Anybody know Rochester Resources? It looks intriguing based on this story,
Rochester at 1.5X Cash Flow, Production Only 2 Months Away
By David J. DesLauriers
07 Sep 2006 at 01:25 PM EDT
resourceinvestor.com
TORONTO (ResourceInvestor.com) -- Your correspondent has a penchant for near-production stories, because your correspondent has a predilection for cash flow situations.
Rochester Resources Ltd. [TSXv:RCT] which closed yesterday at C$1.30 certainly fits the bill, and is only two months away from a November production startup at its Mina Real gold/silver project in Nayarit State, Mexico, with some material already stockpiled and ready to be milled.
The Story
Led by President and CEO Douglas Good, Rochester has put together a great team. This includes consulting directors with decades of experience in the mining business, and Mexican relationships with first, the expertise to implement the successful start-up of mines in the company’s 200-500 tpd business model window, and second, the connections to provide a first look at a lot of solid opportunities.
Rochester’s model is perfect with commodity prices where they are, as payback on these sorts of deals can be typically 6 months, and the process itself is comparatively simple, with the smaller nature of mills that can handle this sort of throughput not being prohibitively expensive to build.
Mina Real is the first example of this plan at work, and though the company only holds 51% now, it is quite clear that they will very soon wrap up the other 49%, probably for shares in the company. With that done, and cash flow rolling in, RCT should be able to repeat the formula, making a lot of money for shareholders.
Indeed, with a tight share structure and a couple of very positive press releases over the last 10 days, Rochester is up recently, but as investors will see, this is still the ground floor.
Valuation
Based on the numbers received by Rochester on its Mina Real development program to date, we believe that the company can achieve an average grade somewhere between 0.4 oz/t and 0.5 oz/t. Using 90% recovery rates which are easily achievable, a cash cost of $250 which would appear to be appropriate, and splitting the difference on grade, at 0.45 oz/t, and 300 tpd, we believe that Rochester can generate something like $17.5 million - $18 million in annualized cash flow for 2007.
Given RCT’s 13 million shares outstanding, and 16 million fully diluted presently, plus taking into account, as a round number, that it will likely cost another 7 million shares to buy out the other half of the mine, this translates into 77 cents per share of cash flow on fully diluted shares (23 million shares) and 88 cents per share of cash flow on issued shares (20 million shares).
The next question is multiple. Here we have to take into account:
It’s a vein mine, so reserves aren’t very visible – favours a lower multiple
Production of under 50,000 ounces per year – favours a lower multiple
Despite that, the company looks as if it has 5 years of life just based on the work done to date, not to mention a further 3 kilometres of quartz gold-silver vein structure already identified – favours a good multiple
Production could potentially grow if the mill is ramped up to 400-500 tpd – favours a higher multiple
The business model and solid management could mean that this team does a similar deal, adding to the bottom line – favours a higher multiple
With all of this in mind, I would say that the company deserves a multiple of somewhere between 5 and 10 times annualized cash flow.
If we take the low end of that and the low end of the cash flow projection at 77 cents per share of cash flow, we get a target price of C$3.85 per share, probably in 6-12 months. On the high end, at 10 times, and 88 cents per share cash flow, we get a target of C$8.80 in probably 6-12 months.
Realistically, the best number probably lies somewhere in the middle at a multiple of 6 or 7 times a cash flow number which will be applied by the market based on something in between issued and fully diluted shares, or a target price of C$5-6 per share, achievable in the next 6 months, but probably closer to 12 months.
Conclusion
This is a very good team, with an excellent project and a superb model at the right time in the cycle.
These targets use gold at its present level and don’t take into account the upside that could come if gold really starts to run.
Based on other producers that are also very near production, RCT should be C$2-C$2.50 immediately, and as the story unfolds and quarterly cash flow numbers come in, something like C$5-C$6 in the next 6 to 12 months. |
