Winston on Geovic MiningWinston's Growth Stock Report
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Issue 54 Vol. 13December 13, 2006 Customer Service 1-800-528-0559
In this Issue: Report on Geovic Mining, Update from Arian Silver
Geovic Mining A World Class Cobalt-Nickel Play www.geovic.net
Cobalt and nickel are two commodities which are currently trading at record high prices.
Combine that fact with the world’s largest primary cobalt deposit which just happens to be the most easily and economically mineable cobalt/nickel project on the planet - and you’ve got yourself an easy double for investors with Geovic Mining as they gear up for production in 2009.
In fact, Geovic is positioned to become the world’s largest producer of cobalt going forward with their projects in Cameroon.
About Cameroon
Cameroon is one of those countries most people couldn’t identify on the map and that’s because nothing bad ever happens there to warrant our attention. Located in West Africa, the country is politically and economically stable. They are also receptive to foreign investment. Aside from this cobalt deal, Exxon Mobil is building a billion-dollar pipeline in Cameroon which is a testament to the confidence in the government and the stability of the country.
The Properties
Geovic has a 60.5% interest in a 631 square km property that encompasses seven deposits.
The first one in development is called the Nkamouna. Its surface area is quite small, encompassing about 10 square kms. However, its internal rate of return (IRR) is quite big.
A prefeasibility and 43-101 study were done on the Nkamouna project which showed the property could produce with an IRR of 78%. That was based on a three year average price for the metals. It has proven and probable reserves of 53 million tonnes at an ore rate of .24% cobalt and .72% nickel. This deposit is 15 meters thick and is near surface.
The payback on the Nkamouna mine alone is only 1.2 years and would be producing 4,000 tonnes per year of cobalt. The net present value using a 10% discount and after tax would be US $317 million. With the stock price at $2.90, the market cap is $250 million on 86 million shares. The mine life of Nkamouna is estimated to be 21 years.
The capital cost on this project is the lowest in the industry at $129 million. One of the reasons for this is that all the deposits occur near surface so extraction is easy. Thus, operating costs are only 42 cents per pound, pre-tax and including nickel credits. Using three years of nickel prices in the model, nickel will be providing about 20% of the revenues.
Pre-Feasibility Numbers
• Internal Rate of Return - 78% - 3-year average metal prices
• Payback - 1.2 Years - produce 4,000 tonnes per year cobalt
• NPV 10% Discount - $317M US - this is Geovic’s after tax share)
• Capex - $129M - An Industry Low
• Operating Expenses - $0.42 Cobalt - pre-tax and net of nickel credits
• Current Mine Life -21 years - 1st of seven deposits
• Cash Flow per Year - $US100M
The final feasibility and permits are expected to be completed by mid 2007.
Immediately north of the Nkamouna deposit is the Mada deposit which has a 43-101 inferred resource of 145 million tons with a grade of .21% cobalt and .48% nickel. This area has not been fully drilled in strike length or to depth. Geovic’s management believe they could triple the resource on this deposit.
In addition there are five other deposits, so this project will be around for a long time – beyond anyone’s lifetime!
The unique characteristics of the cobalt make this project a world class deposit:
The cobalt mineralization in Cameroon is higher grade then any other laterite cobalt deposit in the world. The cobalt itself has large grains which are unusual. Given the unique structure of the cobalt and the ease of mining it, the ore is upgraded by a factor of 3 by using low cost mining methods which triples the rate of return for the company and the net present value.
This is what makes this project such a good investment and that’s why the economic performance of these deposits will be so strong.
Because of the simplicity of this project and given the low capital costs, production can be doubled on the first project at 8,000 tonnes of cobalt for less then $60 million.
The open pit will be less then 16 meters deep and is easily dug out with a front end loader or bulldozer.
After processing the course concentrate on site, the end product would be pure enough to send directly to a battery manufacturer or other industrial user.
The Supply and Demand of Cobalt
The supply side of cobalt is extremely tight right now. All the production now mined is immediately bought up in the market which has left inventories empty. Not surprisingly, the price of cobalt has recently doubled to $30.
Though market watchers don’t expect these heady prices to last, demand will stay strong for years to come.
In my mind, the biggest reason for this revolves around our favorite mode of transportation, the car.
Today the world produces 60 million cars and light trucks per year. In 25 years that will number will grow to over 90 million.
Now with oil and gas prices at much higher levels and with air pollution creating health concerns in major cities around the world, the auto industry and governments alike are pushing toward hybrid vehicles.
With global warming becoming such a HUGE disaster in the making as well, I can see this transition occurring very quickly over the coming years.
Cobalt is a key ingredient needed to make the batteries in hybrid cars.
When you consider today’s already tight cobalt market, there won’t be enough supply to handle those projected demands except Geovic has deposits which could double, triple or quadruple production very quickly going forward.
Cameroon and Geovic could very well become the world’s “swing producer” of cobalt in the same way that Saudi Arabia turns on the oil taps when global supplies get tight.
Cobalt is also used in the construction of jet engines, batteries for cell phones, laptops and other battery devices.
Last year the market for cobalt was 55,000 tonnes and this demand is expected to increase to about 95,000 tonnes over the next decade according to the number crunchers who are not projecting the rapid production rise of hybrid cars.
Management
Jack Sherborne – Chairman and CEO – 36 years executive management experience in energy and mineral industry with Unocal.
William Buckovic – President – 32 years of mineral exploration experienced. 20 international laterite nickel cobalt deposits for Unocal and others
David Beling – Executive VP and C00 – 42 years engineering, management and executive experience having financed, developed, and operated international mines.
Gary Morris – Sr. Vice President – 32 years mineral exploration, land, resource and environment management with Unocal and Western Nuclear
Greg Hill – CFO – 30 years experience in mineral, energy, and technology finance and strategic planning
Conclusion
Given projected first year cash flow of $100 Million, I would say those are bonanza type figures. However we are just talking about the first project that has a mine life of 21 years. There are six more deposits just waiting in the wings.
The rest of the district has potential of one billion tonnes, though not 43-101compliant numbers, the upside is potentially very blue sky while the downside risk is virtually zero.
Currently the Net Present Value of Geovic’s properties are $317 million using a 10% discount. With the price at $2.90, the market cap is $250 million on 86 million shares – leaving 78 cents in valuation. The kicker is that the Nkamouna mine alone can easily double production – and hence it’s NPV – for only US$60 million. Plus there’s ample potential with the other six deposits. Going forward I would expect a big increase in Geovic’s reserve numbers which will also increase the NPV.
Geovic is the type of stock you can buy now while it’s cheap and ride up in the years ahead as the cash flow and production start to build.
Accumulate
This is a great long term buy growth play that you could pass on to your Grandchildren.
Arian Silver – Acquires a Prospective 100 M oz Silver Deposit
This morning Arian Silver announced that it has acquired an exclusive option over 100% of the San Jose silver-base metal property in Mexico. The property lies within the silver-rich Ojocaliente mining district in Zacatecas State.
The San Jose Property
This is by far the best project Arian has in their portfolio of silver plays. The property covers two mining concessions encompassing some 4,000 hectares. The two mines on the properties were in operation from 1973 to 2001 and include a number of mine buildings and a 400 tonne per day shaft.
The key feature of this property is that the mineralized ore body has a 5 km strike length with widening widths up to 60 feet or 20 meters. Only about half of the strike has been mined and the balance remaining appears to be untouched. Historically the past producers mined up to a combined 90 million ounces themselves so potentially, there could be up to100 million ounces still in place. Arian will no doubt give the San Jose property its full attention in 2007. My expectation is that Arian will push toward getting a 43-101 resource figure ASAP and drilling for this will commence early in 2007. The company is fully funded and ready to go.
The news release on the acquisition was very factual (as they should be) with the potential not truly outlined. As the market becomes more aware of the upside on this play, I believe Arian will get a lot of attention.
Additionally, Arian has been drilling the Calicanto and the planned 3,000 metres should be completed in the near future. I see lots of news flow in the New Year as Arian moves toward proving up their properties.
I will do a full updated report on Arian Silver in the New Year. Continue to accumulate on dips.