New Gold-Ore Numbers Confirm Multi-Bagger Potential
By David J. DesLauriers
03 Apr 2007 at 09:58 PM
TORONTO (ResourceInvestor.com) -- Your correspondent has twice covered Gold-Ore Resources [TSXv:GOZ] in the past year, and each time the story has improved. GOZ closed today at C$1.02.
Despite a doubling in share price since the first and second commentaries each around the 50 cents mark, we continue to believe that Gold-Ore could deliver multi-bagger returns over the next 12 months as the company enters commercial production at its Bjorkdal mine in Sweden.
Part of the reason is that nobody is on to this compelling story yet - to our knowledge we are the only writer following Gold-Ore, and the institutions have yet to step in meaningfully.
We are of the opinion that this is about to change, and recent aggressive buying and volumes suggest to us that some institutions are now coming into the play. We would expect that brokers and other analysts will also start to catch on, as this is a very attractive story with multiple components.
A Cash Flow Story
In a press release “Bjorkdal Gold Mine-Internal Engineering Study” issued today, Gold-Ore gave guidance on where costs will come in for the underground mine envisioned at Bjorkdal which it is believed could achieve production of 75,000 ounces of gold per annum.
Assuming $675 gold, two main factors contribute to our cash flow analysis: grade and potential for share dilution (albeit minimal).
If grade surprises to the downside, and if one also assumes that GOZ will need to raise another $5 million before production, we would see, on a fully diluted cash flow basis, something in the neighborhood of 25 cents of cash flow per share.
If grade surprises on the upside (drill results indicate that the 5 g/t number GOZ is using is too conservative), and if the company can finance the $5 million CAPEX through the exercise of existing warrants at $1, the bulk of which are in very friendly hands, we see cash flow on an outstanding basis as being closer to 45 cents per share.
The reality probably lies somewhere in the middle, which given a standard junior gold production multiple of 10X cash flow would put GOZ at C$3.50 per share within 12 months.
A Growth Story
Plant capacity at Bjorkdal is in the 3,500 tonne per day range, or more than double that being utilized by the company under the current plan. Vein mining is not an easy business in terms of generating huge tonnage day in and day out, but given the geological patrimony of the area and the geological prowess of management, we believe that Gold-Ore can build enough tonnage to support more working faces.
Therefore there is a probability that say 18 months into production, or some time in 2009, Gold-Ore could decide to embark on an expanded development plan which could see production rise to the 120,000+ ounce per year level, financed totally out of cash flow, and resulting in the added boon of falling unit costs.
So there is a growth story here, which could in fact double the algebraically demonstrable 12-month potential share price of C$3.50, adumbrated above.
A Reserves Story
As reported in our GOZ story linked in the introduction and published in late August 2006, the size of the target that Gold-Ore is working on, and the potential of the system at depth has led the company to conclude that Bjorkdal has a 2 million - 4 million ounce potential.
Of course that takes time to develop, but if it can be successfully demonstrated, this play goes from a 10-year mine life to much more, and takes on new dimensions. Keep in mind that this a theory developed by a team whose collective resumé boasts the successful discovery of several multi-million ounce deposits, from the grassroots stage.
Conclusion
In the final analysis, Gold-Ore possesses all of the ingredients that one looks for in a near-term producer. In no particular order these include:
1. Infrastructure present and costs already known;
2. Almost no country risk;
3. Great management team;
4. Price will rise because this little known story still has yet to be discovered;
5. Miniscule CAPEX relative to similar plays means very little or no dilution between now and cash flow;
6. Existing infrastructure means very short time frame to production;
7. Levered to the rising gold price environment;
8. Cheap on a future cash flow multiple basis;
9. Ability to use cash flows to grow production beyond initial target rate;
10. Potential for multi-million ounce reserves at property.
For these reasons we see GOZ as a minimal downside, multi-bagger situation with a target price of C$3.50 per share within 12 months, and potentially double that within 18-36 months if either the growth story pans out, the reserves story pans out, or the price of gold goes for a run.
© Copyright 2007, Resource Investor.
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