2013 Tip of the year 4 (of 7) – Buy Chaarat Gold at 19.625p

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I promised something for everyone in my 2013 seven tips of the year. The penny stock is still to come. You have been served up a great income play and a profitable growth play plus one mining stock. There were four mining stocks vying for three places in my (hopefully) magnificent seven. This one made the cut. The shares trade at a discount to net cash. The company is more or less fully funded to start producing large quantities of gold from late 2013 and is well run. Gold stocks are unloved which is why you can buy AIM listed Chaarat Gold (LSE:CGH) at just 19.625p and quite plausibly buy into a five or six bagger in doing so. My target price is at least 100p and it is my 4th of 7 tips of the year.

In case you missed my earlier selections for 2013 you can find:

My first tip of the year here
My second tip of the year here
My third tip of the year here

My macro view which underpins all my selections (including my gold and oil price calls) here

Chaarat is not yet producing gold from its mine in the Kyrgyz Republic but it should be before Christmas 2013.  Until mid November, the only uncertainty was a slight shortfall in the cash it needs (it has c£50 million in the bank – just a tad more than its market capitalisation) to bring its mine into operation. The management had said that it would not issue shares at less than 50p but that it was looking at various non dilutive funding options.

Step forward the Chinese.  First up, Shandong Gold Mineral Resources, the third largest gold producer in China said that it has secured Chinese regulatory approval to make an investment into Chaarat. Discussions are underway but there is of course no guarantee of a deal. Chaarat has publicly stated that it would not issue equity at less than 50p so my guess is that SGMR is negotiating to take a state in the underlying operating asset.  The amount Chaarat needs is pretty small beer ($20 million) and so when the Directors state publically that they “intend that any agreement will enhance long-term value for Chaarat shareholders” – this means that it is in a strong enough position not to be legged over by the Chinese. And a hard bitten and sensible management team simply will not be legged over.

CEO Dekel Golan and FD Linda Naylor (who snapped up 100,000 shares at 19.75p just before Christmas) are an impressive duo in whom you can trust. Naylor has poor taste in football matters but I am prepared to gloss over that in light of her professional abilities.

As an aside Chaarat also announced that it has signed an with MOU China Gold International Resources Corp, the largest gold producer in China, and its 70% owned subsidiary, Kichi Chaarat, holder of a deposit adjacent to the Chaarat asset. This MOU relates to the joint construction and sharing of the cost of a power line from Chatkal, the entry point to Chaarat, to the national grid of the Kyrgyz Republic.  This project is now underway.

If you are interested the mining stock that just missed the cut on my 7 tips of the year for 2013 is profiled here

This means a slightly higher initial capex for Chaarat but lower opex for the life of mine. The company states:

Upon construction and commissioning of the power line, the projected cash cost of gold production at Chaarat is expected to decrease considerably. In addition, the need to transport large quantities of diesel by road will be eliminated. This will enable a more rapid development of the deposit overall.   Chaarat’s management is considering a range of options, including vendor finance, for funding the cost of the power line, which falls outside the original budget of the Project.”

In other words this does not imply that additional equity needs to be raised in order to reduce operating costs Having previously assumed operating costs per ounce of c$700 at launch I am now assuming costs of just $600 oz. Clearly how much cashflow is generated by the mine is down to the gold price but I have spent some of the weekend tweaking my assumptions in order to reflect the lower operating costs and that drives the table below.

Year & Output $1200 Gold $1500 Gold $1750 Gold $2000 Gold $2500 Gold
2014 – 30,000 oz $18m $27m $34.5m $42m $57m
2015 – 70,000 oz $42m $63m $80.5m $98m $131m
2017 onwards 200,000 oz $160m $220m $270m $320m $420m

Even if Chaarat ends up handing 10% of the mine over to a new Chinese partner the certainty of getting the mine, fully financed, into production de-risks this enterprise big time..

Valuing the project on a cashflow multiple of three is bloody harsh since it has a long life of mine, five might be fairer but I shall be a prudent sort of fellow. I accept that the Kygrz Republic has thrown up one or two political “issues” in recent times and in terms of a political risk weighting it is not exactly Belgium.  On that basis, using my new forecasts of today, and using a $1500 gold price you are looking at a 2017 valuation of $660 million. Discount that back at 5% and you are looking at a valuation of $537 million – that is a target price of 134p. Now I accept that there are political risks in the Kyrgyz Republic and that funding is not yet closed. But equally one might argue that a five times multiple is fairer or that a $1750 gold price is fairer.

For cautious investors seeking an investment as part of a balanced gold portfolio the attraction of Chaarat is that even on a $1200 gold price ( and I do not think gold is going anywhere near $1200) while other higher cost producers will stumble and fall, this one will still throw off stacks of cash and on my ( very harsh)  three multiple is still worth 97p Clearly if the gold price goes the way I expect the upside is far greater. You can do your maths..

I shall continue my 7 tips of the year series tomorrow with a very profitable growth play. 2 of my remaining seven tips of the year will appear on various websites and you can alerts to all of those tips (plus on all the other articles I write) by following me on twitter @tomwinnifrith. The 7th tip of the year will be sent out by email on January 2nd on the launch day of the new onefreesharetip.com – to receive that tip and a free share tip from a panel of 20 top tipsters each day of the working week sign up NOW at onefreesharetip.com

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Comments

  1. Kevin Fisher says:

    Hi Tom,

    Great article, just a slight note on the cash balance noted in your article above. I’m sure the cash on hand at the June accounts was $52M (dollars) not £52m, meaning the market cap of the companys isnt quite covered by the cash on hand.

    The company still seems a great play to me though.

    Kevin

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