- CGX
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$720m
CGA Mining
Ratel Gold Spinout
CGX; Hold around $2.13
CGA Mining is in the advanced stage of spinning out its African gold and copper projects into a new TSX listed vehicle – Ratel Gold Limited – with pro-rata entitlement for existing CGA Mining shareholders. At the same time the company continues to optimise the performance of its flagship Masbate gold operation in the Philippines.
“CGA Mining is spinning out its African resource assets into a Canadian listed entity, Ratel Gold Limited. Shareholders have entitlement to participate in the Ratel IPO, but Stock Resource does not recommend taking up this option.”
Ratel Gold Limited
Ratel is currently 100% owned by CGA Mining and is seeking to raise between Cnd$8m and Cdn$14m via an IPO process at Cnd$0.20 per share, with a proposed listing on the Toronto Stock Exchange. Depending on the level of success achieved in the capital raising process CGA will retain between 20% and 37% interest in Ratel.
Ratel is seeking to raise the majority of its funds from CGA’s existing Canadian shareholders and will not seek a listing on the ASX – reducing the incentive for Australasian shareholders to participate.
The indicative timetable for the IPO process is as follows:
Source: Company
Ratel currently has two key assets – a 51% interest in the Mkushi Copper joint venture in Zambia and 38% (increasing to 51% if/when earn-in requirements are met) in the Segilola gold joint venture in Nigeria. It also holds early stage gold interests in Ghana.
Segilola is the most advanced asset. It is located adjacent to a sealed road, 18km south of the town of Ilesha, which in turn is on a sealed dual carriage way, 230km northeast of Lagos (the principal international entry port and major commercial centre of Nigeria).
Segilola currently comprises around 0.62moz of gold resources with an average grade of 4.4g/t. The mineralisation occurs in relatively narrow, sub-vertical quartz vein systems and the majority of it (circa 500koz) is likely to be economic to mine via a conventional open pit operation, with treatment via CIL processing techniques. A feasibility study is well advanced, but the scale of operation that is being assessed does not appear to be material to CGA Mining (relative to the value of Masbate).
Previously we have speculated that Segilola could support an operation producing 90 – 100,000oz pa for 4 – 5 years.
CGA’s other advanced asset is the Mkushi copper project, located some close to the southern limb of the Zambian copperbelt, 60km east of the regional centre of Kapiri Mposhi. Copper resources delineated at the most advanced prospect, Munshiwemba, are 18.3mt at 0.83% copper and CGA has been assessing the feasibility of developing an operation based on this resource. Conventional processing, comprising a simple crushing, grinding and flotation circuit, is proposed.
In the near term further exploration will be undertaken to test known mineralisation outside of the existing defined resources. Additional resources are required in order to increase the scale and value of an operation at Mkushi – which is not yet material to CGA Mining.
As part of the spinout process CGA Mining is forgiving loans of around US$19m in relation to previous funding of work on the Ratel assets. Its retained interest will have a nominal market value in the order of US$3-4m based on the IPO pricing of Cnd$0.20 per share.
Ratel Discussion and Recommendation
In effect, once floated, Ratel will hold 51% interest in two advanced African projects. However, neither project has demonstrated that it has potential to become large scale or high value in the foreseeable future. In addition the Ratel shares will only be listed on the TSX. Accordingly, the risk / reward proposition for CGA shareholders is not particularly exciting at this time and hence, Stock Resource recommends eligible shareholders don’t take up shares in Ratel Gold Limited.
We note that should Ratel prove successful, CGA retains some leverage via a residual shareholding of 20% – 37%.
Masbate Update
CGA Mining’s flagship project is the Masbate gold project in the Philippines, and following the spinout of African projects via Ratel, it will become a single project gold producer. We speculate that this creates a clean structure, possibly aimed at increasing the corporate appeal for potential predators.
Recapping, Masbate is a large scale, low grade gold system that has been re-developed by CGA Mining in recent years. After experiencing early challenges (particularly a failed mill motor on one of the two ball mills) the operation has settled down – albeit this involves treating more tonnes at lower grade compared to the original plan. The initial operating performance is outlined below:
| Quarterly Period | Jun-09 | Sep-09 | Dec-09 | Mar-10 |
|---|---|---|---|---|
| Ore Milled (t) | 442,523 | 839,503 | 1,132,361 | 1,167,521 |
| Head Grade (g/t) | 1.20 | 1.37 | 1.21 | 1.31 |
| Recovery (%) | 76.1 | 82.1 | 83.9 | 82.5 |
| Production (oz) | 12,975 | 29,751 | 36,465 | 40,535 |
| Cash Cost (US$/oz) | na | $578 | $483 | $538 |
Most recently the company noted record monthly gold output during May of 17,707 oz. This was driven by further increases in throughput during the month, which was at an annualised rate of 6.35mtpa – which compares to the nominal design rate of just 4mtpa (although in part it is assisted by treating softer oxide and transition ore types). A study is currently being completed aimed at optimising the long term plant throughput at a rate of around 6.5mtpa and achieving annual gold production of around 200,000oz pa.
An integral part of the Masbate expansion plans is further conversion of its large resource base in reserves. As noted previously Masbate has some 3moz in it reserves, which form part of a larger +7moz of Indicated and Inferred resource.
Recently, CGA Mining announced that it had commenced a US$10m exploration program, including some 55,000m of drilling over a 12 month period. Initial work will concentrate on infill drilling of the inferred resources – both along strike and down dip of existing reserves. Two rigs will be drilling a program that is planned to include 10,000m of RC drilling combined with 20,000m of diamond core drilling.
In addition, regional geochemical and geophysical programs are being undertaken to generate additional drill targets – and once completed an additional two drill rigs will be mobilised to the tenement area to undertake a further 15,000m of RC drilling, 10,000m of diamond core drilling and 15,000m trenching.
Capital Structure
Our estimate of the current corporate structure of the company is as follows:
| Market Valuation | Issued Shares (m) | Share Price (A$) | Market Cap (A$m) |
|---|---|---|---|
| Fully paid shares | 331.3 | $2.20 | $728.8 |
| Options | 11.9 | $2.20 | $26.2 |
| Cash from options | |
|
$10.7 |
| Diluted Market Cap | |
|
$744.3 |
| Cash | |
|
$85.6 |
| Debt | |
|
$76.0 |
| Enterprise value | |
|
$734.8 |
Discussion and Recommendation
As noted earlier, participation in the Ratel Gold IPO is not compelling for Australian investors.
Following its completion, CGA Mining will essentially be a single purpose entity – based around gold production at Masbate in the Philippines. This should increase its corporate appeal, albeit it leaves the company exposed to a single operation, increasing investor risk.
Around the current share price, CGA Mining is trading broadly in line with its global peers on the basis of existing reserves and production levels. Accordingly, potential share price appreciation (other than due to gold price fluctuations) will need to be largely driven by success in the current major exploration and resource definition program.
In the interim, Stock Resource recommends CGA Mining as a Hold around $2.13.
The Chartist’s Perspective
Finding the right steps
The share price based between 1990 and 2001, providing the momentum for the stock to climb higher through a serious of step like actions. The most recent of these occurred in 2008 and 2009 when the price oscillated in a wide range between 80c and $2.20.
Breaking away in December last year, the current upswing which has seen the price rise to $2.61 in May and June, has begun to falter with the price hitting the $2.60 level ten times during the period. Deflected back from this level, the price has sought support around $2.10, but is in danger of weakening further over the short term. Key near-term support lies around $1.90 and failure from this level could see the price fall back within the current trend path towards $1.50.
At this stage we believe that it is more likely that the price continues to churn in the $1.90- $2.35 range as it attempts to establish a base for another step higher, with the $2.60 area providing the next upper trigger.
‘The Chartist’s Perspective’ has been independently derived by Regina Meani from charting and technical assessment, and has not taken into account fundamental analysis of the company.
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Disclaimer
Breakaway Investment Group Pty Ltd, and its authorised representative Stock Resource, have made every effort to ensure the reliability of the views and recommendations expressed in this report. Our research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication.
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As at the date at the top of this page, Directors and/or associates of Breakaway Investment Group Pty Ltd currently hold positions in Adelaide Brighton (ABC), Beach Energy (BPT), Commonwealth Bank (CBA), Cooper Energy (COE), Cue Energy (CUE), Energy Metals (EME), Icon Resources (III), Integra Mining (IGR), Far Limited (FAR), KUTh Energy (KEN), Namoi Cotton (NAM), National Australia Bank (NAB), Northern Iron (NFE), Otto Energy (OEL), PanAust (PNA), Pluton (PLV), Regional Express (REX), Sipa Resources (SRI), Tiger Resources (TGS), Westpac (WBC) and Zicom Group Limited (ZGL). These may change without notice and should not be taken as recommendations.
Reference within the Stock Resource Report to the “Stock Resource Portfolio” is a reference to the hypothetical portfolio on the “Past Predictions” page, which includes details on the methodology used to derive the performance figures.
