capital raising and debt restructure. The best piece of evidence that something is cooking , though, was an off-the-cuff comment from Catalpa chief executive, Bruce McFadzean, about the " excellent M&A skills " possessed by his chairman. Peter Maloney, is a dab hand at mergers and acquisitions, said Bruce, while also dropping into conversation the fact that Catalpa was on the verge of " generating serious cash from its assets ".

The combination of " serious cash " , fresh capital, imminent gold production, and M&A skills in the management team, is a compelling reason to take a closer look at Catalpa, though private investors might have to do some of their own homework. The company has not featured on the radar screens of many analysts because of its gold hedging policy. Purists in stockbroking firms dislike the fact that Catalpa has hedged more than three years of future production, in a deal which has locked in the gold price the company will receive. For doing that Catalpa is ignored by many analysts who dislike hedging, even if in this case it means the company is assured of getting a gold price on its hedge which is about A$350 an ounce above the current spot-market price.

The hedge, which saw Catalpa lock in 352,317 ounces of Edna May gold at A$1,557 an ounce, was one of last year's more interesting gold deals in Australia. It was done when gold was high and the Australian dollar low. Today, with the dollar high and gold having retreated a little the Australian gold price has fallen back from around A$1,500 an ounce to A$1,200 an ounce. In effect, that means Catalpa's hedged ounces will yield a profit of A$921 an ounce, after deducting the pre-royalty cash cost of A$636 an ounce, while the unhedged ounces will generate A$564 an ounce.

Regular followers of Catalpa are familiar with the hedge, which was taken out for the simplest of reasons: it was an insurance policy and a key step in de-risking a project which is an exercise in bulk mining ore grading just above one gram to the tonne. What's changed in recent months is growing confidence that the Edna May development will be completed under budget and ahead of schedule. Bruce McFadzean told the Australian Gold Conference in Perth last week that the commissioning at the process plant would start in mid-April, while the debt restructure and injection of A$20 million in fresh capital would lower project risk and boost exploration. " We look forward to channelling some of the funds into accelerating our drilling program at the new Golden Point prospect and the Edna May underground opportunity " , Bruce said. The ultimate aim is to grow the resource base beyond the current 1.66 million ounces, increase annual output, and extend the mines life.

Layer on to that equation Bruce's comments about his chairman, Peter Maloney, and you get a glimpse of a company which is determined to be more than a one-mine wonder, with a second asset in the shape of a 30 per cent stake in a high-grade goldmine at Cracow in Queensland. Peter's career includes senior finance and commercial posts with the old Western Mining Corporation, plus time at the big Australian oil and gas producer, Santos, and as chief financial officer at the pharmaceutical company, FH Faulding. More important than those jobs is his position as CFO of Lion Selection, the resource-driven investment house which has played a key role in creating Catalpa, especially via a deal last year which saw Catalpa and Lion effectively merge.

Whats next? For investors that has to be the question, because Catalpa is a company with roots in both the mining and finance camps. Mining engineers like Bruce (ex Rio Tinto and BHP Billiton) and fellow directors, Barry Sullivan (ex MIM), and John Rowe (ex LionOre) are getting on with the job of turning a big, but low-grade orebody at Edna May into a cash cow, while utilising the fresh capital to extend and expand the operation. The money men, led by Peter and Graham Freestone (ex Shell and AngloGold) are plotting the next corporate move, with the full-blooded backing of Macquarie Bank, which orchestrated the latest debt/equity shuffle.

The past year for Catalpa has been all about building a mine and laying the financial groundwork to grow. This year will start with the commissioning of Edna May. The cash flow from that mine (aided by the infamous hedge) will underwrite the next corporate deal, making Catalpa a stock to watch closely in 2010 for deal and news flow.