Too conceptual in nature and therefore very high risk.
Mundo Minerals has set itself a target to produce 200,000oz of gold per annum from mines in Brazil and Peru. Targeted production from its key projects is very much conceptual in nature, as are the resources. The company claims a resource base of 3.5m ounces. As yet, Mundo Minerals has not reported JORC compliant resources.
Fat Prophets initially recommended buying Mundo Minerals at 33 cents in November (Fat Mining 51). Our last review of the stock was during July (Fat Mining 183).
From a charting perspective, consolidation remains the major theme for Mundo Minerals. As evident on the daily chart, prices have spent the past seven to eight months trading between resistance at $0.475 and support at $0.30, marked from the top of the prior basing pattern. Currently, prices are trading towards the lower boundary of this range.
Members will recall that the company has four key projects, three of which are in Brazil, and one in Peru. The Engenho Gold Project in Brazil is in production. Here the plan is to increase output to 40,000oz in 2010, rising to 48,000oz in 2011. Long-term the target for Engenho is 55,000oz p.a.
At the Jaqueria Project in Brazil the company is seeking production of around 50,000oz p.a. The Tocantins JV is also in Brazil where exploration has focused on the Conceicao tenements within an unexplored greenstone belt. Here initial RAB drilling has identified two strong gold anomalies, one of which has a strike length of 1.2km.
Visible gold has been identified in 8 individual drill cores at Conceicao and the next step is to develop a JORC compliant resource from which to mount a feasibility study.
The Torrecillas Project in Peru is where the company currently hopes will propel annual gold output towards 200,000oz. This is narrow high-grade gold deposit and the concept is to start production at 40,000oz p.a. and build to 100,000oz p.a.
Key Points from the September Quarterly Report for 2009.
Engenho Gold Project - Brazil.
1) 3Q09 EBITDA of $A3.2m.
2) Gold production of 6,440oz (2Q09: 6,154oz).
3) Cash cost of $A751/oz versus $A698/oz for 2Q09.
4) Higher than usual maintenance and other costs.
5) A strong real cut revenue by $A0.9m.
6) 66,392 tonnes mined.
7) Good gold recovery of 93.9%.
At the Crista prospect which is 1.6km north of Engenho, a drilling program is underway to determine a JORC compliant resource for ore delivery to the Engenho mill by mid-2010. Ore form this source will help boost production and there is another emerging satellite deposit, Olhos also being evaluated.
Cash costs are relatively high over US$600/oz. This is well above the global average cash cost of around US$480/oz.
Torrecillas Project – Peru.
1) Development along the Torrecillas veins confirms high grades.
2) Mineralisation at the current level is similar to higher levels.
3) Trial mining and toll treatment is underway.
4) Head grade for 1Q-3Q09 averaged 22.84g/t.
5) Focus has turned to developing additional veins.
6) The CAPEX for commercial production is $A35m.
7) High grade will result in a lower cash cost – around US$400/oz.
8) Final feasibility study on track for 3Q 2010.
9) First production by late 2011.
In Summary - Pathway to 200,000oz p.a. gold production.
1) Increase production at Engenho to 55,000oz p.a.
2) Move ahead with developing Torrecillas to 100,000oz p.a.
3) Advance the Jaqueira Gold Project to become the 3rd mine in Brazil.
4) Test the two strong gold anomalies at Tocantins.
The company’s ground is prospective for gold but the company is not currently in a financial position to mount a meaningful exploration effort to find a gold deposit.
It is one thing to report positive EBITDA numbers, but another thing to generate free cash to re-invest back into the business. The company reported a negative net operating cash flow of ($A0.82m) of 3Q09 (1QFY10).
We are concerned that the company’s cash position at the end of the September quarter was only $A1.17m. The company needs to raise significant new capital to meet its corporate objective of 200,000oz of gold production per annum. A share issue is probably just around the corner.
The company has excellent exploration potential with plans to grow the business. However at this point in time, we see the risks as too high for Members. The company's activities are capital constrained.
We recommend switching into Chalice Gold Mines (ASX: CHN).
Accordingly we are changing our recommendation from HOLD to SELL for all Members.
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