Virgin Metals Is a Major Buy for Your Development Portfolio
By Michael J. DesLauriers
06 Jul 2006 at 01:45 PM
TORONTO (ResourceInvestor.com) -- Readers of RI have been blessed with a tremendous opportunity to capitalize on an exciting near-production/development play with multi-bagger potential, from the ground floor. This gem, Virgin Metals [TSXv:VGM] listed on Tuesday with an IPO price of 45 cents, and has quickly given up a dime amidst lack of interest and soft market conditions, to a Wednesday close of 35 cents. Your correspondent had a chance to sit down with company President and CEO, Chris Davie, recently, to hear the story first hand.
A Tale of Two Projects
Virgin Metals is a copper play with two exciting projects in Sonora State, Mexico. The company offers an attractive model for investors, by combining the certainty of near-term production (Los Verdes) to generate cash and take advantage of lofty metals prices, with the prospect of major blue-sky in the form of a high impact advanced exploration project, with centi-million tonne potential. The beauty of this scenario is that it allows for one project to finance another, and provides shareholders with added excitement and upside as a potentially world-class deposit gets tested, drilled out, and proven up.
Los Verdes
This copper-moly project is a past producer, with a resource estimated at 7.1 million tons grading 0.86% Cu, 0.16% Mo and 0.135% WO3. Management believes that there is substantial room for expansion in the deposit, and plans to develop a new resource estimate by way of infill drilling – a drill is expected on site this month. The idea for Los Verdes is to initially achieve small-scale production on the order of 200 to 300 tpd, with a view to expanding to the 2000 to 3000 tpd level roughly two years later. The company should have enough cash on hand to actualize phase one of the plan, with ongoing developments being financed through project cash flow.
Cuatro Hermanos
The big upside in this play will come from the Cuatro Hermanos project, where wide spaced drill holes have outlined an anomalous porphyry-copper zone, spanning 4.5 km2. Previous drilling has turned up economic grades of copper and moly over significant intercepts. The company is planning an aggressive infill drilling campaign, along with some step out drilling to explore zones of interest. Additionally, Virgin intends to examine the possibility of near-term production from surface conglomerates, and certain zones that have been the subject of more extensive drilling.
Management
In addition to being a quality production/development play, this story more than fits the bill where management is concerned. As regular readers are aware, in the mining business the jockey is almost always more important than the horse. Virgin boasts numerous seasoned jockeys on the back of a bona fide thoroughbred, and therefore possesses all of the right ingredients commensurate with a recipe for success.
Valuation
At current prices Virgin Metals has a fully diluted market capitalization of roughly C$25 million. Based solely on the company’s first phase of production at Los Verdes your correspondent believes that the stock is a quadruple from here.
This is because, with over 3.5 million pounds of high grade copper production, 1.5 million pounds of moly production, and with attractive tungsten credits, Virgin will cash flow in well in excess of $25 million in its first year of production, using commodity prices discounted heavily from their present levels. That cash flow alone should garner a multiple of at least 4 times, which would put the company’s share price at C$1.40+.
Of course, the above takes no account of the big expansion in year three, or the huge potential of Cuatro Hermanos, which could well result in a buyout.
Conclusion
Over the next three to four years, as Los Verdes expands to full production and Cuatro Hermanos proves its mettle, we believe that VGM could command a handle in the mid to high single digits.
http://finance.yahoo.com/q?s=VGM.V
© Copyright 2006, Resource Investor.
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