Saracen Minerals Holdings Limited 09 Jun 10

Off and running

By way of background it has taken four years for Saracen to begin producing gold at its Carosue Dam project at South Laverton. The first gold bar was poured at the end of January 2010.

Saracen acquired the project from St Barbara in October 2005 for A$19.4 million. St Barbara acquired the project from the receivers for Sons of Gwalia but placed the operation on care and maintenance after three months. The Carosue mill produced 700,000 ounces of gold over five years.

After acquiring the asset, Saracen developed a two-stage plan to re-start mining from multiple open pits for the first five years and then develop underground mines.

Fat Prophets visited the project some years ago when the Carosue facility was under care and maintenance. Except for some minor repairs the plant was in very good condition. At the time of the visit power was supplied by diesel generators but the plant is now connected to the grid via a 90 kilometre power line. Availability of grid power lowers the cash cost by at least $A50 per ounce.

The Carosue Dam plant is located within eyesight of the Whirling Dervish gold deposit. During Stage-1 production, ore is mainly being sourced from Whirling Dervish and from the Porphyry open pit which is some 40 kilometres north of the plant. Production is also being supplemented from open pit ore from Enterprise, Wallbrook and Deep South.

Saracen’s gold resources are hosted within four distinct districts. The most northern district contains the Red October and Butcher Well deposits. These deposits require 120 kilometres road haulage to Carosue. Some 40 kilometres closer is the Safari Bore District that hosts the Safari Bore and the Deep South/Mexico deposits.

The Porphyry District hosts the Porphyry, Million Dollar, Margaret, Enterprise and Wallbrook deposits. The Carosue Dam District also hosts the Karari, Twin Peaks, Elliot Lode and Montys Dam deposits.

A criticism of the Carosue Dam is that there are multiple deposits to develop and road haulage is undesirably long in the case of the far flung deposits. Carosue will never be a low cost gold producer. Depending on grade and distance hauled, the cash operating cost is expected to be between A$550 and A$750 per ounce. At the current price of gold the cash margin is more than adequate for the company to report a robust operating cash flow.

To ensure a strong cash flow for the first couple of years to recoup initial capital outlays, Saracen has entered into a gold put/call option program. The put option component covers 176,000 ounces at a strike price of A$1,250 per ounce. Call options have been sold covering 103,494 ounces at a strike price of A$1,250 per ounce.


Saracen Minerals remains in an upward trend since October 2008 from a low of 5.7 cents. The recent high touched was at 53 cents in early January, which represents a gain of 47.3 cents (+829.82%). A minor retracement has resulted, which is not uncommon after such a strong appreciation in price.

The bullish moving average cross formed in early April 2009 remains firmly in place, providing upward momentum. A wedge pattern is currently in formation, which suggests of an upward break. Generally, the breakout is in the direction of the underlying trend. Should a break to the topside result, a move higher should target the previous high of 53 cents. Any downside move should be well supported at the 200 day SMA (red line) at 39 cents.

The weekly chart depicts the resilience of the uptrend since the 2008 low. Broader term momentum is favoured towards the upside, coupled with the consolidation in place at the upper border of resistance at 53 cents, bodes well for a continued move higher over the longer term.

Exploration is a very important part of the story for Saracen. The company holds a large tenement position covering parts of two major structural zones where more than 20 million ounces of gold has been discovered. There are large areas under cover that have potential for blind deposits.

There are 20 known gold deposits on Saracen’s ground and each of these is being systematically re-evaluated. The company is confident that additional resources and reserves will be outlined at several of the known deposits. The company also has several geochemical anomalies that require drill testing.


Saracen has a market capitalisation of A$174 million. The market is valuing the company’s gold resources of 3 million ounces at A$59 per ounce or US$48 per ounce.

The current market valuation across 68 companies with 769 million ounces in resources (gold equivalent ounces) is US$103 per ounce.

Saracen is undervalued by at least 50%. Yet the company has started producing gold at Carouse Dam and owns a 2.4 million tonnes per annum processing facility in very good condition. Saracen currently has gold resources of 3 million ounces and plans to produce 100,000 to 120,000 ounces of gold per annum.

In April 2010 the company produced 9,600 ounces of gold at a cash cost of A$535 per ounce. At current prices, a cash cost of US$444 per ounce is slightly below the industry average of around US$480 per ounce. This was the first full month of production. Gold was produced from 167,000 tonnes mined from the Porphyry open pit grading 1.9 g/t gold.

Gold recovery was around 94% in April and the annualised rate of throughput was just over 2 million tonnes per annum, and annualised gold production was 115,200 ounces. Wet commissioning began in early February 2010 and took three months to ramp up to full scale production. This was testament to the high quality nature of the Carosue plant.

Saracen is off to a very good start. Cash costs in April were lower than forecast but are expected to rise in May and June, resulting in a cash cost of A$690 per ounce or US$573 per ounce for 2Q10.

In April the company reported very encouraging drilling results from Wallbrook. The results included some high grade intersections including 7 metres at 9.5 g/t gold and 5 metres at 17.1 g/t gold. Saracen hopes to announce an increase in resources around mid-year that will permit expanding the Wallbrook open pit.

The higher grade intersections were particularly encouraging because it appears that there is potential for higher grade material. Increasing the head grade to the plant by 0.5 g/t increases the recovered gold value by nearly A$23 per tonne.

Wallbrook is only a very small resource that currently stands at 1.5 million tonnes grading 1.5 g/t gold. The drilling results might indicate that Wallbrook is going to surprise on the upside.

Exploration and evaluation of the Red October deposit is continuing. One of the next steps at Red October includes an extensive underground drilling campaign in addition to trial mining and testing of the ore through Carosue. Red October hosts a resource of 756,000 tonnes grading 8.4 g/t gold. The deposit is open at depth and along strike to the south and is an attractive target for underground mining.

At the end of 1Q10 the company had A$9.9 million in cash and is adequately funded now that gold production is underway. At the end of 4Q09 the company only had short term debt of A$8.5 million excluding lease liabilities. The company had a low gearing ratio with a net debt to equity ratio of -11%.

Catalysts for a re-rating include continuing good operating results from Carosue Dam and exploration results from Wallbrook and Red October. With more cash to spend on exploration we anticipate positive news flow from expanded exploration programs.

Saracen will never be a low cost gold producer. However, at current the current gold price the operating margin is over A$700 per ounce at the spot gold price. The exploration potential is very high and we note that the replacement cost of the Carouse Dam processing plant is more than Saracen’s market capitalisation.

Saracen Mineral Holdings Limited is a speculative investment but with the gold price expected to make further gains we are recommending the stock as a BUY for all Members.


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