eureka report - the speculator

PORTFOLIO POINT: We reshuffle our holding in emerging gold producer Cortona Resources as it lines up a development deal with an experienced underground miner.


Portfolio stock Cortona Resources (CRC) this week announced the signing of a memorandum of understanding (MoU) with Perth-based underground mining specialist, GBF Mining and Industrial Services Pty Ltd, to mine its Dargues Reef gold deposit in NSW.

This is an important step in the development of the Dargues Reef project, 63 kilometres south-east of Canberra, where a positive feasibility study indicates an initial base case for a mine producing 50,000 ounces a year of gold plus silver credits.

The feasibility study, presented to shareholders at the end of last year, targets mining 330,000 tonnes of ore a year with a head grade of 5.1 grams a tonne (g/t) to yield 248,900 ounces of gold plus 73,144 ounces of silver over an initial six-year mine life.

That would yield revenue of more than $300 million based on a conservative gold price of $1250 an ounce and a low cash operating cost of $628 an ounce. Importantly, the feasibility study excluded various satellite discoveries near the mine and other near-mine targets, with potential to significantly extend the project and its current ore bank.

With the arrangement signed this week, both parties will contribute expertise to mine planning and management, driven by an incentive scheme that will reward the contractor on performance indicators based on safety, production and costs.

Cortona managing director Peter van der Borgh believes the deal will deliver a range of benefits to his company, including access to top-quality personnel, maximised performance, reduced operating costs plus availability to tried and tested systems from start-up.

Contractor to inject capital funds

As part of the incentive arrangements, GBF Mining will subscribe for between $1 million and $2 million of shares in Cortona at a price to be agreed upon at the date of execution of binding agreements.

GBF Mining was formed in 1995 and has since successfully completed contacts valued at more than $1 billion in 20 different underground mining operations. The company has about 450 employees across five underground mines in Western Australia and the Northern Territory.

The owners and operators of the business ? Michael Foulds and Ross Graham ? have been in the mining industry for more than 25 years. Foulds holds a degree in mining engineering and a first-class mine manager?s certificate. Graham began work as an underground miner on the Eastern Goldfields of WA at the age of 18 then established his own independent contracting business in the 1980s before joining Foulds to found GBF in 1995.

Among their many achievements, GBF in 2001 acquired a mothballed nickel asset from WMC, successfully relaunched underground operations and continued to operate the mine until 2007, at which time it was sold to Mincor Resources.

The new funds to be injected into Cortona will be a welcome addition to cash resources. At the end of the December quarter, Cortona held $6.68 million cash with expectations that expenditure on exploration and overheads in the latest March quarter would run that down by $2.05 million.

Cortona shares have traded between a 12-month high of 28? and a low of 12.5?. With 196 million shares on issue, and sales today at 16.5?, the company carries a market capitalisation of $32.34 million.

Issued capital was boosted last October through a placement of 25.5 million shares at 17? to clients of Perth broker Hartleys, to raise $4,335,000.

The new capital was aimed at furthering exploration on Cortona?s wider 700 square kilometre Majors Creek gold project surrounding the Dargues Reef mine site. Majors Creek is the largest historic gold field in NSW, having yielded 1.25 million ounces of alluvial gold since the mid-1850s. Only about 2%, or 30,000 ounces, has come from underground workings, where the deepest shaft the old-timers sunk went down to only 67 metres at Dargues Reef.

Since that capital raising several significant near-mine targets have been drill-tested with most encouraging results, but they are yet to be added to an updated resource base. Among the most promising has been the Ruby lode, discovered 150 metres north of Dargues, with a best intersection of 12.6 metres of 9.9g/t gold.

Cortona also has on issue 34.4 million listed options exercisable at 20? by January 31, 2012. The Speculator held 50,000 options at an average cost of 5.3? early last year and sold half in April 2010 at 12?. In the past week I?ve sold the rest at 5? since, in common with all of Cortona?s existing unlisted options, they are all ?out of the money? with exercise prices above the current share price.

Nevertheless, to stay with this promising company, we?ve switched to a small shareholding, bought this week at 16.5? a share, and will look to top that up in any forthcoming capital issue.