mining (gold) resumes at ballarat - article

Though the below company profile I wrote for CGT might be of interest.

I wrote it for publication in a resource/mining journal coming out in July. Nothing new to those already onboard, but though it might be helpful for those who have/are looking to take positions today.


Mining resumes at Ballarat - Castlemaine Goldfields (CGT)

In a world where central banks have thrown responsible monetary policy out the window and world governments have been spending like there is no tomorrow, papering over the damage caused by the GFC, there are but a few safe havens for those looking to protect their wealth. Of course the most prominent of those is Gold, a metal whose rare properties have seen it flourish as a wealth protection tool for many thousands of years.

For absolute protection physical Gold is a must, but for those looking to capitalise on Golds rise there is also the option to invest in companies that are exploring for and mining the precious metal. Some Gold mining companies look set to profit handsomely with costs much lower than the spot price of the metal itself.

An investor needs to weigh up the many risks associated with mining companies; one of those is the risk that future government policy will reduce the value of an investment (sovereign risk). While mining costs can be significantly cheaper in less developed countries there is also risk of nationalisation of mines and mineral resources (something discussed recently in Bolivia and South Africa) as well as other changes that could be a detriment to the investor. That is why I prefer to direct most of my capital into Australian based miners.

One of the up and coming Gold mining companies in Australia is Castlemaine Goldfields (ASX: CGT). You wouldn't know it by looking at their name but CGT's flagship project is the Ballarat Gold Project. The project was purchased from Lihir Gold (ASX: LGL) in 2010 for a paltry $4.5m and a 2.5% royalty on production (capped at $50m). $400m had been spent developing the project; the purchase included a 600ktpa plant (designed and installed by Gekko) which has been fully commissioned (removing some of the major risk associated with a start-up producer) as well as a state of the art laboratory, supporting infrastructure, drilling equipment, freehold land and all associated license areas.

Over the months following the transaction CGT sold surplus equipment (given their plans for a smaller operation) totalling $1.95m, covering over 40% of the initial purchase cost.

Capital ($25m) was raised recently in a placement to sophisticated investors at 5c; other shareholders were also offered the opportunity in a Share Purchase Plan. These funds will be used to advance exploration at Castlemaine, Berringa and Tarnagulla. It also provided working capital for the company to resume production at Ballarat during the third quarter of this year.

CGT is targeting 50koz pa from Ballarat with potential to ramp this up to 100koz pa with ore from surrounding regional deposits. Cash costs at Ballarat are anticipated to come in at around $750. Assuming a $950 total cash cost we could see gross cash flow of around $22.5m (using AUD$1400 Gold price), around $15m after royalty and tax (1c EPS). With a market cap around $64m (early May 2010, 4.2c share price) it's easy to see why one could see plenty of value here for the astute investor. With significant investors (top 20) holding close to 70% of the company it does mean liquidity for daily trading can sometimes be lacking, this results in an erratic share price at times.

While CGT have not used LGL's 2007 resource statement for Ballarat (which was 1.5m ounces of Gold at 11.8g/t), they do have a JORC resource at Castlemaine of 686koz. LGL had plans to mine 200koz pa for 20 years from Ballarat, it's likely that the deposits at Ballarat have the potential to supply CGT with Gold rich ore for many year (if not decades) to come.

Significant grades from drilling (by LGL) in the 18th months leading up to the resource upgrade at Ballarat included: 9m at 30g/t, 8m @ 22.7g/t and 4m @ 47.4g/t. Results from CGT in early 2011 have also shown promise with recent results (from Ballarat East) including: 7.8m at 13.8g/t, 5.5m at 61.4g/t, 8.8m @ 9.2 g/t and 12.7m @ 7.1 g/t.

Mining has just commenced with the company expecting first ore to be intersected in the next few months (which will lead to first Gold production). Investors are clearly cautious about the potential at Ballarat with the share price languishing. This is not unexpected given LGL's failed attempt with the project, but Matthew Gill (MD & CEO) was recently quoted saying, "We're not targeting the same mining rate (as the previous owners). We're more measured and going to let the geology direct where we take it". With the right plan and people in place I think there is a good chance that Castlemaine Goldfields will succeed where others have failed.


Bullion Baron
www.bullionbaron.com

Disclosure: Stock in Castlemaine Goldfields held at the time of writing article.