PROMISING JUNIOR PLAYS NOW WORTH THIER WEIGHT IN GOLD FOR...

PROMISING JUNIOR PLAYS NOW WORTH THIER WEIGHT IN GOLD FOR INVESTORS.

JUNIOR gold companies with near-term production potential are the flavour of the month. It
makes sense too because, while the gold price has remained strong, gold equity values have yet to
shake off the wobbles that came with the broad sell-off in resources stocks way back in April last
year.
So the idea is that gold equities are better value than they were, particularly as it is near impossible to
find anyone to tip a major decline in the yellow metal, as the world's paper money printing presses
work overtime and look as if they will continue to do so for as long as it takes, as US Federal Resource
chairman Ben Bernanke has made clear.
North American, German and Swiss investors have caught on to the idea. But they do insist that their
dollars, euros and francs only go into junior gold equities with "turnkey" potential, to take advantage of
bumper gold prices by being close to production, having completed all the boring stuff of discovery,
delineation, permitting and ideally, financing.
Apart from an absolute desire to park funds in assets with haven appeal in times of financial turmoil,
there is the added appeal of acquiring something that is still being priced in light of the April 2011
sell-off rather than the here and now of a gold price that is up 12 per cent on last year's average and 470
per cent higher than its 2002 average, if you don't mind.
All this was touched on in this column on September 5 with the item on Millennium Minerals (MOY),
ahead of first production from its Nullagine project in Western Australia. First production is meant to
happen any day now and, in the meantime, MOY shares have moved up from 2.5c to 3c. It doesn't look
a big deal until it is remembered that is it is a 20 per cent gain in under three weeks.
But today's interest is in another "turnkey" gold stock, the Mexico-focused Cerro Resources (CJO). It
too has got a wriggle on this month, moving up from 7c to 10c, a gain of 43 per cent.
Its Cerro del Gallo gold-silver project in central Mexico, about 20km northeast of Guanajuato city, is
pretty much ready to go in a country which, surprising to some, could show Canberra a few things on
how to encourage mining investment through stable fiscal and permitting terms. A first-stage
heap-leach development could see Cerro in production in the first half of 2014.
Like existing Mexican heap leach projects, the production cost at Cerro del Gallo is expected to be as
competitive as they come. A feasibility study estimated average annual production of 95,000 ounces of
gold equivalent at a cash cost of $US516 an ounce or $US840/oz after depreciation and royalties.
Mine life at 7.2 years is nothing to write home about but, with a payback on capital of 2.7 years (using
a trailing three-year average gold price, which is well short of current prices), the first-stage heap leach
development should be seen for what it is -- a derisking event ahead of the mine life being pushed out
to 14 years or more from the second-stage development of a carbon-in-leach /heap leach mill expansion
from about year five of operations, funded out of cashflow from stage one.
Before all that, there will need to be some clarity on whether Cerro will own 68 per cent of the project
as it does now, or whether it moves to 90 per cent over time on the dilution of the 38 per cent owned by
Canadian gold heavyweight Goldcorp.
Goldcorp is on its way to 4 million annual ounces of production at other projects, so the betting is that
the 32,000oz from Cerro del Gallo is not exactly front of mind.
But until Goldcorp flags otherwise, Cerro is being valued on its 68 per cent cent Cerro del Gallo
interest. Clarity around that is expected next month, when Goldcorp has to make a call on maintaining
its interest or letting it dilute to 10 per cent interest. Once that is cleared up, Cerro will be able to put in
place its debt/equity funding package for the first-stage development.
BARRY FITZGERALD THE AUSTRALIAN SEPTEMBER 26, 2012 12:00AM
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Given the expected quick payback of capital, as much debt as possible will be the go, with a bit of
hedging at these higher metal price levels if required. Once that is locked in, Cerro should be on its way
to becoming a producer. The company's share price got as high as 36c 18 months ago, so the potential
for a rerating on the October event is clearly worth watching.