Friday, November 5, 2010

Castlemaine Goldfields Ltd (CGT) - An Introduction

LGL increases Ballarat East resource to 1.5 million ounces
Lihir Gold Ltd (LGL) has lifted its Total Mineral Resource estimate at the Ballarat East project by 7% to 1.5 million ounces, following encouraging drilling and trial mining activities over the past year.


Importantly, this includes a 27% increase in Indicated Resource to 305,000 ounces from 241,000 ounces previously. Ore in the Indicated Resource category has increased from 560,000 tonnes to 952,000 tonnes. The average grade of the total resource has increased from 11.3 to 11.8 grams per tonne.
LGL ASX Release - 30/10/2007
You might be wondering why I've started this blog with a announcement for a different Gold company to that listed in the title...

Despite what their name might suggest, Castlemaine Goldfields (CGT) is far from a one trick pony.

The above mentioned Gold resource (1.5m conservatively estimated ounces) that once belonged to Lihir Gold (LGL, now taken over by NCM) was sold to CGT along with a Gold plant, freehold land, drilling equipment, mining licenses, Gold lab, light vehicle fleet and more. The Ballarat Gold plant and tenements is a world class package that was developed at a cost of more than $400m to LGL.

The entire Ballarat project was acquired by CGT for:
- An upfront payment of A$4.5m
- Assumption of the rehabilitation liability
- A 2.5% net smelter royalty capped at A$50m

I challenge you to find a better value Gold acquisition in recent years!

To further show the sort of value achieved from this acquisition, in the last quarterly (September 2010) CGT  announced they had sold surplus equipment from the project for $1.7m. That's a 38% return on the upfront payment just from selling the bits they won't need!

This was a fantastic move by CGT given that they also have a Gold resource of 686,000 oz at nearby Castlemaine. The purchase was a strategic move that in my opinion solidified CGTs position as one of the best upcoming Victorian Gold developers/producers.

Here are a few numbers:

Share price: 3.7c (as of close 05/11/2010)
Number of shares: 1.02b
Number of options: 6m (unlisted, strike @ 20c+)
Market cap: $40.8m
Cash: $18m
Gold resource: 2.2m Oz
Market Cap / Resource = $18.55 p/oz
(or $10.35 p/oz after taking cash off market cap)

Significant grades from drilling (by LGL) in the 18th months leading up to the resource upgrade at Ballarat included:
9m @ 30g/t
8m @ 22.7g/t
4m @ 47.4g/t
10m @ 8.2g/t
8m @ 11.3g/t


LGL had plans for a 20 year mine life at 200koz per annum from Ballarat. CGT will be looking at a different plan, intending on being a 100koz per annum producer with 50koz/pa coming from their Castlemaine resource and 50koz/pa coming from the Ballarat resource.

CGT has suggested a timeline that would see them producing by late 2011. The plant is currently on care and maintenance while they shore up the resource in the areas they intend on mining from initially.

In my opinion at the current market cap CGT presents an excellent buying opportunity. The share price has seen some weakness the last few weeks, however expect this to turnaround soon. I think CGT is one of the best value Gold picks on the ASX. As mentioned in the title, this is only an introduction and I will likely cover CGT in more depth at a later stage.



BB.

Disclosure: Position held in CGT. Not investment advice. Do your own research.

8 comments:

  1. Damn good call.

    Went up like 15% on Friday after this post and another 7% this morning.

    Need to find some cash to play with.

    ReplyDelete
  2. Thanks for the reply Toby.

    The timing of the post certainly worked out well as we seemed to find some support on Friday to close back above 4c.

    I could see CGT doubling or tripling from here and still representing excellent value with the assets, plans and Gold they have.

    Look at MCO leading into production, they had a market cap of $100m+, I don't see why CGT couldn't see the same, they have more Gold (but at lower grade), a lot more cash and a larger capacity plant. Nothing against MCO as I own shares in them also, but I think CGT should be on par with their market cap in all fairness. What is keeping the SP from rising? Perhaps uncertainty about whether they will succeed with the Ballarat project (where LGL failed) or perhaps it's just that no one knows about CGT!

    BB.

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  3. If Ballarat is so fantastic, why did Lihir walk away??? Where is the 1.5Moz resource in Ballarat, does CGT still quote this? Look at the history 1 Moz at a head grade of 9g/t from the Ballarat East corridor, and that was with the old timers hand sorting the ore, and only transporting the higher grade material to the surface, that is they selectively mined the ore once it was blasted underground. They high graded the material, something which is not efficiently done anymore. In the days of rubber tyred equipment need to take mider widths than the small widths historically taken, which equals more dilution. Or hand held mine it at a significantly higher cost, and then with the low grade anyway make no money.

    Best thing that can be done at Ballarat is to plug the portal and walk away.

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  4. Anon, Lihir went in with the expectation they would be able to mine 200k/oz per annum from Ballarat over a sustained period. Their goal was large scale/low cost, but seems the project was not suited to their plans. CGT is only looking to take 50k/oz pa and given their modelling/updates it appears they are getting very specific around where they will extract their ore. CGT has not quoted the resource used by LGL as you pointed out, this is a fair observation. I believe CGT are targeting an updated resource in early 2011 so we should hear more from CGT about a resource then. Further to the smaller scale mining we also have higher Gold prices on average now than when the LGL or historic mining occurred.

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  5. Bullion

    Your point on higher gold prices is only partially true, I have seen presentations were they have shown operating mines from the days of the 1990's and mid 2000's and modelled the current gold price into the previous operations. You would be surprised, the profits margins are not significantly greater using a gold price of today, compared to that of 2 or 3 years ago, or even those of 10 years ago. As the gold price has risen, so hace labour and consumables and all operating costs. People place too much emphasis on the rising gold price.

    Have a look at the last announcement, and how it is written. The intercepts do look wonderful. Now take off the shiny wrapping paper. 6.4m at 61g/t, this consists of 1m at 382g/t gold. Meaning the other 5.4 m contain virtually nothing, the only reason of the other 5.4m in the 6.4m is to make it look a nice width for people who don't look to deep into the facts. Then when you look at the notes at the end of the announcement you will notice a comment regarding true widths. Given that the hole is drilled obliquely to the strike of the reef, and drilled further on a angle, all facts they cant control due to can only place the rig where there is space. But truth is that the true actual mining width of the 1m at 382g/t is most likely to be only 10cm or so! Gonna need some good miners to extract that.

    Need to take off the shiny wrapping paper on companies like this before you get too carried away.

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  6. The entire rise in the price of Gold cannot be taken into account as you've suggested, but Gold has seen a significant increase over the last several years and I don't believe costs have kept pace with it's rise. Average price of Gold over 2007 was approximately AUD$835, this year it has been AUD$1330 (using monthly data averaged from Perth Mint), that's a rise of almost 60% and I doubt costs would have risen much more than half that for most companies.

    I don't think there's any denying that it's "nuggety" Gold, although I think your focus on that one assay result is as bias as the way it was presented in the report.

    I don't think CGT have any qualms admitting that it's going to be difficult to extract the Gold given the complex geology, the MD says as much in today's BRR.

    The mine study/planning being worked on at the moment should provide some clarity on how CGT plans on tackling the mining of Ballarat and this is something I look forward to seeing.

    Thanks for your thoughts Anon. Curious, do you come from a mining back ground?

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  7. Bullion

    Yes I do come from a mining background, and have worked in the area, and in particular have worked in Ballarat previously at the Ballarat East project, so given my knowledge of the project and its geology and major concerns on ground conditions and mining therein, maybe I could be considered somewhat biased against the Ballarat project

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  8. Anon1 is right, you do have to mine 6.4m of quartz to ensure you get the 1m at 382g/t, just like the miners at Bendigo mine all the quartz saddle to ensure they get the high grade narrow seams of gold that occur on the quartz margins.

    I'm somewhat knowledgable in the Bendigo field/mine and have no arguement that at least some underground sorting did occur in the 1800s. However I see it that they could only seperate the white stuff from the black sediment host rocks and it was probably only at that level of "high grading". Would you risk leaving a large nugget of gold inside a piece of quartz that doesnt show gold on the outside? Or crush that quartz small enough to ensure it doesnt have that nugget within when there is a steam stamper battery up top? I wouldnt so I doubt many old timers did either.

    One interesting point about Lihir's Ballarat experience that CGT have put forward is that when they slowed down at the end (during sale etc)and concentrated on mining quartz and not dilution + a little quartz the grades were over 7g/t (between 8 and 10g/t for late months of 2009 if I am correct). Does this not evidence a slower more considered mining levels that selectivity can be brought back?

    Maybe Anon1 had left Ballarat mine by then?

    Anon2

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