This is worth reading - from DesjardinsGlencairn Gold Corporation (GGG C$0.44, TSX/GLE US$0.36, AMEX)
Visit to the Bellavista mine in Costa Rica; maintain Buy rating and C$0.90 target
The Desjardins Takeaway
We visited the Bellavista mine in Costa Rica. Despite the longer-than-expected time to complete the mine, it shows very
well. All components of the mine are up and running and we can expect good cash flow out of the mine in 2006. The
reporting of meaningful profits should spur the stock higher. We currently rate the stock Buy–Speculative with a C$0.90
target.
Event
We visited the Bellavista gold mine on December 1 on the occasion of the official mine opening. The Bellavista mine is
due to enter commercial production at year-end. The construction of the mine, which cost US$30m (US$15m more than
expected), took almost two years to complete. This was about six months more than expected due to an abnormally wet
rainy season and some delays in getting some equipment operational.
The Bellavista mine is now working close to design expectations. Currently, gold is being poured at the rate of 1,000
ounces per week. This is slightly lower than design at 1,250 ounces per week, but we expect the company to better this
in the coming months. The mine shows well and all aspects of the mine appear to be working as expected. The mine is
a conventional open-pit heap leach mine which should produce approximately 60,000 ounces per year at a cash cost of
US$200–250/oz for more than eight years.
Costs have risen from the feasibility estimate of US$150–200/oz not only because of commodity costs, but also because
the company utilized a contractor for the mining. Nevertheless, the mine is due to enter into an important new phase.
The mine should start to produce meaningful cash flow of US$15m (at US$500/oz gold) per annum and, if successful,
this should be a tremendous boost to the stock price. We believe that as the company starts to show meaningful profits
from this mine, as we believe, we could see the stock go substantially higher.
When we visited the mine, the actual grade of the mined benches was about 7% higher than forecast and throughput to
the pad is above expectations. The heap leach pad is in the early stage of development and it is difficult to speculate on
recoveries thus far. Generally, the operation appears to be going well.
Implication
The mine visit should have a neutral impact on the stock. The operation appears to be working well. However, it will
take a couple of quarters to confirm this and this is what the market is looking for. The company will have to raise
US$3–5m to pay for a build-up in working capital which was unexpected due to the delay in the mine construction. This
will likely keep the stock from moving in the short term. However, we are bullish on the progress of Bellavista and
therefore positive on the longer-term future of the stock. The stock is very cheap, trading at a large discount to net asset
value.
Recommendation
We currently rate the stock Buy–Speculative with a C$0.90/share target.