BMA Gold 15 Mar 06

Our newest gold producer

BMA Gold represents Australia's newest gold producer, having joined the production ranks in February 2006. Its Twin Hills Project in Queensland hosts the 309 mine, which is set to generate gold production of 50,000-60,000 ounces annually at a low cash operating cost of A$250 per ounce over the next five years. The company is completely un-hedged, allowing it to take full advantage of gold prices at a 25-year high.

"BMA Gold has commenced production at the perfect time, with spot prices at a 25-year high."

BMA is currently recovering from a correction within a two-year upward trend channel. Encouragingly, the February low of 27.5 cents was well above the lower boundary of the channel, currently at 22 cents.


Additional near-term gains in BMA Gold will initially target the January high of 40 cents. The upper boundary of the channel lies just above here at 41 cents. In time, we believe that BMA has the potential to break beyond these barriers, re-affirming the sustainability of a longer-term upward trend.

BMA Gold's current focus is on its Twin Hills Project, located some 120 kilometres north of Clermont and 250 kilometres south of Charters Towers in Central Eastern Queensland, in an area known as the Drummond Basin.

Extensive previous exploration of the Twin Hills Project identified two significant epithermal mineralised gold deposits - the 309 and Lone Sister deposits. These deposits are located within 7 kilometres of each other, with the higher-grade 309 deposit currently undergoing development and mining.


The company undertook an intensive infill-drilling programme at Twin Hills during 2004, which led to the announcement of an initial JORC-compliant resource estimate and completion of a Bankable Feasibility Study.


Stage 1 of mine development at 309 involves a decline accessing the ore body via a box cut and mine portal from 80 metres below surface. Total capital development costs were $22 million.

Mining of 309 underground ore is underway, with ore hauled 280 kilometres by road to the company's recently acquired Rishton treatment plant. The 500,000 tpa plant has ample capacity and is well suited to treat Twin Hills ore.


BMA purchased the plant at a cost of $5.6 million, which is very cheap when compared with the alternative of building a new plant and tailings dam on-site at Twin Hills. The acquisition also gives the company access to an experienced workforce, experienced with operation of the plant.

The other advantage of utilizing the Rishton plant is that it allows BMA to commence gold production much more rapidly than if it were to build a new plant from scratch, allowing it to take full advantage of current gold prices that are close to 25-year highs and reducing capital risks.

The company is looking to build upon its existing 309 Reserves base, which currently total 285,000 tonnes @ 25.6g/t Au and 13.4g/t Ag for 235,000 contained ounces of gold.

A 17-hole drilling program commenced in February with the aim of converting Inferred Resources in Area 3 which currently total 196,000 tonnes @ 8.3g/t Au, into mineable Reserves.

The company is also exploring the regional potential at Twin Hills, before Stage 2 development commences, which will involve the mining of the lower-grade Lone Sister gold ore body and the relocation of the Rishton treatment plant to the Twin Hills site.

In order to maintain its un-hedged position, BMA has raised all of its working and development capital through equity rather than debt. The company raised $12 million in equity during 2004, a further $9.8 million during 2005 and $8 million in February 2006. This has allowed it to avoid mandatory hedging, allowing it full leverage to strong gold prices. It has current cash reserves of around $8 million.

With regard to production, we anticipate gold production of 50,000 ounces and silver production of 36,000 ounces during calendar 2006 at a low cash operating cost of A$250 an ounce.

Assuming a conservative gold price of US$500 an ounce and an exchange rate of US$0.75, we anticipate CY2006 EPS (earnings per share) of 4.0 cents, which puts BMA on a modest P/E (price/earnings) ratio of below 8x.

For CY2007 and CY2008, we anticipate gold production of 55,000 ounces and silver production of 36,000 ounces, with EPS of 4.5 cents during CY2007 and CY2008. BMA's P/E ratio thus falls to below 7x and we have not accounted for the likely commissioning of the Lone Sister deposit in 2007.

Gold remains in a consolidative phase after reaching a 25-year high of US$575 in February. Recent price action has seen trading confined to a range between US$575 and US$534.50.


Fat Prophets have held a bullish outlook on gold since our initial recommendation at US$262 in March 2001. Long term upwards trends never travel in a smooth line with strong price gains balanced by periods of consolidation. With this in mind, we view the current consolidation in the gold price as a temporary pause in the longer-term upward trend.

Although we cannot rule out further consolidation in the coming weeks, we believe higher prices will eventuate. In time, we believe that gold will trade above the 1980 all-time high of US$850.

BMA Gold has taken the fast lane into production and is set to reap the benefits of a high-margin gold operation. With no hedging in place and cash operating costs of around A$250 per ounce, the company is generating robust cash margins of around A$480 an ounce. We are a firm believer in the ongoing strength of the price of gold and BMA provides Members with tremendous exposure. We recommend BMA Gold as a Buy to all Members around 30.5 cents.


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