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Monday, 29 July 2013
Sacre-Coeur Minerals stands out from other junior miners: Prime Equity Research
Sacre-Coeur Minerals (CVE:SCM) is in a position many average Canadian mining juniors can't even dream of, according to research released Monday by Prime Equity Research, which has assigned a speculative buy rating in a report initiating coverage on the Vancouver-based company.
In fact, the analyst, Vitalie Eremia, wrote in the note that the term "junior" to describe Sacre-Coeur is a bit of a misnomer, in the fact that the company is already producing "some low-cost gold" from an alluvial operation in Guyana, with annual proceeds in the millions of dollars.
Eremia noted that the miner, is, however, quite good at hiding this, booking the proceeds as offsets to exploration costs, as at the same time, Sacre Coeur is developing its Million Mountain Zone 1 resource body in Guyana. "Perhaps this is one reason why it appears underappreciated by the market – it’s not obvious that the company has cash inflows and appears to be an average junior," the analyst took note.
As recently as last month, the gold exploration and development company reported metallurgical test hole results from Million Mountain, saying the results were encouraging in terms of grades. The holes, which yielded in particular 42.8 metres grading 10.56 g/t gold, were drilled to collect samples as part of the feasibility study that is currently underway for the project.
Owing to the positive results of Sacre Coeur's own internal analysis, the company decided last year to move directly to a formal feasibility study, now being done by Tetra Tech, and expected in the third quarter. The report will be followed immediately by a final development decision, as well as by the completion of development financing and the start of construction - should the study lead to a positive result. Commissioning of the mine and plant for production is targeted for the third quarter of next year.
Though the company is already in production in Guyana, boasting all-in cash production costs of less than $500 an ounce at its alluvial/elluvial operations. In a recent interview with Proactiveinvestors, president and CEO Gregory Sparks attributed the reason behind the company's low-cost success mainly to the planned retrofitting of its first production unit, and the addition of a second unit, equipped with a fine gold recovery circuit. The net effect from these changes led the miner to boost its production forecast for the year, to between 6,000 to 8,000 ounces of gold, up from its prior estimate in the range of 5,000 to 7,000 ounces.
"The fact that the company is already producing has huge implications: it allowed SCM to secure gold-backed debt financing several months ago and the company plans to raise additional debt to fund the capital expenditures for its flagship half-a-million ounce project, for which it has commenced (in a fast-track fashion) a feasibility study, expected to be completed by autumn," wrote Eremia.
"Reliance on debt financing has allowed management to publicly commit to limiting shareholder dilution – something an average junior can’t even dream of. If the feasibility study comes back positive (management seems to have little doubt about that), SCM plans to commence a low cost mining operation in the second half of 2014, with a potential of expanding it further, subject to an additional feasibility study."
The Million Mountain Zone 1 deposit hosts roughly 500,000 troy ounces of gold as currently tested, including NI 43-101 compliant measured resources of 12.12 million tonnes grading 1.0 g/t gold, and indicated resources of 2.18 million tonnes grading 0.9 g/t gold. Since this report, the company has drilled an additional 40 holes on the outside of the resource body, with the estimate to be updated as part of the feasibility study in process.
The operation is also expected to be low cost, as the mining plan for the deposit is to be completed in two phases, with the first phase to be limited to the portion that is saprolitized, or the resource from chemically weathered rock. Drilling and blasting is not required to excavate saprolite, and therefore crushing and grinding requirements are less intensive than hard rock. Because of this, Sacre Coeur is focusing on initially exploiting only the upper saprolite layer for 5-7 years, with a separate feasibility study to be commissioned for mining the underlying bedrock after the mining of saprolite has advanced. The company is also working to lower the volume of the down-line processing stream for the property, reducing the size and capital and operating cost for the actual gold recovery system.
It currently envisages producing on average 37.7K ounces per year from the upper saprolite layer at an average cash operating cost of US$386/ounce. Prime Equity is modeling a more conservative cash operating cost of $500 an ounce, plus initial capex of $30 million, versus management’s estimate of $25 million.
The Prime Equity Research report says that though Sacre Coeur is not really a junior, it is not yet a full producer either, and lies somewhere in between, despite being perceived by the market as a junior. The analyst notes nevertheless that Sacre Coeur has smaller risks than other juniors, but cautions that the firm's valuation is speculative at this stage and dependent on the results of the upcoming feasibility study, which "will be the main catalyst for pushing the price up".
“Interestingly, Sacre-Coeur Minerals plans to begin paying out excess cash flows as dividends already in 2015, which is also unusual for junior companies. In a recent presentation, the company stated that around 30% of excess cash flows is planned to be paid out in cash or gold ETF units,” noted Prime Equity’s Eremia, adding that the company has also committed itself to minimizing shareholder dilution.
“This is yet another differentiator from the rest of junior miners, whose only source of financing is typically issuing new shares. Moreover, management has demonstrated its ability to follow through with this plan, issuing gold bonds in January 2013.”
The Canadian junior company, which has stated that capex to put its Million Mountain Zone 1 project into production will be funded by a gold-denominated bond and/or gold streaming or royalty sale, owns about 860 square kilometres of both producing and development-stage properties in Guyana, including another eight targets at Million Mountain, where scout drilling at Zone 9 intersected 0.55 meters of 84.26 grams gold.
Based on its internal analysis at Million Mountain Zone 1, using a base case gold price of $1,500 an ounce, Sacre-Coeur is projecting a net present value of $145.5 million from the project at a discount rate of 5 per cent, and an IRR of 123 per cent. "The economics are quite robust all the way down to $1,000 an ounce of gold," said Sparks.
The equity research firm concludes that the company's shares should be valued at 64 cents, based on its analysis, calling the numbers at hand pretty much "self-explanatory". "Only a very low gold recovery rate or a drop in the price of gold below $1,000/ounce would reduce the target valuation close to the current price level," the analyst wrote.