Tuesday, April 5, 2011

Prodigy Gold Jumps On Great Preliminary Economic Assessment

In my own profiles of junior exploration companies, found in the "goldexploration" classification, I've mostly settled on using a Preliminary Economic Assessment (PEA) to size up the potential for an exploration stock. The gap-up of Prodigy Gold shows that the market is paying attention to the same criterion too.

Prodigy Gold jumped up 22% yesterday on a great PEA for its Magino project, located 40 kilometres northeast of Wawa in Northern Ontario, that it released an hour after trading began. The PEA shows a net present value (NPV) of $351 million using $1,000 gold; for $1,300 gold, the NPV is $691 million. Both figures are before taxes. The internal rate of return is 49% for $1,000 gold. Prodigy's current market cap is below $100 million, making for a huge discount below the NPV.

The Magino itself is a large near-surface deposit, with indicated gold resources of 1,924,200 ounces at 1.16 g/t gold and 587,100 ounces of inferred gold resources grading 1.04 g/t using a 0.35 g/t cut-off grade. As the grade indicates, the deposit will be a strip mine if it gets off the ground.

In order to get it up and running, the PEA estimates it will take $242 million. That's a lot for a compnay with only a $97.565 million market cap, even after its spike-up. As is often the case, a large discount to the NPV is balanced out by massive dilution needed to pursue the project on an equity-financing basis.

In cases of stocks like this spiking up, there's often a pull-back period that offers a second chance to get in. Just below is the one-year chart for Prodigy, from Stockwatch.com:

The Moral Of The Story: With big projects requiring more and more capital, a huge discount paradoxically increases the risk of the project not getting financing. Prodigy would be too leveraged for a conventional loan to make much sense unless lenders are eager to lend. The best outcome for a company like Prodigy, assuming everything holds up in pre-feasibility and feasibility stages, would be for its stock to rise a lot further. Sadly, when the excitement fades, a lot of stocks of this sort tend to sink as reality sets in. Perhaps the best outcome for this company is a takeover, as the size of its deposit is well above the 1 million-ounce threshold. It may have to resort to a joint venture with a senior, which would end up with the lion's share of the project.

Disclosure: None.

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