Initiating Coverage of Cerro Resources (Mexico Gold & Silver) with a Buy Rating.
Stifel Nicolaus.
Company Overview Primary Asset: Cerro Del Gallo project, Mexico Start-up Capex: $120mn heap leach, 2014E startup Primary Metal: Gold Reserves and Resources: 1.7mmoz Au at 0.67g/t LOM Avg. Gold Production (primary): 82koz Au LOM Avg. Total Cash Costs (co-product): $640/oz Au LOM Avg. Silver Production (secondary): 0.9mmoz Ag Status: Development, updated FS due 1Q12 Cerro Resources NAV8%: C$536mn (or $0.36/share) Insider Ownership & Trading Activity : 13%, Neutral
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."
* Peer comparison with Grayd. "It is difficult to find a company directly comparable to Cerro Resources which starts as a heap leach operation and then adds a CIL plant five years down the line. However, we have compared Cerro with companies operating in Mexico, with somewhat comparable annual gold production. We note that Grayd Resources valuation following the recently announced takeover by Agnico-Eagle provides a positive read through for Cerro Resources — i.e. a potentially higher EV/oz valuation if Cerro receives a takeover offer or as it delivers milestones (FS, debt- financing, permitting, construction, production)."
CJO Price at posting:
12.5¢ Sentiment: LT Buy Disclosure: Held
