Full Analyst Report TextBrian Tang, CFA
Analyst
Vincent Weber, BSc
Research Associate-Mining
Kevin Liu, BBA, BSc
Research Associate
January 22, 2009
??
2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Castle Gold Corp. (TSX.V: CSG) –Initial NI 43-101 Resource Estimate for the La Fortuna Property
Sector/Industry: Junior Mining Gold https://www.castlegoldcorp.com/
Market Data (as of January 22, 2009)
Current Price $0.46
Fair Value $1.67 (?)
Rating* BUY
Risk* 4 (Spec)
52 Week Range $0.15 - $0.64
Shares O/S 75.31 mm
Market Cap $34.64 mm
Current Yield N/A
P/E (2009E) 3.95
P/B 1.20
YoY Return -17.9%
YTD TSXV -65.2%
*see back of report for rating and risk definitions
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
23-Jan-08 22-Apr-08 21-Jul-08 19-Oct-08 17-Jan-09
$0.00
$0.20
$0.40
$0.60
$0.80
Investment Highlights
?? The El Castillo Mine entered into commercial production on July 1, 2008. For Q3
2008, the El Castillo Mine produced 4,629 oz of gold from processing 486,000
tonnes of ore with an average grade of 0.5g/tonne. The company has the objective
of increasing production to 25,000 - 30,000 oz of gold per annum in early 2009,
and 50,000 oz of gold per annum in the second half of 2009.
?? At $685/oz, the El Castillo mine incurred higher average operating expenses than
expected due to a higher strip ratio of 1.55, versus the expected 0.6. According to
management, the company expects operating costs to decrease in 2009, by
improving mining efficiencies including utilizing large equipment (which will also
be used to increase gold production from the mine).
?? In Q3 2008, CSG was entitled to 1,913 oz of gold (50% of the company’s total
production from the El Sastre mine), with an average grade of 2.55g/tonne. A
second leach pad in the mine achieved planned commercial production levels
during Q3 2008. CSG expects gold production of 1,000 to 1,200 oz in Q4 2008
and 2009. The company also expects the ore grade to remain at 2.5 g/tonne during
the first half of 2009, as new areas of the mine are put into production
?? In Q3 2008, the company posted revenues of $6.33 million ($5.04 million and
$1.29 million from the El Castillo and El Sastre mines, respectively), compared to
$2.32 million in Q3 2007 (from the El Sastre mine). Net income was $0.77 million
(EPS: $0.01) in Q3 2008, compared to a net loss of $0.20 million (EPS: -$0.00) in
Q3 2007.
?? The company completed an initial NI 43-101 resource estimate for its La Fortuna
property, totaling 308,100 oz. of gold in the measured and indicated category. This
was followed up by results from metallurgical testing showing high recoveries
(>90%) for gold.
?? We have maintained our BUY rating on the company and increased our fair value
estimate to $1.67/share from $1.22/share.
Risks:
?? Like other producing companies, the value of the company depends heavily on
gold prices, cash costs, and recovery rates.
Key Financial Data (FYE - Dec 31)
(US$) 2007 2008E 2009E
Revenues 7,831,966 14,621,309 38,446,787
Net Income (1,520,053) 488,589 8,806,348
EPS (0.03) 0.01 0.12
Cash + Marketable Securities 1,415,491 354,295 7,857,742
Working Capital 1,775,414 1,295,745 9,454,560
Mineral Assets & PPE 39,340,141 40,947,232 42,233,598
Total Assets 43,329,923 46,317,554 55,762,735
Castle Gold is producing from the 100% owned El Castillo Gold Mine in Durango, Mexico and the 50% owned El Sastre Mine in
Guatemala. The company’s strategy, pioneered by experienced management, is to start with small, low cost heap leaching operations,
build resources and grow production out of cash flow.
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 2
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Company
Overview
La Fortuna
Castle Gold is a gold mining and mine development company focused on low cost properties
with long-term growth potential in Latin America. They operate the 100% owned El
Castillo gold mine in Mexico, and jointly operate, and own, 50% of the El Sastre gold mine
in Guatemala.
Since our previous update on the company, significant progress has been made at La Fortuna
including the completion of a 43-101 resource estimate and metallurgical testing. Based on
our discussion with management, the company also made good progress in its goal to
increase production from its EL Castillo mine to over 50,000 oz of gold per annum in the
second half of 2009. Management has informed us that the company intends to utilize larger
equipment to achieve this production rate. The larger equipment is also expected to improve
mining efficiencies at the EL Castillo mine.
Resource Calculation: The company announced an initial NI 43-101 resource calculation
for the La Fortuna property on November 12, 2008. The optimal cutoff grade is 0.5 g/t Au
showing a measured and indicated resource of 308,100 ounces of contained gold.
Table 1:
Measured Indicated Cutoff Measured & Indicated
Grade
(g/t)
Tonnes
(000)
Au
(g/t)
Tonnes
(000)
Au
(g/t)
Tonnes
(000)
Au
(g/t)
Au Oz.
0.8 1,322 3.332 2,681 1.731 4,003 2.260 290,800
0.5 1,538 2.956 3,287 1.533 4,824 1.986 308,100
0.3 1,538 2.956 3,669 1.415 5,207 1.870 313,100
Source: Castle Gold Corporation
Metallurgical Testing: The company reported that SGS Mineral Services (“SGS”) of
Lakefield, Ontario has completed a series of metallurgical studies on a bulk sample extracted
from underground working at the La Fortuna property. SGS made note of the important fact
that ore is available as free grains, and is not encapsulated in sulphide minerals. A number
of techniques were explored including pre-concentration.
Testing indicated that in combination with cyanidation, crushing material to minus ½ inch
yielded recovery of 60% which increases to 99% following grinding of the material to 75
microns.
High recoveries of gold appear possible through a gravity (90%) or flotation (96%)
concentrate that contains 10-15% of the original mass of feed. Commercial ore sorting
techniques (x-ray and microwave heating), with the ore crushed to ½ to 1 inch in size,
resulted in the recovery of 20-25% of the original rock mass that contained in excess of 90%
of the gold. A pre-concentration stage can significantly decrease further processing costs.
Scoping Study: The company has indicated it intends to initiate a scoping study regarding
the development of the La Fortuna deposit which it hopes to have concluded in the second
quarter of 2009.
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 3
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Outlook on
Gold
Financial
Analysis
We have maintained our short-term (US$885/oz in 2009, and US$900/oz in 2010) and longterm
(US$600/oz) gold price forecasts.
Revenues: In Q3 2008, the company posted revenues of $6.33 million ($5.04 million and
$1.29 million from the El Castillo and El Sastre mines, respectively), compared to $2.32
million in Q3 2007 (from the El Sastre mine only). For the first 9 months of 2008, the
company reported total revenues of $8.79 million, compared to $5.52 million in the
comparable period of 2008. The company is on track to exceed our revenue expectations of
$10.72 million for 2008.
El Castillo Mine: On July 1, 2008, the company achieved commercial production at the El
Castillo mine. The company produced 4,629 oz of gold in Q3 2008 (ended September 2008)
from processing 486,000 tonnes of ore with an average grade of 0.5g/tonne. According to
our discussion with management, CSG has the objective of increasing its production rate to
25,000 to 30,000 oz of gold per annum by the end of 2008, and 50,000 oz of gold by the
second half of 2009. In Q4 2008, we forecast revenues of $4.32 million from sales of 5,440
oz of gold. In 2009, we forecast revenues of $29.32 million from sales of 33,125 oz of gold.
El Sastre Mine: In Q3 2008, the company produced 1,913 oz of gold (50% of total
production) from the mine with an average grade of 2.55g/tonne, compared to 1,558 oz of
gold in Q3 2007 (50% of total production) with an average grade of 2.74g/tonne. For the first
9 months of 2008, the company produced 3,851 oz of gold (50% of total production) from
the mine with an average grade of 2.07g/tonne, compared to 4,284 oz of gold in the same
period of 2007 (50% of total production) with an average grade of 2.96g/tonne. In addition,
the second pad constructed in Q2 2008, achieved planned commercial production levels
during Q3 2008.
According to management, CSG expects gold production of 1,000 to 1,200 per month in Q4
2008 and 2009. The company also expects the ore grade to remain at 2.5 g/tonne during the
first half of 2009, as new areas of the mine are put into production. In Q4 2008, we forecast
revenues of $1.52 million from sales of 1,914 oz of gold. In 2009, we forecast revenues of
$9.13 million from sales of 10,318 oz of gold.
We revise our revenues forecasts upward to $14.62 million, and $38.45 million, in 2008,
and 2009, respectively, versus $10.72 million in 2008, and $28.14 million in 2009, in our
previous report.
Operating Expenses: In Q3 2008, the El Castillo mine had an average operating expense
(including production costs, royalties and all site related operating and administration costs)
of $685/oz, significantly higher than our expectations. Operating expenses were negatively
affected by a higher strip ratio (tonnes waste per tonne of ore) of 1.55 in Q3 2008, compared
to the predicted life of mine average (LOM) of 0.6 (current 43-101 reserve report by ACA
Howe - August 1, 2008). As a result, over 460,000 tonnes of additional waste material was
mined. The company expects that higher than average costs will continue into 2009, until
such time as the waste to ore ratio declines to the LOM average. Adjusted operating costs
(costs associated with the higher waste stripping cost relative to the LOM average strip ratio
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 4
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Valuation
deducted) averaged $585/oz in Q3 2008. Based on our discussion with management, the
company expects operating costs to decrease during 2009, through different efficiency
improvements, and optimization measures, including utilizing larger equipment. At the same
time, CSG expects the strip ratio to decline in 2009, and reach the predicted LOM average in
2010. In addition, the company’s estimate of long term averageoperating costs ranges
between $370/oz and $400/oz. As a result, we have increased our long term operating cost
forecast from $343/oz to $385/oz, for the EL Castillo mine in our valuation model.
For the El Sastre mine, operating expenses were $192/oz and $209/oz in Q3 2008, and the
first 9 months of 2008, respectively. These are inline with our previous expatiations, and we
have maintained our assumptions in our valuation model.
Earning Forecasts: The company posted net income of $0.77 million (EPS: $0.01) in Q3
2008, compared to a net loss of $0.20 million (EPS: -$0.00) in Q3 2007. For the 9 months
ended September 2008, the company posted net income of $1.22 million (EPS: $0.02),
compared to net income of $0.04 million (EPS: $0.00) in the same period of 2007. Our
forecasts of net income are $0.49 million (EPS: $0.01) in 2008, and $8.81 million (EPS:
$0.12) in 2009.
Cash Flows, Capital Structure and Liquidity: In the 9-month period ended September
2008, the company generated $2.79 million from operations, and spent $2.26 million in
investing activities. We believe cash from operations will be sufficient and the company
will not need to raise capital in Q4 2008 and 2009. The following table summarizes the
company’s liquidity position as of September 30, 2008.
(in US$) 2007 Q3 2008
Cash + Marketable Securities 1,415,491 2,217,950
Working Capital 1,775,414 6,164,635
Current Ratio 1.8 3.0
Debts/ Assets 17.1% 15.6%
Recent Financings: There was no major financing subsequent to the quarter ended
September 2008.
Stock Options and Warrants: At the end of September 2008, the company had 5.86
million outstanding stock options with exercise prices ranging from $0.24 to $70, and a
weighted average remaining life between 1.85 to 4.95 years. The company also had 3.91
million warrants outstanding with exercise prices ranging from $0.54 to $1.00, and weighted
average remaining life between 0.1 to 0.6 years. None of the options and warrants are
currently in the money.
Our revised valuation of the company is $1.67/share, compared to $1.22/share in our
previous report, primarily due to an increased resource estimate from the La Fortuna
property.
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 5
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Valuation Summary
El Castillo $89,712,932 $1.19
El Sastre $13,093,900 $0.17
La Fortuna $26,923,821 $0.36
WC $2,217,950 $0.03
Debt (5,400,304) ($0.07)
Net Value $126,548,299 $1.67
Shares (diluted) 75,610,717
La Fortuna property: Our revised DCF model gave a fair value estimate on the La Fortuna
property of $0.36/share, compared to $0.10/share in our previous report. We have valued the
property based on the new resource estimate of 308,100 oz of gold, compared to 202,407 oz
of gold in our previous report (half the historical resource estimate). In addition, we have
increased recovery to 90% from 70% based on recent metallurgy testing.
Ownership 100%
Mineral Resources (in tonnes) 4,825,000
Gold Grade (gpt) 1.986
Contained Gold (in troy oz) 308,100
Recovery - Gold 90%
Mine Life (years) 4
Long-term Gold Price (US$/oz) 600
Capital Costs $40,000,000
Operating & Admin costs ($/tonne) $15
Discount rate 12.84%
Net Present Value $26,923,821
No. of Shares (Diluted) 75,610,717
Fair Value per Share $0.36
DCF Valuation Summary - La Fortuna
EL Castillo mine: Given the assumptions discussed above, our revised DCF model gave a
fair value estimate on the El Castillo mine property at $1.19/share, from $1.06/share. The
following table shows our revised valuation on the project.
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 6
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Ownership 100%
Mineral Resources (in tonnes) 96,550,000
Gold Grade (gpt) 0.788
Silver Grade (gpt) 1.720
Contained Gold (in troy oz) 1,183,901
Recovery - Gold 68%
Mine Life (years) 16
Long-term Gold Price (US$/oz) 600
Capital Costs (2009) $1,500,000
LT Operating & Admin costs ($/oz) $385.00
ST Operating & Admin costs ($/oz) 2009: $547/oz, 2010: $420/oz)
Discount rate 12.84%
Net Present Value (C$) $89,712,932
No. of Shares (Diluted) 75,610,717
Fair Value per Share $1.19
DCF Valuation Summary - El Castillo Mine
EL Sastre mine: Our revised DCF model (shown below) gave a fair value estimate on the
El Sastre mine property at $0.17/share, compared to $0.14/share previously. The following
table shows our revised valuation on the project.
Ownership El Sastre - 50%
Total Mineral Resources (in tonnes) 2,503,000
Wt. Avg. Gold Grade (gpt) 1.96
Total Contained Gold (in troy oz) 157,500
Recovery - Gold 80%
Remaining Recovered Gold to CSG 59,143
Mine Life (years) 5
Long-term Gold Price (US$/oz) 5
Remaining Capital Costs (incl. Sustainable Capital) $4,806,322
Operating Costs ($/tonne) $14
Discount rate 16.49%
Net Present Value (C$) $13,093,900
No. of Shares (Diluted) 75,610,717
Fair Value per Share $0.17
DCF Valuation Summary - El Sastre Mine
Sensitivity: The following table shows our DCF model is highly sensitivity to our long term
gold price forecast (US$600/oz).
Gold Price Valuation
500 1.28
600 1.67
700 2.07
800 2.47
900 2.86
1000 3.26
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 7
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Conclusions &
Rating
Risks
Based on our revised valuation models and review of the company’s progress since our
previous report, we reiterate our BUY rating and raise our valuation on the company
from $1.22 per share to $1.67 per share.
We rate the shares a RISK of 4 (Speculative). The following risks, though not exhaustive,
will cause our estimates to differ from actual results:
??Like other producing companies, the value of the company depends heavily on gold
prices, recovery rates, and operating costs.
??The company may experience operating issues from its El Castillo mine, which recently
achieved commercial production.
??The success of further development, exploration, and expansion is a significant factor in
Castile Gold’s success
Brian Tang, CFA Castle Gold Corp. (TSX.V: CSG) –Update Page 8
?2009 Fundamental Research Corp. www.researchfrc.comBrian Tang, CFA
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Appendix: Financial Statements
Castle Gold Corporation - Income Statement
(in US$)
2007 2008E 2009E
Revenues 7,831,966 14,621,309 38,446,787
Cost of Sales 1,977,835 8,942,750 20,179,442
Gross Margins 5,854,131 5,678,559 18,267,346
Expenses
General and Administrative 1,754,790 3,205,264 3,834,094
Exploration Expenses 433,247 361,037 469,349
Impairment charges 1,076,986 - -
EBITDA 2,589,108 2,112,258 13,963,903
Depreciation, Amortization and Accretion 976,400 829,743 863,634
EBIT 1,612,708 1,282,515 13,100,269
Other Income (636,474) (584,530) (869,230)
Non-controlling Interest (2,054,951) - -
Income Taxes (441,336) (209,395) (3,424,691)
Net Income (Loss) (1,520,053) 488,589 8,806,348
EPS (0.03) 0.01