Little-Known Gold Producer Trading at One Times Cash Flow
By David J. DesLauriers
27 Apr 2006 at 06:29 PM EDT
TORONTO (ResourceInvestor.com) -- Gold-Ore Resources [TSXv:GOZ], which closed Thursday at 49 cents, is a development play that has flown under almost everyone’s radar.
The company meets all of the relevant criteria for a superb junior company – great management, project with excellent upside, generating cash flow, presently unknown and therefore undervalued by the market.
Management
Gold-Ore is run by Bob Wasylyshyn and Glen Dickson. Mr. Wasylyshyn has discovered a couple of million plus ounce mines over 23 year career, while Mr. Dickson is well-known for his role in the discovery of two million ounce plus mines in Nunavut, when he ran Cumberland Resources [TSX:CLG].
These guys are as solid, accomplished, experienced and honest as you can get, and both have great reputations in the business. It should also be pointed out that this is management’s only vehicle (aside from directorships of course), and both gentleman therefore dedicate their time and focus to Gold-Ore alone. Management owns 15% of the company.
Project
The company’s flagship project is the Bjorkdal gold mine located in Sweden, 30 kilometres (along paved highway) northwest of the city of Skelleftea and 750 kilometres north of Stockholm.
Bjorkdal currently produces 25,000 ounces of gold per year by the processing of low-grade stockpiles, at a cost of about $400 per ounce.
It should be noted that Bjorkdal is a past producer of nearly 1 million ounces of gold with recovery rates of around 90%, and infrastructure includes a fully operational 1.3 million tonne/year plant which was built in 1988 and has been well maintained. The plant consists of a coarse crusher, a rod and ball mill, a gold gravity concentration circuit and a flotation circuit for gold bearing pyrite.
The current resource on the property in all categories is 1 million ounces of gold at a cut-off grade of 0.5 g/t, and over 800,000 ounces at a cut off of 1 g/t.
Convert the Resource, Grow the Production
Gold-Ore is fully cashed up and has embarked on an aggressive exploration campaign to develop the northern extension of the open pit by underground drifting/drilling. The goal of the program is to expand the measured and indicated resource categories of the deposit, and it will be followed-up by a Phase 2 program and a feasibility study for open pit mining.
The company is testing an area previously drilled by widely spaced holes, which is sufficiently large to host 500,000 to 1,000,000 ounces of gold.
The Gold-Ore press release linked here explains the specifics of the program. In summary though, GOZ will follow up some tunneling and bulk sampling with 8,000 metres of drilling, which is scheduled to begin within the next month.
The beauty of this is that the exploration almost pays for itself, as bulk samples from the tunneling program will be fed through the mill. If all goes well, Gold-Ore believes that they “have the opportunity to complete a comparatively simple feasibility study with a goal to achieve production at 75,000 ounces of gold annually as quickly as the first quarter of 2007.”
This is staggering considering the valuation of the company at present.
Cash Flow
Gold-Ore currently has 50 million shares outstanding, and no need to dilute further as the current low-grade stockpile production is generating cash, and a good part of the exploration program will be paid for by the bulk sample.
Management believes that it can produce 75,000 ounces per annum, lets say conservatively, starting some time in the first half of 2007, to account for the fact that there are always delays in the mining business.
Taking historical grades, and then discounting them back a little bit, preliminary work indicates that costs would come in at or under $300 per ounce.
This means that at $600 gold, GOZ would generate over $22 million in cash flow on an annualized basis, starting some time in the first half of 2007. This equates to 45 cents per Gold-Ore share! In other words, the company is trading at 1X cash flow.
Conclusion
What investors who capitalize on this now are betting on is that: Management, who between them have discovered several million plus ounces mines in the past can expand the resource at Bjorkdal, a fully functioning mine currently in production in a safe part of the world which demonstrates a number of exciting new targets, and areas where grades are consistent, but definition drilling is warranted.
That sounds like an excellent bet, and with shares changing hands at 50 cents, or essentially 1X cash flow, investors could well be rewarded with a 10 bagger over the coming year if Gold-Ore executes on its plan, and goes on to trade at the standard 10X cash flow multiple of its gold producing peers.
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