I looked at the CMM annual report yesterday and did some other...

I looked at the CMM annual report yesterday and did some other follow up work and like what I see.

No, I am not the reason for today's substantial one day share price increase, but hey maybe some people have been examining the report and also like what they see.

To summarise my view.

CMM is a junior gold mining company which in late June started producing from its Karlawinda project in WA. This looks like an excellent project. It has a 1.2 million ounce reserve and a 2.1moz resource and would appear to be a low risk, high return mine. CMM have estimated an All in Sustainable Cost (AISC) per gold production of A$1140 to A$1190 per ounce. Compare that to the current Australian dollar gold price of around $2400 per ounce and we see a big safety margin against a falling gold price and a very high profit margin. The mine should produce 110,000 to 125,000 oz per annum for ten years plus.

The nature of Karlawinda makes it easy for mining. It is very flat land with little vegetation and consistent grade. It is an open-bulk pit mining operation with a conventional processing CIL circuit. CMM has implemented a significant grade control drilling programme and found no problems. It is expected that the current production ramp-up should result in few hiccups.

Macquarie bank lent CMM $200m to develop the mine. Macquarie is one of the smartest lenders in Australia. As a result of the loan CMM has entered into a 200,000 oz gold hedging arrangement at a flat forward price of A$2,250/oz.

Management have a history of successfully building and running Regis Resources, one of Australia's biggest gold companies. They have substantial skin in the game owning around 10% of CMM and recent large share purchases exude confidence in CMM's future. I understand the management team is well known for running lean operations and adopting creditable accounting policies. CMM management have developed Karlawinda on time and on budget.

In late July, CMM announced the acquisition of the Mt Gibson Gold project for approximately $40 million. The Mt Gibson Project has an inferred resource estimate of around 2.1 moz based on assessment of historical drilling in the region. The acquisition multiple of A$20/oz is very attractive although the grade is lowish around 0.8g/t. I understand gold resources are generally valued at around A$50-150/oz, especially for resources that are close to production or existing infrastructure as is the case with Mt Gibson which is 280km from Perth.

The process going forward is, as Karlawinda generates cash (about $5m a week) much of this can be used to develop a mine at Mt Gibson over the next two years, hopefully without the need for further loans or capital raisings. If Mt Gibson can turn out to be as good as Karlawinda we could expect a significant rerate in CMM's share price. From a recent podcast there is a belief from CMM management it can turn out that way.

CMM will be doing explorative drilling around Karlawinda and Mt Gibson to prove up further gold. I consider there is significant potential to delineate 'a new mining frontier' over the next 18-24 months. This would also lead to a significant rerate of the CMM share price.

Many junior gold miners have a significant Gold ETF shareholder presence on their register (up to 10 per cent of the issued capital). As Capricorn enters steady production, there is strong consideration for index inclusion over time. Should CMM be eligible for index inclusion over time, there may be considerable demand from passive investors that may help share price performance.

Mt Gibson seems an attractive acquisition and we will learn more about this resource as time goes on. What we learn should be good for the CMM share price: For example,- there is a significant inferred resource which hopefully will be proven up with infill drilling in a known gold region. From reading other commentaries there are some very interesting drill intercepts within and outside the existing resource shell – including 16 metres @ 62g/t Au at 114 metres which is classified as very close to surface. The existing pit is shallow at around 50-100 metres in depth, so fewer dollars required to recommence production in the pit.

So what is CMM worth currently. Well my calculations suggest around $900m which is close to its market cap (adding in net $90m debt to the 368m shares x $2.26). However, my calculations do not include anything for Mt Gibson, and assume no further gold discoveries by CMM at Karlawinda or Mt Gibson. Also it assumes a gold price of A$2400 over ten years and an ASIC of A$1190. It is more likely the gold price will be higher over the next ten years and CMM management have hinted they may be able to reduce the ASIC which right now is just an estimate. I do note that the gold hedging for 200,000oz at $2250oz is at a price lower than my assumed A$2400 over ten years. In short, my calculations are very conservative re length of mine life, production levels etc.

The risks to CMM are a much lower price of gold, Mt Gibson turns out to be a dud and management execute poorly from here. I dont think any of these risks are likely to occur.

On the positive side, Karlawinda looks like an excellent resource, worthy of the current share price on its own. Management look skilled and keen, I like the Mt Gibson potential, both mines are in Australia, CMM could be a takeover target and CMM does not need the gold price to shoot higher to turn out to be a multi bagger from here. Of course, if gold does shoot higher then...........

In summary, keen on CMM but it may take time.