Company: Andean Resources Limited
ASX Code: AND
Share Price: $2.16
Market cap: $1.02bn
Recommendation: ‘Spec Buy’
The road to production for any mining hopeful is far from easy and most never strike paydirt or that elusive ‘company-maker’. In fact the mining ‘wannabes’ that litter the Exchange’s boards far outnumber those companies that achieve meaningful production status. Some even resort to settling for less than attractive projects just to ensure cashflow is coming through the doors. So when Andean Resources acquired the ‘unwanted’ Cerro Negro gold project from Xstrata in 2004, investors may have been forgiven for suspecting another run-of-the-mill goldie. However, despite any early doubters, Andean has since become anything but your average gold play. Following years of drilling and exploration, Cerro Negro is now world-class and one of the largest gold projects being stgeloped by a non major gold company.
Situated in South Argentina, Andean’s stgelopment of the Cerro Negro project attracted the interests of Kingsgate Consolidated (KCN) back in 2006. An established ASX200 goldie, Kingsgate launched a takeover bid for Andean offering 1 KCN share for every 15 AND shares held. At the time of the offer, KCN was trading at $5.87 and AND at $0.32 a share, with the deal effectively valuing AND at $0.39, a 22% premium to the share price. The bid was unanimously rejected by shareholders and in hindsight, rightfully so! Kingsgate’s attraction to Cerro Negro was just a sign of the things to come. Since the rejected bid, Andean’s share price has surged +580% and this is without a single ounce even being poured. From a series of ‘unwanted’ tenements, the word on the true potential of Cerro Negro has ‘hit the streets’.
When acquired in 2004, the initial resource at Cerro Negro was 620,000 oz of gold but ongoing drilling has seen the resource base drastically expand to recent estimates of 2.6m oz of gold and 23.2m oz of silver. Despite these already impressive figures, drilling continues and the potential for additional resource grades appears likely with the project shaping up to host multiple deposits. Those discovered to date remain open in all directions, meaning the extent of the mineralisation has yet to be fully defined, which leaves room for resource upgrades. The bulk of the resource defined to date is contained at the Eureka West discovery. With a gold grade of 12.5g/tonne and a silver grade of 184g/t, Eureka West is one of the highest grade unstgeloped precious metals deposits anywhere in the world.
As mentioned, Andean’s tenements are still largely unexplored and the Santa Cruz region is believed to be highly prospective for gold. This was highlighted by the recent exceptionally high grade discovery at ‘Bajo Negro’. In addition, within the Cerro Negro project – comprising just over 25,000 hectares – are ten currently identified prospect areas with potentially substantial gold deposits. To date, only two of these, the Vein Zone and the Eureka West prospects have been subject to systematic drilling. The company is set to increase exploration spending to continue to unlock Cerro Negro and drilling results could continue to trigger share price re-ratings.
With the potential of Cerro Negro continuing to unveil, Andean has its sights set on production. Pre-feasibility work forecasts average cash costs of US$198/oz and having confirmed the robust economics of the project, Andean recently raised $100m to partly fund upfront capital costs. Initial capital expenditure at Cerro Negro for the construction of the mine was first estimated to cost US$281m. However, more current estimates are suggesting US$100m below this figure. With $14m in the bank (with funds from the raising expected to flow through shortly) and no debt, the company would be able to secure further financing considering its very low predicted cost base. In fact, at a predicted cash cost of US$198/oz over the life of the project, management is claiming the title as one of the lowest cost producers in the world. Caution however should be had, as gold mining is a particularly complex exercise and ‘predicted costs’ rarely hit the mark. Nevertheless, if management can deliver near this cost estimate, the potential earnings streams for the company will be significant – particularly at current gold prices.
First gold pour is targeted for 2011, but there are still plenty of upside catalysts looming in the interim. Additional exploration success and improved project economics have the potential to fuel re ratings. Drilling is ongoing and a steady stream of newsflow may be expected. The Bankable Feasibility Study due by year end aims to factor in significant capital cost savings. So with a sooner than expected economic recovery coming on the back of unprecedented global stimulus spending, future inflationary pressures may be building. Inflation is generally good for the gold price and investors may be interested in hedging their portfolios through emerging gold producers like Andean Resources. Regardless of gold’s near term direction, Andean is set to become very profitable on the back of the extremely low projected cash costs. The gold price could fall substantially and the company still reap significant rewards. In light of the company’s ongoing progress, there is an increased likelihood of predators once again running their ruler over Andean and the emergence of another takeover bid wouldn’t surprise, at all.
Joshua Terlich is an analyst at wise-owl.com. All views in this article are those of wise-owl.com, not of TheBull.com.au and do not constitute advice.
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