Risk-Reward is the name of the game in riding profits in the PMs.
Right now one of the best risk-reward scenarios is Central Sun Mining (AMEX:SMC). Central Sun has an operating and profitable 40,000 ounce per year mine operating in Nicaragua. In the 10 to 15 cent range it has a market cap of 9.7 Million!
Take a look at the market caps of other similar sized producers:
$96 MM - CGC.to
$47 MM - AMC.to
$45 MM - AGT
$33 MM - CGR
$33 MM - RIC
Take a look at the chart I posted previously on this thread - it shows that the mine is profitable to the tune of $234 per ounce so far this year. That is the best level of profit the mine has achieved in the last 10-years! SMC has been working on a number of projects since last year and it looks like those projects are paying off - lower cash costs, more throughput, better recoveries.
The market is discounting CSM because it falsely thinks the company is headed for bankruptcy. Check out the balance sheet - nothing could be further from reality. Also the market incorrectly perceives that SMC is dependent on the start up of the Orosi Mine in order to be a going concern. Again, not correct as SMC slashed expenses when it was forced to suspend the start-up of the Orosi project.
Look, as the feasibility study demonstrates - the Orosi project is an 80,000 ounce per year mine. SMC was in the middle of rebuilding the mine when the financing crisis cut off their ability to raise $15MM cash to fishing the build. That project is essentially free right now. No doubt SMC will either find the money to finish building the project or this is a takeover candidate. Which mid-tier wouldn't want a 100,000 opy mine for $10MM in shares and $15 MM in construction costs?
But the fun of the Orosi project lies in the district wide nature of the deposit there. Dr. Bill Pearson, the geologists from the Jacobina Mine, has only just started identifying the resources on this property. So far they have identified several 2 to 3 km long ore zones. One of the ore zones has shallow gold at double and triple the the head grades in the current mine plan. Looks like the potential exists to open pit some of these new discovers and increase the overall head grade fed to the new mill. Since the mill is targeted at 90% recoveries, the increased in number of ounces fed into the plant will be nearly a direct pass through. With only a modest increase in head grade Orosi goes to 100,000, 125,000 or 150,000 opy.
Remember, the guy running SMC is Peter Tagliamonte - the guy that restarted the Jacobina Mine for Desert Sun way back in 2006. I'm sure a few long-term posters remember DEZ and made a bunch of money on that one. Well here is the ground floor on the same thing.
So to sum up the advantages:
1. Relatively large discount to peers (2x)
2. Cash flow positive mine at 40,000+ opy
3. Demonstrating improved recoveries, throughput and operating costs.
4. 50% built Orosi Mine - only needs $15MM and 6-months - completely discounted by market cap.
5. Good potential to be at 100,000 opy by end of 2009, 125,000+ opy in 2010.
6. Proven management team.
Once financing comes through on the Orosi project this one will take off. Until then forced liquidations and tax loss selling should bring unique buying opportunities.
Anyone else have a different view?
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