intelligent investor re-iterates cah spec. buy

an interesting post yesterday from the highly respected "intelligent investor" mining analyst gaurav sodhi ...

CATALPA - SPECULATIVE BUY
6 Oct 10 | Issue 306
By Gaurav Sodhi

Most analysts have one thing on their minds when evaluating a prospective gold miner; grade. Generally speaking, higher grade ores are not only more profitable, they also offer greater protection from the menace of a fluctuating gold price. So when a prospective miner shops a new deposit with low grades (just above 1 gram per tonne, for example), scepticism is a natural response. And its one Catalpa Resources has become accustomed to. For many years, Catalpa struggled to find funding for its large, low grade Edna May open pit mine in WA as investors approached low grade mines with caution.

Two things have changed to turn investors from wary to willing. Catalpa has expanded the processing facilities on site to generate useful economies of scale and, of course, higher gold prices have helped shake investors out of their apathy.

The Edna May mine may be lacking in grade but, partly due to an attractive hedging deal that locks in an astonishing price of A$1,557 per ounce for about 350,000 ounces of gold, the cash margin Edna May will generate makes it one of the highest margin new mines in the country. Simple geology and a shallow orebody also bode well for a smooth-running mining operation.

Edna May is currently ramping up production and well be watching its operating performance closely. Low grade mines, even at attractive margins, demand strong cost control. This remains a very real risk.

At Catalpas other producing asset, the 30%-owned Cracow mine in Queensland, reserves have been upgraded and production appears as steady as it always has. This is a prize asset that Catalpa surely has its eye on. Majority owner Newcrest Mining has probably outgrown the 100,000-ounce-a-year Cracow operation and may look to divest it over the coming years. That potential makes smooth sailing at Edna May rather crucial; Catalpa has a war chest to build.

We estimate a value of about $1.85 for Edna May and a further 50-60c for the 30% stake in Cracow (ignoring growing reserves and higher grades that are likely from an underground operation at Edna May).

The stock is up more than 28% since 30 Apr 10 (Speculative Buy - $1.60) and weve bumped up our recommendedation guide to account for the companys progress. For now, Catalpa remains a SPECULATIVE BUY for no more than 1% of your portfolio (and a maximum weighting of 2% if youve purchased at lower prices and are sitting on handy gains).

Disclosure: The author, Gaurav Sodhi, owns shares in Catalpa Resources.