aqq- aphrodite gold. ipo of the year

I recently took a chunk of the Aphrodite gold IPO and thought id share my thoughts/opinions on the stock. After sifting through the details with a fine comb and given the current AUD gold price I am confident Aphrodite should be one of the IPOs of the year.

BACKGROUND TO APHRODITE
- The Aphrodite gold project was sold to Apex minerals from Barrick in 2007 for $7m. At that time the JORC compliant resource was 287,000 and AUD gold price of approx $800
- Struggling under a mountain of Debt, Apex was forced to sell the project late in 2009 and Aphrodite picked up the asset for $6.5m (funded from seed capital). Whilst this may seem a modest discount for a distressed asset, AUD gold price had since rallied to over $1100AUD in the same time period.
- In May 2010 Aphrodite announced an $ 8-10m IPO to further explore and develop the project. AUD gold is now close to all time highs at $1500 per ounce and more significantly the company was able up up the JORC resource almost 400% to 983koz

LEVERAGE TO THE $A GOLD PRICE
- Whilst we dont have figures yet, we can assume Aphrodites cost per ounce will be on the higher end of the scale vs peers. This is the result of two factors:
o The gold is being extracted from refractory ore bodies which can be an expensive process because of the heat resistant nature of the rock. Barrick has successfully overcome the same problem at the Kanowna Belle mine 50km south.
o Low grade nature of the resource (averaging 1-4g/t)
- Many investors dismissed Aphrodite on the two reasons above, HOWEVER, if you believe in the gold story, then a higher cost producer simply provides better leverage to the underlying gold price. For example:
$A Gold = $1000 per ounce
Producer XYZ costs @ $200/oz = $800 margin p/oz
Aphrodite costs @ $800/oz = $200 margin p/oz

Now lets take the current scenario of $AUD Gold at $1500 per ounce, lets see what happens.
XYZ margin p/oz rises from $800 to $1300. An increase of 62.5%
Aphrodite margin p/oz from $200 to $700. An increase of 350% increase
Leverage is a double edged sword so dont invest if you dont believe the gold story. Risks associated with Aphrodite are far greater than the hypothetical XYZ and the project wouldnt remain feasible with AUD gold $900 or below meaning a lower safety buffer.


CAPEX
Wayne Ryder has stated his intention to utilise existing mills nearby to process initial ore as several have excess capacity. If Aphrodite can grow its resource enough they will probably look at their own mill but having the option allows Aphrodite to get some cash in the bank early on with minimal capex (also reducing the chance of a new equity issue).
Room for reserve upgrade
Numerous statements throughout the prospectus hint that a significant reserve upgrade is imminent:
Previous work on the Alpha lode, including historic drilling, assumed the strike length of this gold lode was limited to 430 metres. However, the Independent Geologist states in its Independent Geologists Report, that the Alpha lode may have a total strike length of up to 1,400 metres

Primary mineralisation at Phi extends for at least 450 metres along strike and recent modelling indicates the strike length of the Phi zone may be approximately 1,800 metres

983k JORC is a HUGE resource for a company with a market cap of only 27.5m. I have spoken to a couple of geologists who have gone through the prospectus. They would be disappointed with anything less than double the current 983koz within 12 months   


Smart Money
Mark Creasy is Australias most prolific gold investor. He has used his gold mining prowess to build a personal fortune of over $300m. Mark is personally investing $3.5m into Aphrodite which represents over 35% of the whole IPO. Now thats a vote of confidence.

The IPO closed early and oversubscribed. This alone is a great indication of the interest in the stock. Whats more impressive is Aphrodite being able to generate this kind of interest in what has been the worst few 3 months for the equity market since the market bottomed in MAR 2009!!
Peer comparison and Price Target
In order to compare Aphrodite to other junior explorers, I have taken the enterprise value (EV) of the stock, and divided it by how many JORC ounces

With a confirmed 983k JORC and EV of $20m (market cap 27m -7m Cash) Aphrodite has an EV/JORC oz of $8, Significantly below peers. This is what we are paying per ounce of gold in the ground. As mentioned before I am confident the reserve will increase and the cost per ounce will drop even further.
Have a look at the table below and you can see how much of a bargain it really is.




Aphrodite will always trade at a discount to these other larger names given its junior explorer status however I think this is far too great of a discount. Given its probable reserve upgrade, using this valuation ratio, I believe Aphrodite is a strong buy up to 40c alone. This would mean around $16 per oz before reserve upgrade, still a hefty discount. Remember AQQ can transition from explorer to producer with minimal capex!

Anyway this is just my analysis DYOR......Hold onto your hats ladies and gentlemen I think this one is going t FLY!!!!!!!!!!!!! :):):)