Thursday, 28 July 2011

Soho Resources aims to deliver with key Durango gold project

Soho Resources (CVE:SOH), the Mexico-focused miner of gold, silver and base metals, has taken the fancy of broker Objective Capital, which believes that having emerged from an especially tough economic downturn with renewed vigour, the company is well placed to press ahead with its promising projects.

For Will Purcell, analyst at Objective Capital, the group’s key Tahuehueto polymetallic project in Durango, Mexico in particular offers considerable scope for upside.

In a detailed note on the company, Purcell notes Soho has already delineated a “substantial mineral” resource of gold, silver, zinc, lead and copper in several zones along a large principal structure at Tahuehueto.

A preliminary economic assessment (PEA) last year, meanwhile, yielded “robust economics”, according to Purcell. Recently Soho commenced data collection at Tahuehueto to support a prefeasibility study for a potential open pit and underground mine for the site.

The Tahuehueto project currently hosts a measured and indicated mineral resource of 7.38 million tonnes, averaging 2.1 grams of gold and 35 grams of silver per tonne, as well as 2.01 per cent zinc, 1.06 per cent lead and 0.28 per cent copper.

The deposit hosts a further inferred resource of 4.87 million tonnes, averaging 1.06 grams of gold and 31.8 grams of silver per tonne, as well as 2.26 per cent zinc, 1.23 per cent lead and 0.23 per cent copper.

Purcell says the potential for further discovery at Tahuehueto remains “excellent”. Indeed he is optimistic enough to have added 7 million tonnes of hypothetical mineralisation into his model for the prospect.

The PEA, meanwhile, has indicated an internal rate of return of 31 percent and a 27-month
payback, based on capital costs of US$89 million. It also projected cash flow over the life of the project at US$184.2 million, or US$109.6 million when discounted at 5 per cent.

The study contemplated a processing rate of 2,750 tonnes per day, well in excess of Purcell’s initial 2,000-tonne-per-day estimate as a result of the incorporation of an open pit plan.

The analyst also notes that the economics were achieved using conservative metal prices –“considerably lower” than currently prevail. He adds: “The potential for higher metals prices provides significant upside potential.

The economic assessment is, of course, even more robust, if current metal prices are factored in.

According to Soho management calculations, using spot metal prices as of February 16, 2011, the internal rate of return for the project jumps to 56 percent and the net present value (discounted at 5%) rises to US$300m, with capital cost payback within just 1.5 years.

Soho recently began prefeasibility drilling at Tahuehueto, with the programme designed to provide infill drill data as well as geotechnical information for the prefeasibility study. The drilling and data collection phase of the prefeasibility programme will take an estimated four months.

With the engineering and analysis of the data likely to require a further four months, Purcell believes Soho, potentially, could be in a position to complete its prefeasibility study in early 2012.

There are positives for Tahuehueto also on the all-important issue of infrastructure. The Mexican government is constructing a new paved, two-lane highway that connects northwestern Durango State with Tamazula and Culiacan, and to the Pacific coast via a more direct and easier route than previously existed.

Soho’s previous plan involved transport of its concentrate over a 185-kilometre gravel road requiring extensive upgrading, and from there another 400 kilometre haul to a smelter in Torreon. Purcell says the new route will pare nearly 200 kilometres from the distance and require significantly less capital cost.

Another bonus to the new route is that it will place Tahuehueto within closer reach of Durango’s power grid, which is currently about 30 kilometres distant. Soho had initially contemplated acquiring power from Tepehuanes, nearly 200 kilometres away.

While the fundamentals for Tahuehueto look appetising, Purcell notes that successful fundraising by the company will be key to enabling the company to advance the project.

The analyst says: Soho requires more cash within the next several months, if it is to stick to its prefeasibility timetable. Management has indicated that successful completion of a private equity placement sufficient to cover costs of the study is an immediate priority.”

Judging by the positive reception received by Soho’s previous placement, Purcell believes the company is very well placed to raise the necessary funds. He points out also that the company’s cash requirements are “modest” in the short term.

Although Tahuehueto remains Soho’s primary focus, the company is also looking to advance its Jocuixtita silver project in Sinaloa, Mexico, acquired in 2009. It intends to continue exploration at Jocuixtita concurrently with development of Tahuehueto.

Soho is proposing a C$0.4 million budget for the first phase of its Jocuixtita silver project, where due diligence sampling has already yielded assays of up to 867 grams of silver per tonne, with encouraging levels of gold, lead and zinc.

Purcell says the samples suggest silver accounts for 50% of the potential rock value at Jocuixtita, with zinc and lead also major contributors.

The company has already begun its first phase of exploration at Jocuixtita, with the programme including geological mapping of exposed mineralisation and drilling.

Soho, like many other resource stocks had a tough time during the depths of the recession and indeed was forced to place projects on care and maintenance for a period. Funding requirements in such a climate inevitably led to a significant shareholder dilution.

The dilution has had a negative impact on Purcell’s valuation for the stock. But the very strong recovery in metal prices since mid-2009 to at or near all-time highs and lower interest rates have helped moderate the impact of dilution more recently.

“Should metals prices hold near current levels or continue to rise, the value ascribed to Tahuehueto would increase significantly,” he says.

Based on these developments, and analysis of the company’s project funding requirements, Purcell has now increased his valuation of Soho Resources from C$0.35 to C$0.47 per share. That amounts to “quite an encouraging result given the substantial shareholder dilution incurred since mid-2009”, he says.

In fact, his more optimistic assessment, which assumes higher probabilities of exploration
success, increases to C$0.63 from C$0.44 per share.

Looking further out, Purcell notes that the upside potential of Soho becomes more apparent at future stages of development. Assuming success at all stages through feasibility and permitting, his base-case and most optimistic valuation assessments rise to C$1.10 and C$1.59 respectively, compared with our earlier estimates of C$0.85 and C$1.22 respectively.

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