Gateway Mining 07 Feb 08

Sluggish exploration progress

Gateway Mining has provided an update on its exploration activity in its December 2007 quarterly report. Encouragingly, there appears to be some prospect of drilling activity in the March-June quarters on its Cowra and Gidgee projects, after delays associated with rig availability and wet weather. Unfortunately, we cannot find any compelling reason to continue to hold the stock, despite our patience over the past two years.

Fat Prophets initially recommended buying GML around 18 cents in March 2006 (Fat Mining17). Our last review of this stock was in November 2006 (Fat Mining 52).

Since retesting the all-time high of 28 cents in January 2007, the performance of Gateway Mining has been disappointing. By September, the stock had fallen by more than two-thirds to a low of 9.1 cents. As is evident on the daily chart, prices have since been contained in a band of consolidation between this low and resistance at 14 cents.

Currently, there are no signs pointing to the restoration of upward momentum in the near-term. Instead, we anticipate ongoing consolidation for the stock.

It has been a long while since our last coverage of Gateway Mining. One of the major problems from our perspective has been the relative lack of exploration activity. This has been a major concern to us, particularly over recent times.

At the end of the day, if an exploration company’s activity levels are limited, there is no real compelling reason to hold the stock, and investor’s money is best invested elsewhere. Unfortunately, this is the point we have reached with Gateway Mining.

In our initial coverage of Gateway Mining way back in March 2006, we based our liking for the company on the lucrative exploration joint venture that it had recently negotiated with Barrick Gold, the world’s largest gold producer, over its Gidgee Project tenement area in Western Australia. To have a company of Barrick’s calibre as a joint venture partner was a credit to Gateway’s persistence and project prospectivity.

Under the deal, could earn a 70% stake in selected tenements within the Gidgee project. Unfortunately, after conducting initial exploration work, Barrick elected to withdraw from the project. This was a major blow to Gateway’s prospects and share price, from which it has found it difficult to recover.

Since then, Barrick has been replaced by listed junior, WCP Resources, as project partner over some of Gateway’s Gidgee acreage. WCP is a well credentialed and successful Aussie exploration company, so all is by no means lost.

WSP is focused on primarily exploring Gateway’s Airport Central and Barrelmaker projects at Gidgee. Under a joint venture arrangement, WCP has the option to earn up to 70% in the projects by funding exploration, with Gateway retaining a 30% stake. Gateway will initially receive 12.5 million shares in WCP, along with a further $1 million worth of stock at staged intervals.

WCP is testing depth extension targets under the Whistler open pit, which hosts an existing Inferred Resource of 25,600 ounces averaging 7.5g/t Au. WCP is also exploring other regional targets.

Elsewhere, Gateway has joint venture agreements with highly respected explorer, Minotaur Exploration, on two of its projects, the Cowra Project in NSW and the Surprise Project in Queensland.

At the Cowra Project, Minotaur can earn up to a 75% stake in the project by spending $2 million over a 54-month period. The project covers more than 50km of prospective Ordovician-age rocks, which Gateway acquired for its potential to host porphyry copper-gold mineralisation.

At Surprise in the Mt Isa region of northern Queensland, Minotaur can earn up to a 75% stake in the project by spending $1 million over a 54-month period.

One of the major issues for Gateway Mining has been accessing drilling rigs to enable an appropriate amount of exploration drilling to take place. The current strong demand for rigs has not helped its cause. On the positive side of things however, it seems likely that drilling will take place at both Cowra and Surprise during the March quarter.

As at 31 December 2007, the company held cash reserves of $1.0 million.

Gateway Mining remains a modestly valued junior exploration company, with a tight capital structure and strong leverage to any exploration success. Management has done a remarkable job surviving on the smell of an oil rag, as it were. Unfortunately, this has come at a cost.

We do not see any real speculative upside for Members, in either the short or medium terms, due to the relative lack of exploration activity. There are numerous other junior companies with much higher activity levels on which Members should focus.

We therefore recommend Gateway Mining as a Sell around 11.5 cents.


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