Canaccord increase target to $2.40Precious Metals Weekly | 6
20 September 2010
Andina Minerals (ADM):
Our 12-month target price has increased to
C$2.40 (from C$2.00) based on 1.0x (previously 0.75x) our 12.5%/diluted peak NAVPS
estimate of US$2.36 (previously US$2.50) translated assuming US$/C$ parity (previously
US
.95/C$).
Good progress at Volcan; further de-risking on the horizon
In advance of a pre-feasibility study expected in Q1/11, Andina Minerals has announced
an improved resource estimate and refinements to the previously contemplated
Conceptual Development Plan for the Volcan Gold Project in Chile.
Highlights include:
• An updated resource estimate for Volcan that includes 8.182 Moz Au grading 0.71
g/t in the Measured and Indicated category (using $950/oz Au) vs. the previous
estimate of 9.773 Moz grading 0.62 g/t (using $850/oz Au). The updated resource
estimate is an improvement over the previous estimate given the 14.5%
improvement in grades, although the overall ounces in the measured and indicated
category have declined by 16.3% due to some of the lower-grade ounces failing to
meet the higher cut-off grade.
• An Initial Phase I Development Plan is being further evaluated by Andina based on
a subset of the overall M&I resource (70-80% of contained ounces) contained within
an intermediate pit shell containing M&I resources of 6.051 Moz grading 0.72 g/t.
The conceptual plan is based on a combined heap leach and milling scenario
involving the processing of higher-grade ore (1.720 Moz Au grading 1.485 g/t)
through a 9,000-13,000 tpd mill and heap leaching of lower-grade material (4.331
Moz grading 0.597 g/t). This compares with the previous base heap leach only
scenario involving an estimated mineable resource of approximately 5.8 Moz
grading 0.69 g/t. Our revised profile now assumes an overall mineable resource of
5.9 Moz grading 0.70 g/t for Phase I (mill – 1.677 Moz grading 1.45 g/t, heap leach
– 4.223 Moz grading 0.58 g/t).
• For Phase 1 the company is targeting a 50,000-60,000 tpd combined heap leach
and milling operation (9,000-13,000 tpd mill) compared with the previous 60,000
tpd heap leach only operations. We now assume a combined 55,000 tpd heap leach
and milling operation including an 11,000 tpd mill and a 44,000 tpd heap leach
operation.
• Mill recoveries are estimated at 60-83% and heap leach recoveries at 45-69%, with
overall blended recoveries (mill and heap leach combined) under the scenario
expected to improve to 60-70%. This compares favourably with the previous base case
heap leach only scenario which highlighted lower overall recoveries of 57-60%, based
on a realistic 6 mm crush size. Our revised profile assumes mill recoveries of 76% and
heap leach recoveries of 63% for blended average heap leach and mill recoveries of
65%.
• While capital cost estimates have not been provided, we have increased our
assumed initial capex to $650 million from $510 million. We have also increased
our sustaining capital assumptions to a more realistic $8 million per year ($107
million over the life of the mine) from our previous estimate of $2 million per year
($22 million over the life of the mine).
• Average annual production is estimated at 260,000-330,000 oz over a 12- to 14-
year mine life. Our modelled profile assumes a heap leach operation producing an
average of 180,000 oz/year over a 14-year mine life and a mill operation producing
approximately 141,000 oz over nine years, for combined average annual production
of 269,000oz over 14 years.
Valuation
While the improved grades have a positive impact on our 12.5%/diluted peak NAVPS
estimate, this is largely offset by higher assumed capital costs. However, we note that
our revised profile is calibrated to the Phase I Development Plan and includes only a
subset of the overall resource (5.9 Moz). There is upside potential to our valuation on
potentially incorporating the entire M&I resource of 8.2 Moz, after Phase I has been derisked
(at a 10% or lower discount rate). Our 12-month target price has increased to
C$2.40 (from C$2.00) based on 1.0x (previously 0.75x) our 12.5%/diluted peak NAVPS
estimate of US$2.36 (previously US$2.50) translated assuming US$/C$ parity (previously
US
.95/C$).
Upcoming catalysts
Volcan project pre-feasibility study (Q1/11)
Investment risks
The typical risks associated with any mining investment include commodity and
exchange rate risk, and permitting and technical (development/operating) risk. In
particular, investors considering an investment in Andina Minerals should consider the
early stage of the Volcan project, which is still at the resource definition stage