Mount Magnet South Attracts Attention

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– Mount Magnet South readying for production
– Strongly prospective tenements
– Potential for production upside

By Eva Brocklehurst

Perth-based Mount Magnet South ((MUM)) is in the critical stage of moving from an explorer to a producer with its flagship Kirkalocka gold project in Western Australia. DJ Carmichael has initiated coverage as the company is  planning for 50,000 ozs per annum in gold production, commencing by the second half of 2013. The broker has the stock as a Speculative Buy with a target price of 10c and expects the share price to be re-rated once Mount Magnet is producing. (Last closing price 6c).

Kirkalocka may have a life of mine of five years but exploration upside is good, according to the broker. Total resources at Kirkalocka are 13.8mt at 1.1g/t for 506,000oz gold. Reserves are 8.2mt at 1.1g/t for 250,000oz. The company, after an infill drilling program this month, hopes to increase the ore reserve by 50,000-100,000oz. Kirkalocka is within the Murchison granite-greenstone province with high grade gold shear hosted within basalt. The tenement cover is large, over 35,500 hectares, and prospective for further discoveries.

As a case in point, drilling at the nearby Jumbulyer project, just 65km to the north, was completed in November. The drilling was designed to test potential gold mineralisation based on targets generated from extensive surface mapping and sampling, and from historical exploration. This is the first stage of a multi staged exploration program and includes first pass assessment of the Daveys, Pantomine and Foothills prospects. The objective of the drilling is to identify areas that may be integrated into the potential mining inventory for Kirkalocka. Work planned for the December quarter includes analysis of infill drilling to increase confidence in near-surface inferred material to an indicated resource.

The processing plant and all infrastructure is in place at Kirkalocka, having seen production by Equigold until 2008, and this will reduce the spending outlays. The plant includes a 1.6-2.1mtpa processing plant, 106 room camp, airstrip and power plant. Initial capex is projected at $29m, including $6.5m for working capital. Debt financing has been mandated with a global investment bank for up to $20m with a cost overrun facility of up to $3m. The plant was constructed in 2002 and when Equigold closed the operation it was placed on care and maintenance. Around 294,000 ozs was produced between 2002 and 2008. Of the $5m paid for the assets Equigold took $1.5m in cash and the remainder in shares in Mount Magnet. The largest shareholding in Mount Magnet is the Argyle family with 13.19%.

The broker is also impressed with management at the company. The general manager is Graham Howard, who held key management roles during the redevelopment of Newcrest's ((NCM)) Telfer between 1996 and 2006. Chairman Reg Gillard is also chairman of Perseus Mining ((PRU)). In a high gold price environment, with management that is of high calibre for such a small market cap, DJ Carmichael believes there are plenty of catalysts for the share price. The broker predicts net profit of $25m in FY14 allowing for circa 44,000oz of production for the year.

In its modelling, the broker uses a long term gold price of US$1300/oz and AUD/USD of 1.00. Translating this in terms of the company's sensitivity to movements in the gold price and DJ Carmichael comes up the following scenarios: a 10% increase (decrease) in the gold price, with currency forecasts unchanged, gives a valuation increase (decrease) of 32% or, with a 10% decrease (increase) in the AUD, and keeping commodity pricing unchanged, the valuation increases (decreases) by 8%. DJ Carmichael assumes the development capex required is $30m. For valuation purposes, it assumes equity of around $7m will be raised in the first half of 2013 resulting in an additional 140m shares on issue. 
 

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