We are initiating coverage of Cerro Resources with a Buy rating in the higher risk, potentially higher reward junior mining sector, and a C$0.30 target price.
As is typical of Australian companies, the share count is high relative to North American companies (794.6mn fully diluted shares), leading to a low share price (C$0.09) on the market cap of approximately $69mn.
Valuation: Our sum-of-the-parts net asset value for the flagship Cerro Del Gallo (8%-NAV) and Namiquipa (10%-NAV) assets in Mexico is C$536mn, or $0.36/share (based on approximately 1.5bn fully diluted, fully financed shares). Cerro Resources currently trades at 0.30x P/NAV at spot gold prices, versus peer average of 0.61x.
Cerro Del Gallo (CDG) Deposit – Strong Foundation: CDG was a divestiture by Goldcorp, which retains a 34% stake in the project that may be ultimately converted into a 10% NPI (Net Profit Interest) if Goldcorp chooses not to participate in funding CDG. The CDG deposit has a 43-101 resource of 77mmt at 0.67 g/t gold and 14.2 g/t silver.
A Feasibility Study (FS) is due in 1Q12. We model total project capex of 225mn (comprising $120mn for heap leach 2014E startup, and $105mn for CIL plant 2019E startup) with annual LOM production of 82koz Au and 0.9mmoz Ag (approximately 100koz AuEq) at total cash costs (co-product, excluding depreciation) of $640/oz over 14 years. The first four years should average 66koz at $507/oz pa. We note that the by-product silver may be a source of funding to offset some of the initial capex requirements for the heap leach.
Takeaways from the coverage report.
* They value Mt Philip at $30 million based on historical transactions. " Cerro Resources owns 100% of the Mt. Philip iron ore project located in Queensland, Australia, 900km from a port, but close to the main rail line from Mt Isa. In October 2011, Cerro reported an initial inferred resource of 25mmt of 36.6% Fe including 12mmt of 47.6% Fe. An updated resource estimate is due in 1Q12. Recent drilling is likely to have increased this by a possible 50%. Preliminary metallurgical studies show the ability to produce a high quality 68% iron product with acceptable silica content using the traditional flotation process. As the resource is small, we have valued the Mt. Philip project at C$30mn, approximately $3 per contained tonne of ore in resource. This appears reasonable after a review of historical transactions."
* Seem to be bullish on Namiquipa and even generate a model input for the mine with a valuation. " Given the lack of deeper drilling on the multiple veins and known strike length, the deposit could be significantly larger and could conceptually support a higher throughput. As this deposit is in Mexico, there are several smelters nearby, owned by Grupo, Fresnillo, and Penoles, that could treat the concentrate produced."
CJO Price at posting:
12.5¢ Sentiment: Buy Disclosure: Held
