I just cut n'pasted that from a Canaco Resources document. Here's more from it:
months. We also add a $10/oz. call option value (
.05/share) for resources
currently defined at the Handeni project. Although we maintain that resource
expansion at the project is possible, drilling results from regional targets will be
have on our valuation of Canaco.
The most significant risk to our price target results from depletion of cash as
exploration continues at Handeni. There is a risk that if value is not added to the
negatively impacted. Resource expansion and gold prices are another source of
risk in our valuation, in that if resource expansion is not significant or if gold
going forward. As such, the option value per ounce applied in our valuation is at
risk of being removed, which would negatively impact our valuation.
The Shine Has Come Off
Canaco (CAN-SU) has released the maiden resource estimate for the Magambazi
deposit within the Handeni project in eastern Tanzania. The resource is based on
over 100,000 meters of drilling from 397 drill holes completed since 2009. The
resource includes contributions from several zones within the main target area,
with the bulk of the ounces contained within the Magambazi Main Zone.
The compliant estimate was substantially below our expectations as we
anticipated approximately 1.7 million ounces (M oz.) would be included with an
average grade of 3.4 grams per tonne (g/t). We also previously expected an
additional 500,000 oz. would be added over the next 12 months and had
incorporated 2.2M oz. into our valuation. Our grade estimate was based on the
weighted average for all reported drill results within the Magambazi deposit.
Additions to total resources defined within the Handeni project may be realized if
drilling continues at targets to the northwest of MGZ, but resource expansion at
MGZ specifically will likely be insignificant. Any potential additions would come
from other regional targets such as Kwadijava, but are not likely to be realized
in the next 12 months. A pathfinder Reverse Circulation (RC) program has been
completed on a number of targets within the property, but detailed diamond
drilling is not likely to commence until Q3 at the earliest, once a full review of
the RC data has been completed by Canaco.
The biggest negative impact to our valuation is the substantially lower grade of
the MGZ resource versus our initial estimates. It is not yet fully clear what
caused the major discrepancy between our initial estimate and the compliant
estimate. Management has stated that reduced continuity of ore within the
central portion of the MGZ Main Zone was recognized, which was not
anticipated. Discontinuity through the Main Zone is possibly the reason an
inverse distance cubed estimation method was applied. This method significantly
reduces the influence of drill data as distance from a location (block) increases
and may have reduced the influence that high-grade intercepts had on the
overall deposit grade. The application of a variable top-cut, which was 2.5g/t for
one of the defined ore domains, also likely acted to significantly reduce the
influence of high-grade intercepts and likely resulted in a lower overall average
grade of the deposit. Magambazi' s Mi ssi ng Pieces: Resource Expectations Overestimated - May 17, 2012
Although the average grade increases by approximately 44% if an increased
lower cut-off grade of 1.0g/t is applied versus a 0.5g/t cut-off, total ounces
decrease by roughly 23%. The company has indicated that there is potential for
a starter pit towards the southern end of MGZ that would have an average grade
in excess of 2.0g/t and a very low strip ratio, but at this time we believe the
project remains uneconomic.
We have performed a sensitivity analysis for the project based on varying cut-off
grades for the current resource estimate to outline potential project economics.
In Exhibit 2, we outline several of the applied parameters in our sensitivity
analysis and resultant valuation metrics, including post-tax Internal Rate of
Returns (IRR), annual ounce production, and potential cash flow generation. In
our model, we assume that the first two years of production would have an
average production grade of approximately 2.0g/t and a strip-ratio of 2:1. The
remaining years of production would reflect the average resource grade relative
to the applied lower cut-off and an increased strip ratio of 5.5:1.
We expect that despite showing a positive after-tax IRR based on the 1.0g/t
lower cut-off resource estimate, Canaco would not elect to develop the project
as the NPV at all discount rates above 0% is negative and profit margins are
extremely narrow. Project economics worsen when we incorporate estimated
parameters for all other stated cut-off grades.
We believe a minimum IRR of 10% would be necessary to warrant development
and that a figure in the 15%-20% range is more realistic in trigging a
development decision. We would also expect that Canaco would want to show
the possibility for approximately 100,000 oz. per year production or more from
the project before a development decision is made. Ultimately, for Canaco to
become a target for acquisition, we also think a 15%-20% IRR and 100,000 oz.
per year potential are required at Handeni.
Based on our initial estimates of 2.2M oz. with an average grade of 3.4g/t, our
implied 8% discounted NPV was $470MM. The total tonnes we incorporated into
our initial estimate were near equal to the total tonnes stated in the compliant
estimate based on the 0.5g/t lower cut-off. The variance in grade between our
initial estimate and the 0.5g/t lower cut-off estimate results in a 8% NPV
differential of approximately $647MM, or roughly $3.24/share. Adding net cash
to our initial 8% NPV, we derive an implied value of $3.71/share, which
compares to our previous price target of $2.80/share.Magambazi' s Mi ssi ng Pieces: Resource Expectations Overestimated - May 17, 2012
At this time, we do not expect to see any significant addition to the total
estimated resources at the Handeni project in the coming 12 months. Any
additions to resources would require detailed drilling to be performed at several
of the regional targets to the northwest of Magambazi, but drilling will not begin
until Q3 at the earliest. As such, completion of a compliant resource estimate on
any other targets outside Magambazi within the coming 12 months is unlikely.
Initial results from drilling at targets to the northwest of Magambazi will be
required before we are able to gauge potential for tonnage or grades within
regional targets and for any potential resource expansion.
Given the negative economics we have estimated for the current Magambazi
resource, we limit our valuation of the project to a $10/oz. call option value for
the current resource defined at MGZ. Inclusion of the option value for current
resources is partially based on our expectation that total resources at Handeni
could expand and that an economic project may be defined in the future. Our
option value also accounts for the potential that gold prices may increase in the
future, which could improve project economics to the point a development
decision is triggered. Incorporating the 0.5g/t lower cut-off resource of 1.01M
oz. at 1.44g/t into our model suggests that a minimum gold price of $2,000/oz.
would be required to obtain a positive 8% discounted NPV. At $2,000/oz. gold,
we estimate the IRR for the project would be approximately 9%.
The remaining contribution to our valuation is simply net cash. Management has
provided an interim estimate of $94MM in cash and equivalents available to
Canaco at this time, which represent the bulk of our valuation at approximately
.47/share. The current cash balance is sufficient to allow Canaco to continue
exploration at the Handeni project for at least two years time, but would likely
be insufficient to sustain exploration beyond 2014.