CHALICE GOLD LOOKS TO SELL ITS MAIN ASSET
2011-12-13
Chalice Gold Mines (CXN-T, CHN-A) could potentially sell its 60% stake in the Zara gold project in northern Eritrea.
The country's state mining company, ENAMCO, holds 30% of the project, while the Eritrean government has a 10% free-carried interest.
The company's chief asset sits 160 km northwest of the country's capital, Asmara.
The junior said it inked a non-binding letter of intent with an unnamed entity on Dec. 12, adding it will update shareholders on the tentative deal in two weeks.
Haywood Securities' analyst Joe Mazumdar says he sees the potential agreement as a "positive" because it indicates that other companies are taking notice of the project's robust economics.
Zara hosts a large high-grade gold deposit with simple metallurgy. The Koka deposit has reserves of 4.6 million tonnes grading 5.1 grams for 760,000 oz. A July 2010 feasibility study envisions Koka producing 104,000 oz. gold a year for seven years.
Along with the project's high-grade and plus a million-ounce potential, Koka has a low startup cost and is almost permitted.
The study pegs the cost to build the project at US$122 million, while Haywood Securities estimates the figure to be slightly higher at US$150 million.
The tentative agreement with a third-party arose while the Perth-based company sought financing alternatives to fund its 67% share of the project's cost, writes Mazumdar in a Dec. 13 note.
When asked about Zara's potential buyers, he suggests it could be a major or a Chinese company with a huge appetite for risk.
"You got some majors working there, like Anglo American that has done some joint-ventures in Eritrea and is looking at Eritrea. What you want to think of are companies or countries that do not consider Eritrea a high risk. So for South African gold producers, who already have a high-risk portfolio... Eritrea might not be a big leap. But for someone that has their assets in countries like Australia or the U.S., Eritrea might be a bit of a leap."
A Chinese state-owned miner may also be interested in Chalice Gold's asset, he adds, pointing out how Chinese companies, such as China Gold International Resources, have recently been scouring Africa for gold projects.
China Gold signed a non-binding agreement to form a joint-venture at Banro's (BAA-T, BAA-X) Twangiza property earlier this year.
The growing fear of risk coupled with UN's recent sanctions on the country's government makes Gold Chalice's project a good buy for suitors.
"If you are unfazed by Eritrea you could get [Zara] at a significant discount because [Chalice] hasn't traded very well over the last year because of the risk aversion in the investment community," says Mazumdar.
He estimates the net present value of the Koka deposit at US$198 million, at a 7% discount. Haywood Securities has a target price of 60¢ on Chalice Gold.
On the day of the potential agreement, investors pushed the company's shares up 5% to 33.5¢. The following day the stock gained another 10% to close at 37¢.
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Received on Tue Dec 13 2011 - 21:25:53 EST