Stonecap Securities says Esperanza Resources is in "enviable position" relative to peers
11:10 am by Deborah Sterescu
Stonecap Securities initiated coverage on Esperanza Resources () Tuesday, saying the junior gold explorer has a Mexican gold asset that's been "flying under the radar".
The capital markets firm gave the miner, who is currently focused on the Cerro Jumil project in Morelos, Mexico, an outperform rating, with a $2.25 price target.
The research report noted Esperanza's 100,000 ounce per year open pit heap leach operation.
Based on a preliminary economic assessment report for Cerro Jumil in September last year, the project is estimated to produce 103,000 ounces per year over a six-year mine life, at a "below-industry" average operating cash cost of US$499 per ounce.
Stonecap analyst, Brian Szeto, also noted that mine life is expected to reach 10 years. Esperanza is currently undertaking a drilling program with the goal of upgrading existing resources and testing the outer limits of the resource envelope.
"Ultimately, we believe that total resources will reach 1.5 - 2.0 million ounces. If successful, this could propel the mine life of the project from six to 10 years – an important psychological threshold for gold projects," said Szeto.
Stonecap also took note of the fact that initial production from the mine is "around the corner", as Esperanza is in the process of fast-tracking the project into production, with plans to begin production by early 2015.
The feasibility study for Cerro Jumil is expected by the first quarter of next year, with all necessary permits expected by the fourth quarter of 2013, and construction anticipated to start in the first quarter of 2014.
"The low capex requirement and simplicity of the flow sheet significantly reduces the technical, operating, permitting and financing risk associated with the project," said Stonecap.
"These factors along with the fact that Esperanza is fully financed through to completion of its Feasibility Study and could be generating positive cash flow by 2015 puts it in an enviable position relative to its peers."
Stonecap's valuation is based on a discounted cash flow approach for the project, as well as a long-term gold price of US$1,250 per ounce.
In the 2011 PEA, the base case scenario for the project, using a gold price of $1,150 per ounce, was estimated to yield a 26 per cent internal rate of return with a net present value of $122 million, at a 5 per cent discount rate.
Initial capex was projected at $114 million.
Experanza is currently changing hands Tuesday at about $1.05 on the TSX Venture Exchange.