Thursday, April 7, 2011

Carpathian Gold: A Probable Producer, But...

Before market's open, Carpathian Gold annouced an updated resource estimate for its 100%-owned RDM project in Brazil. Measured plus indicated resources now total 936,600 ounces of gold, and inferred resources total 587,300 oz. This inferred figure combines open-pit and underground resources. The open-pit part, which could lead to an expansion of its planned open-pit mine at RDM, is 240,700 ounces.

An hour after trading began, the company also released a full-scale feasibility study for RDM. Because it's an outright feasibility study, the resources it covers can be regarded as economic reserves. According to the study, proven and probable reserves for the open-pit project are 830,000 oz. at $950 gold. 100,000 oz. of gold are projected to be produced in the first three years of the strip mine's life, which is expected to be eight years. Its internal rate of return is expected to be a sizable 21.9% after tax for $1,150 gold; for $1,350 gold, it's expected to be 33.4%. As for net present value (NPV), it's expected to be $123.8 million with a 5% discount rate and $1,150 gold; with $1,350 gold, it's forecast to be $220.1 million. That's pretty sizable. Initial capital costs are estimated to be $160 million.

The market had some time to digest these results: the stock closed down half a cent at 47 cents.

Carpathian's stock is low-priced, but that's because of the total shares outstanding. With 388,697,615 shares, its current market cap is $182.688 million. The NPV for RDM is sizable, but so is its market cap. At $1350 gold, the NPV per share is only 56.5 cents U.S. per share - or only 54 cents Canadian. That figure's not much higher than where the stock is now.

Evidently, the market considers a mine to be probable. Given its already huge market cap, Carpathian could field the capital costs with a private placement - but doing so would nearly double the total shares outstanding. It could easily have 750 million shares if it goes the private-placement route.

There's only two ways in which Carpathian's NPV could be jacked up well above its current market price. The first way is for those inferred resources to add value to its planned mine. The second way is for gold to keep shooting up.

Those are the only two options for a stock like Carpathian making sense as an buy. Sadly, the bloating market got to this one first. It would make sense as a speculation on higher gold prices, but so would a much bigger name like International Tower Hill which Jim Cramer recommended as a speculative buy.

No wonder Carpathian's price has slumped, as its one-year chart (from Stockwatch.com) shows:



The Moral Of The Story: Some exploration stocks close to becoming producers are "yes, but..." deals. In Carpathian's case, the "but" is the price. Sadly, the exploration market is such that a probable producer is sometimes discounted as such. Carpathian's rich market cap does make it a more probable producer candidate, but the cap also limits the upside. Such stocks are best considered as speculative vehicles for betting on gold to keep rising unless they can be snapped up after their stock caves in.


Disclosure: None - I don't own any Carpathian.

2 comments:

  1. Your analysis is what a rookie investor in the resource sector might do. I suggest you do some real DD and you will find the company already has all the capital costs covered through cash on hand, gold loan, lease agreement with Caterpiller and debt financing. They also own over 10 million gold eq. ounces in Romania in the golden triangle and growing plus the resource at RDM in Brazil will certainly increase and find it's way into the feasibility study. A very poor assessment.

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  2. Not when it came to the risk-reward ratio. If a mine is a certainty, then the stock at 44 cents is only a little below fair value. The only reason there's somewhat of a discount now - not much of one - is because the stock fell three cents after I wrote the original post.

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