Small Caps | Oct 27 2011
– RBS Australia initiates on Ampella with a Buy rating
– Stock offers both significant exploration potential and project development upside
– Ampella now rated a Buy by three brokers in the FNArena database
By Chris Shaw
Ampella Mining ((AMX)) is a gold play with a 2.2 million ounce resource at the Konkera project at Batie West in Burkina Faso. Batie West is a 110km long prospective shear, which has been largely untested by recent exploration methods.
In initiating coverage on Ampella with a Buy rating, RBS Australia sees significant upside potential as exploration work continues. As RBS notes, Ampella plans $31 million worth of exploration in 2012.
Drilling will test a number of highly prospective targets on regional properties. Some drilling had been done on five of the properties prior to the region's wet season and RBS suggests results could provide an additional value catalyst if drilling on these properties proves to have been successful.
At the existing Konkera West project, pre-feasibility studies are underway to determine the viability of mining the resource. A significant amount of drilling on the project was recently completed, the aim being to upgrade the resource category and extend zones at depth at both Konkera Main and Konkera North.
RBS expects this will lead to further resource upgrades in the current quarter. What should follow is rapid development of the project into full feasibility in 2012, RBS noting Ampella has a target for the project of 3.5 million tonnes per year, which would translate into gold production of around 200,000 ounces annually.
Cash costs for the project should be competitive at around US$600 per ounce and RBS expects first production from Konkera early in 2014. A ramp up to full production is expected by 2015.
As RBS points out, Ampella's current cash position of $35 million is not enough to cover the cost of both the aggressive exploration program and feasibility studies. This suggests further capital will be required, likely early in FY13.
Aside from the positive of good potential to grow production and resources, RBS sees some corporate appeal in Ampella that adds to the attraction of the stock. This reflects a significant level of M&A activity occurring among domestic and offshore gold miners at present.
As Ampella offers both resource upside potential and near-term development upside RBS sees the company as attractive to a mid-tier mining company as a bolt-on type acquisition. On the flipside, there is potential for Ampella to be an acquirer of a number of local projects.
RBS picking up coverage on Ampella brings to three the number of brokers in the FNArena database covering the company. Credit Suisse similarly initiated coverage on Ampella with an Outperform rating in September, while BA Merrill Lynch also rates the stock as a Buy.
RBS Australia has set a target on Ampella of of $2.84, which is around the mid range of targets given Credit Suisse has a target of $3.00 and BA-ML of $2.60.
Shares in Ampella today are unchanged as at 10.30am, with a last sale price of $1.765. This compares to a trading range over the past year of $1.505 to $3.42. The current share price implies upside of around 59% to the consensus price target according to the FNArena database of $2.81.
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