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Minera: Good news from Peru – cheap but are there cheaper gold plays?

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AIM, Canada and Peru-listed gold mining stock Minera IRL (LSE:MIRL) has today announced the results of a feasibility study on its Ollachea project in Peru. This is a company I have followed for a couple of years on t1ps.com and more recently on my own blog and which I have recently written about in a modestly bullish way twice – with the share price lower than it is today. The following reviews the feasibility study announcement and its implication on the current investment case…is it still a good share tip?

© Image copyright randa

The study has derived a post-tax Net Present Value, at a 7% discount rate and $1,300 gold, of $155 million. At $1,600 gold this increases to $258 million. These are based on a nine year mine life producing an average of 113,000 ounces of gold per annum at full capacity and with life-of-mine cash operating costs of $499 per ounce. The company is however confident of a much longer mine life as it has already identified more than one million ounces of ‘Inferred’ resource and abundant exploration potential remains – both along strike and down dip.

To read my earlier detailed note on Minera click here

To read the view of top mining broker Fox Davies arguing that Minera shares can double click here

The up-front capital cost estimate is $177.5 million, with the company “investigating financing options and intend to commence detailed engineering early in 2013. Our target is to start ore processing at the beginning of 2015”. The announcement follows a feasibility study on the company’s Don Nicolas project in the mining-friendly Santa Cruz province of Argentina earlier this year which derived a post-tax Net Present Value, at an 8% discount rate and $1,500 gold, of $41.4 million – including a $55.5 million capital cost. The company is targeting production there by early 2014 and a recently announced increase in the ‘Measured’ and ‘Indicated’ resource is expected to extend that mine life. However, financing options are also currently being investigated for that project.

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In the current economic climate, the issue of financing is something a bugbear for prospective miners – and the requirement for development capital means some discount to Net Present Value is currently warranted here. However, Minera is differentiated by already having production cash flows (the Corihuarmi gold mine in Peru), both prospective new operations offering quick payback (3.7 years and 2 years even on a base-case basis) and a senior management team with extensive, particularly South American, industry experience. Given this context, I continue to believe that the financing for Don Nicolas should be raiseable and this would then de-risk the Ollachea flagship.

At a current 54.5p share price, Minera’s market cap is £82.8 million ($132.8 million). Although, as noted, some sort of discount to Net Present Value is warranted given the company’s current stage, the present rating seems a much too harsh assessment given the stated NPV’s of Don Nicolas and Ollachea (on what I consider conservative gold prices), that financing for these looks entirely realistic and that the company has current cash-generating production and further interesting exploration upside potential. As with all company’s at such a stage of development, there are clear risks here but for an investor prepared to accept these, I continue to believe it should prove a shrewd long-term move to add a few shares in Minera at their current levels to a gold portfolio.

Having said all of this there are more obvious buys in the gold sector. My top three other ideas right now are below

One

Two

Three

Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith

 

 

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