This was published Aug 25 08. Given adm is now trading at only $90 million it clearly shows an outstanding rate of return on the shares of ADM:
Buy, Sell or Hold Andina Minerals (ADM: TSX-V)
Key Facts
- Approximately 79 million shares outstanding
- Share Price (July 25, 2008) closing = $3.20
- Market Capitalization = $253 million
Andina Minerals recently released a revised NI 43-101 complaint resource estimate for the Dorado zone of its Volcan project in Chile.
- A 126% increase in the measured and indicated resources category from 2.93 million to 6.62 million ounces of gold (241.7 million tonnes grading 0.85 grams per tonne gold).
- Decline in inferred resource category to 2.76 million ounces of gold (95.4 million tonnes grading 0.90 g/t Au), a reduction of 1.43 million ounces as a result of converting inferred resource ounces to the measured and indicated category
- In total, the resource at Volcan now stands at 9.4 million ounces of gold, an increase of 32% from the previous resource estimate of 7.1 million ounces.
One of the most important tidbits of information that can be taken away from this revised resource estimate, in addition to the increased ounces is the increase in grade. There was an 8% increase in the grade of measured and indicated resources (from 0.79g/t to 0.87g/t) and a 17% increase in the inferred grade (from 0.77g/t to 0.9 g/t). The increase in grade is important because it leads to decreased operating costs.
Since the Dorado zone is still open at depth and in several directions and results from the Ojo de Agua zone are still pending, one doesn’t have to go far in assuming that Andina will soon (within the next 12 months) prove up a 10 million ounce gold resource. In fact, at a 0.3 g/t cut-off, the Dorado zone resource has already surpassed the 10 million ounces. Furthermore, Andina’s discovery costs have been $5/oz thus far – amazing isn’t it? With companies like Kinross, Barrick Gold and Yamana also exploring in the Maricunga gold district, Andina is surely in the sights of a number of majors as a takeover candidate.
For a quick back of the envelope calculation of what Andina might be worth in a takeover, I turn to the recent bid by Kinross Gold of Aurelian Resources in Ecuador, in which Kinross valued Aurelian’s in-ground resource (58.9 million tonnes grading 7.23 g/t gold and 11.8 g/t silver) at approximately $88/oz. Now I KNOW that there are several important distinctions between Aurelian (a stock I own) and Andina, however at the $88/oz valuation, Andina should be worth approximately $827 million (it is currently worth $253 million).
Besides Chile being a lot more mining friendly than Ecuador, Andina has additional upside potential through its 5 million tonne (non 43-101-compliant) sulphur resource, grading about 40% sulphur, which is adjacent to the Volcan project. Sulphur prices have risen from approx. $70/tonne to $700/tonne in the last year as a result of demand for phosphate fertilizer which utilizes sulphuric acid as a principal input.
Another morsel of information I wanted to highlight about Andina is that they have already secured the water rights needed for the Volcan project, at a total volume of 340 litres per second, from a private Chilean company by issuing 6.7 million Andina common shares on May 30, 2008 (share price closed at $3.94 that day). With the going rate for water in Chile being an estimated U$100,000 per litre per second of water and rising, securing the water rights for Andina may have been one of the most brilliantly significant decisions the company’s prescient management has taken.
Subtracting the approximately C$21 million in the treasury and the considerably discounted value of Andina’s sulphur deposit, which I will peg at $30 million, Andina is currently being valued at around $200 million. $200 million for 9.4 million ounces of gold – anyone else see an opportunity here?
Since my back of the envelope calculation wont stand the rigorous due diligence of many, I present below the NAV calculations of RBC Capital Markets analyst Stephen D. Walker. |
