Tuesday, November 9, 2010

Cobar Consolidated Resources Ltd (CCU)

Cobar Consolidated Resources (CCU) is currently my longest held stock. As a shareholder I've watched the share price rise from just 6c (where I purchased my core position) to over 40c in late 2009, collapse back to under 20c and now it's soared back over 40c. It's been quite a ride, but while I've successfully traded a few small parcels I have held my core position all the way through the volatility.

I have mentioned CCU briefly in a couple of earlier posts relating to the Silver juniors on the ASX. CCU is one of only three "pure" Silver stocks on the ASX (three left after CXC delists later this year). Given the few choices of stocks with decent Silver exposure and the recent significant rise in the price of Silver, CCU is poised to do well.

Cobar Consolidated listed on the ASX in July 2006. In December 2007 CCU entered into a joint venture agreement with CBH Resources Limited over its Wonawinta tenement EL6155 (initially with potential to earn up to 70% interest), which was located near it’s existing Gundaroo Prospect. A maiden resource was announced in mid 2008 with several upgrades as drilling continued over the next 18 months. CBH Resource’s interest in the Wonawinta Project has now been reduced to a 2% royalty.

An optimised mine schedule has been performed, capital expenditures for plant construction estimated and debt adviser appointed to assist them with financing the project. There is potential for production by the end of 2011 with cash costs expected to be in the vicinity of $6.50p/oz (after lead credits).

In a recent announcement showing target minerlisation it was suggested that there may be another 40m+ oz to be discovered over and above their existing resource.
This junior seems to tick all the boxes with solid management, reasonable cash burn levels, a large resource, registry dilution minimal so far & a solid plan emerging.

One of the most impressive feats of management this year has been raising capital at well above the share price at the time ($3.25m paid for 13m shares by Magna Resource, an Indonesian based resource company), usually capital is raised by juniors at a hefty discount to the share price. 
Ian Lawrence (Managing Director) has more than 30 years experience in senior line management, strategic management and consulting, including a 20 year career with WMC Resources where he held senior roles including General Manager Group Technology, and Resident Manager and Manager Metallurgy at Olympic Dam. Ian Lawrence has been with CCU from the start and I believe he has done a great job so far and will continue to do so as he leads CCU into Silver production.

Share price: 41c (as of close 08/11/2010)
Number of shares: 131m
Number of options: 6m (unlisted)
Market cap: $53.7m (undiluted)
Cash: $2.9m
Silver resource: 50.6m oz @ 71.8g/t (Res. 14.3m oz, 97g/t) + 2.7m oz @ 47g/t
Market Cap / Resource = $1.06 p/oz (Wonawinta Resource only)

The optimisation study suggested 2.6m oz will be produced per year for 5 years from their reserves.

Estimated cost in the study is $6.50 per ounce (net lead credits). I'll use an estimated total cash cost of $9.50.

There's 131m shares on issue currently, with requirement to raise $30m for plant going into production.

For the purpose of the example I will dilute the registry by the amount required to fund the CAPEX, however reality is that they will use financing for at least part of the project (but let's call it the worst case scenario).

$30m / .41 = 73m shares extra added to the original 131m (+ 6m options) gives us a diluted registry of 210m shares.

What Silver price do we use for the 5 year period?? Let's just use the AUD spot price for now of $27.30.

So 2.6moz x $27.30 = $71m revenue per year - total costs ($24.7m) = $46.3m profit per year / 210m shares = 22c EPS x very conservative PE of 5 and you have $1.10 per share.

That's not taking into consideration tax (or the CBH 2% royalty), but this is mainly as I assume there are significant development costs they will be able to claim against net profit (?). Also $1.10 per share provides no value for their resource further than the first 5 years reserve, I suspect CCU will extend the resource and reserves significantly with further drilling.

I don't think CCU will stick around at this share price level when the market realises the potential that CCU has.

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


  1. Only comment I'd make is that a PE of 5 for a company with a 5 year (assumed) resource is probably still high. That is basically just adding up 22c a year for 5 years with no discount.

    Now as you said, there is probably more resource to be worked, so the valuation may well be fine. But just something to watch out for on short term projects. Somewhere around 3.5 might be a better PE in this case if you are not including unconfirmed resources.

  2. intuitivereason, thanks for your comment. I agree that if we were looking at 5 years until mineable resource/reserve depletion then a PE of 3.5 would be more appropriate (which would give a share price valuation of 77c, still almost double current SP).

    My expectation is that CCU will increase both their reserves and resource with further drilling (this assumption is partially built into my valuation). Of course there are no guarantees.



  3. Hi BB,

    I'm a novice investor who wants to know more about investing in mining stocks, particularly precious metals. Do you recommend any books that I could read?


  4. Hi Jimmy

    Can't say that I've read any books that would help towards picking precious metal stocks. I've picked up a lot from reading investment forums & websites, you learn to separate those users worth listening to vs the rampers. A couple of years worth of reading reports and announcements from precious metal explorers and miners has helped also.

    This site might be somewhere to start (at least if you are not familiar with mining terms, etc):

    Another tool which I wouldn't do without is my Gold Nerds subscription:

    This has been a fantastic way of quickly identifying stocks that I should investigate further (if they meet my criteria).

    Feel free to drop me an email if you think I can help or if you have any specific questions, but I would still consider myself a novice after 2 years trading/investing in precious metal stocks.


    bullionbaron at gmail dot com

  5. Thanks Baron,

    I've owned gold ETFs (yeah I know); an Asian copper, gold, and nickel miner/refiner; and Fortescue all over a period over three years. Most of my education has been general, so I appreciate your tips and will keep reading the blog.