pattersons initiate buy recomendation

Hope this of interest to all current and future holders.

RESEARCH NOTE � PATERSONS SECURITIES LIMITED 1
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
RESEARCH NOTE
Phoenix Gold Ltd
Investment Highlights

Phoenix Gold Ltd (PXG) is a Kalgoorlie-based gold exploration company, which listed on the ASX in December 2010 after raising $8m in an IPO to fund exploration on gold properties near Kalgoorlie in Western Australia. PXG has an experienced management team in place and is targeting a 50% increase to its global resource inventory of 977,000oz, within 12 months. The company has commenced drilling at the Kunanalling and Grant�s Patch projects, which are located along strike from several +1Moz deposits. We expect exploration momentum and forthcoming drill results will drive the fortunes of PXG in Q1 CY11.

High impact exploration underway. A 7,500m RC drilling programme has commenced at the Rayjax and Outridge projects on the Kunanalling shear and at the Backflip discovery at Grant�s Patch, 60km NW of Kalgoorlie. Despite excellent access, the region is underexplored at depth. Previous drilling within PXG�s tenure (455km) has generally been shallow, clustered drilling to an average depth of 50m. Extension drilling will target high-grade gold mineralisation at depth and along strike of known deposits, with significant potential for �high impact� intercepts. It is the first stage in a 2 year programme which will target new discoveries and extensions to existing mineralisation. Initial assay results are expected in 4-6 weeks.
Right address. PXG is drilling within close proximity to the +4Moz Kundana Gold camp (Barrick Gold Corp), the +1Moz Frog�s Leg deposit (Avoca/La Mancha), the 1Moz Ghost Crab deposit (Avoca), the +1Moz Enterprise deposit and the 4Moz Mt Pleasant field (Norton Gold Fields). The Kunanalling and Grant�s Patch projects are located within trucking distance of several established processing facilities (45km from Coolgardie) and within close proximity to major infrastructure and haulage roads. We note that several nearby mills offer PXG potential for early cash flow with toll-treating oxide ore.

Resource upside. The Kunanalling and Grant�s Patch projects will form the bulk of PXG�s resource development over the next 12 months, due to the number of high priority targets identified in these project areas and the shallow depth (5-15m) of existing mineralisation. PXG is undertaking a review of five geological databases (16,000 drill holes), which last year identified more than 40 historical projects and prospects which merit further assessment. This review will likely be an important avenue for PXG to identify additional exploration targets and achieve critical mass, increasing the present resource inventory of 977,000oz of gold by 50%.

Investment thesis. PXG emerges in Q1 CY11 as a promising resource definition play in a proven gold camp. With $3m in cash post this round of drilling being completed in Q3 CY11 (budget $2m) and a market capitalisation of $14.9m assuming the full vesting of the Directors shares, the implied EV/Resource valuation of $10/oz, sits comprehensively at the bottom of our range (page 5). We note that the ongoing database review is likely to identify additional targets for drilling in CY11 and we anticipate steady news flow, with initial assay results expected in 4-6 weeks.

Catalysts. (1) Exploration momentum with positive drilling results expected in late January/February, (2) extensions to mineralisation along strike and at depth at Kunanalling and Grant�s Patch, (3) resource update expected in Q4 CY11.
20 January 2011
Speculative Buy
RIC: PXG.AX
BBG: PXG
Issued Capital
m
78.95
Price
A$
0.19
Market Cap.
A$m
14.9
Net Debt/Equity
%
Na
Cash
A$m
5
Feb 2012 Options
m
36
Nov 2014 Options
m
36
Analyst:
Michael Lovesey
Phone:
(+61 8) 9263 1297
Email:
[email protected]
Board and Management
Dale Rogers, Non Executive Chairman
Clay Gordon, Non Executive Director
Jon Price, Managing Director
Ian Copeland, Geology Manager
Disclaimer:
Patersons Securities acted as Lead Manager to PXG�s IPO in December 2010. Patersons received fees for this service.
Drilling underway, 1.5Moz target
20 January 2011 Phoenix Gold Ltd
Background
Phoenix Gold Ltd (PXG) listed on the ASX in December 2010, raising $8m in an IPO, with funds to be directed to exploration at gold properties near Kalgoorlie in Western Australia. The majority of the exploration tenements were acquired from Cazaly Resources Ltd/Hayes Mining Ltd after Phoenix acquired Hayes (a wholly owned subsidiary of Cazaly) in June 2010. These were then consolidated with the tenements acquired from Blackham Resources, Maincoast and PXG�s own tenements.
Other than resource data reviews and wide-spaced shallow drilling, limited work has been carried out on the properties in recent years. PXG will focus on three main projects - Kunanalling, Carbine-Zuleika and Ora Banda-Grant�s Patch.
The Kunanalling project straddles the Kunanalling shear zone and contains gold resources of 461,000oz, within four deposits. The Carbine-Zuleika project is adjacent to the Zuleika shear and contains gold resources of 197,000oz, within three deposits. The Ora Banda-Grant�s Patch project contains gold resources of 300,000oz, within three deposits. PXG is undertaking extension drilling in Q1 to expand known mineralisation at Kunanalling and Grant�s Patch, targeting a resource upgrade to 1.46Moz in CY11.
Figure 1: Phoenix Gold Tenement and Project Plan
Source: PXG
Capital Structure
PXG has 78.95m shares on issue and 36m options (PXGO) exercisable at $0.20 before 28 February 2012 and 36m options (PXGOA) exercisable at $0.25 before 30 November 2014. PXG is fully funded for exploration in CY11 with circa $5m of cash.
Directors Dale Rogers and Jon Price are major shareholders in PXG, each holding an 8.8% interest in the company. Both have entered into performance agreements with shares held in escrow pending the achievement of milestones. This includes delivering an inferred mineral resource of at least 1.46Moz of gold within 18 months of listing. As per the prospectus, PXG intend issuing 6m options, subject to shareholder approvals, to both Price and Rogers to replace shares they surrendered prior to the IPO.
RESEARCH NOTE � PATERSONS SECURITIES LIMITED 2
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
20 January 2011 Phoenix Gold Ltd
Strategy - Targeting 1.5Moz in a proven gold camp
PXG�s stated objective is to increase the resource inventory at the three Kalgoorlie projects from 0.98Moz to 1.5Moz of gold by the end of CY11. This will involve 7,500m of RC drilling and a review of existing geological data. The projects include 16 individual deposits and several stockpiles from previous mining activities in close proximity to several multi-million ounce gold deposits. This includes the +4Moz Kundana Gold camp, the +1Moz Frog�s Leg deposit, the 1Moz Ghost Crab deposit, the +1Moz Enterprise deposit and the 4Moz Mt Pleasant field. These projects are owned by Barrick, Avoca/La Mancha, Avoca and Northon Gold Fields.
Resource extension drilling is underway to expand resources at the Kunanalling and Grant�s Patch projects (Rajax, Outridge and Backflip deposits) and a review of five geological databases is in progress (16,000 drill holes). We note that this will likely be an important contribution towards PXG reaching 1.5Moz of gold resources and generating new drill targets.
Early cash flow opportunities, an operational scenario
Various toll-treating opportunities exist for Phoenix with a number of mills in the region, where a scenario is for the company to deliver oxide ore (circa 1g/t Au from old stockpiles, up to 3g/t Au from shallow oxide pits) to these mills. We note that the economics of such an initiative could see 10-15koz of gold mined over the course of the year, which at the current gold price (circa US$1,350), would likely generate meaningful positive cash flow (15koz at US$1,350 = US$20.3m).
Figure 2: Phoenix Project Locations
Source: PXG
Figure 3: Shallow Drill hole plan � Average drill depth of 48m
Source: PXG
RESEARCH NOTE � PATERSONS SECURITIES LIMITED 3
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
20 January 2011 Phoenix Gold Ltd
Extension drilling to bolster resources
The Rayjax deposit is 20m below the surface and mineralisation is open in all directions. Highlights from previous drilling included 2m at 87.8g/t Au, 6m at 6.5g/t Au and 3m at 8.9g/t Au.
The Backflip prospect is a relatively new discovery at surface and mineralisation is open at depth. Highlights from previous drilling included 9m at 16.0g/t Au, 19m at 13.2g/t Au and 12m at 2.7g/t Au.
The Outridge deposit forms part of the Castle Hill project (Kunanalling) and is within 15m of the surface. Highlights from previous drilling included 9m at 5.4g/t Au, 10m at 3.9g/t Au and 22m at 1.4g/t Au.
We note that in the company�s presentations the Directors have expressed confidence in their ability to secure much of the additional 0.5Moz in resource through reworking of five databases over the next six months. This news flow, in conjunction with the physical drilling will likely augment resources to +1.5Moz. The Castle Hill project is likely to rank highest in the company�s priorities for developing its first mine.
Figure 4: Rajax Deposit
Figure 5: Backflip Deposit
Source: PXG
Figure 6: Phoenix Resource Estimate
Phoenix Gold � Summary of Mineral Resources
Measured Mineral Resource
Indicated Mineral Resource
Inferred Mineral Resource
Total Mineral Resource
Project
Mt
Au
g/t
Au oz
Mt
Au
g/t
Au oz
Mt
Au
g/t
Au oz
Mt
Au
g/t
Au oz
Kunanalling
0.67
2.7
58,000
2.13
1.5
106,000
6.14
1.5
297,000
8.94
1.6
461,000
Ora Banda -Grants Patch
0.75
1.6
38,000
4.57
1.8
262,000
5.32
1.8
300,000
Carbine �Zuleika
0.51
2.5
40,000
2.21
2.2
157,000
2.72
2.3
197,000
Stockpiles
0.50
1.2
19,000
0.50
1.2
19,000
Total
0.67
2.7
58,000
3.89
1.6
203,000
12.93
1.7
717,000
17.5
1.7
977,000
Note: Stockpiles report material mined from historical mining operations at Lady Jane, Broads Dam, Premier, Catherwood, Buebell, Mick Adam and Shamrock.
l
Source: PXG
RESEARCH NOTE � PATERSONS SECURITIES LIMITED 4
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
20 January 2011 Phoenix Gold Ltd
RESEARCH NOTE � PATERSONS SECURITIES LIMITED 5
All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility
or liability on any account whatsoever on the part of this firm or any member or employee thereof.
Valuation Commentary
Our valuation metrics highlight PXG as an early-stage investment opportunity with exploration upside. We expect the current drilling programme will provide steady news flow over the next 12 months, prior to the resource update expected in Q4. The company is well within the lowest quartile of comparable peers (selected ASX-listed gold companies) and with the market capitalisation of $14.9m, we view PXG as a cheap option on commercialising ounces in a proven gold camp with major infrastructure and processing facilities.
Figure 7: Phoenix EV/Resource oz
Source: PSL
Moving forward
Phoenix went to the market with an apparent low market capitalisation, inclusive of total Director shares that are subject to a series of performance criteria including;
1) JORC-compliant resource ounces increase by 50% from IPO level; (1m shares each, or 2m in total)
2) 100,000oz converted to reserve supporting a three-year mine plan, (2m shares)
3) Doubling market capitalisation from date of listing (2m shares)
The Directors at PXG clearly entered into this arrangement with a great deal of confidence where;
1)
A share price of 40 cents implies an EV/resource valuation of $17/oz at 1.46Moz.
2)
A resource of 1.46Moz implies a valuation of $6/oz at the 19 cents share price.
The issue of short dated February 2012 options in the IPO provides a direct link to future funding where the exercise of 36m February options at 20 cents will inject $7.2m at a point in time when the company could be expected to have plenty of momentum. The