CALIDUS RESOURCES (CAI) BACK TO FIRST PRINCIPLES: THE GOLD IS...

CALIDUS RESOURCES (CAI)
BACK TO FIRST PRINCIPLES: THE GOLD IS THERE...


CHALLENGING ANNOUNCEMENT IN A TOUGH MARKET!


The September Operations Update provided some insights into the progress of Warrawoona’s ramp up. While important key milestones have been met, the issue of 20% lower head grade to mill is concerning but we don’t believe it is a fundamental red flag or an insurmountable problem. From a first principles perspective, we believe that this is NOT a geological issue (i.e. the gold is there), the plant has achieved nameplate (and higher) capacity with very high recoveries, the LNG power plant has been commissioned and the labour/mining issues believed to be associated with lower grade to mill are being addressed.

NOT A GEOLOGICAL ISSUE BUT A MINING ISSUE...

100% grade control reconciliation to the resource model is an important milestone. While there has been a 13% reduction in ore tonnes, this will likely have a marginal impact on mining costs (due to exclusion of lower confidence blocks away from main zone). We have a high degree of confidence that there is no fundamental geological issue at Klondyke as CAI’s grade control reconciliation has also been externally verified by an independent third party. Calidus points to labour related shortages (including mandatory isolation due to two Covid incidents) as key driver for lower than budget mining movements, which combined with sub-standard blasting control resulted in excess dilution of grade from in situ to the crusher. These issues are being addressed.


SHOOT FIRST, ASK QUESTIONS LATER...

We believe that the combination of factors, including: (i) memory of major issues with DCN and GCY (where primarily structural geological issues including low grade reconciliation to resource model caused material shareholder value destruction), (ii) teething issues during ramp up at Warrawoona driven by labour shortages, (iii) sub-standard blasting control, (iv) the outstanding $107M Macquarie Bank debt facilities (no covenant breaches and we understand Macquarie Bank remains supportive) and (v) a difficult market environment have caused a number of investors to head for the exit.From a first principles perspective, we note that if CAI's management is right (not a geological problem but a mining one) and grade to mill improves in the next quarter then CAI represents a great value opportunity!


MAINTAIN BUY RECOMMENDATION – TARGET PRICE $1.00

We expect updates during the next months to reflect improved mill head grade of 0.9 g/t and closer to 1 g/t. We have updated our model to reflect the slower than expected ramp up, maintain our BUY recommendation and have reduced our target price to $1.00 per share (previously $1.15), reflecting an implied return of 186%.



Blue Ocean Research Update