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Chaarat Gold – Great Grades, Share Price All Wrong

By Tom Winnifrith | Tuesday 9 October 2012


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


I have not covered myself in glory with AIM listed gold soon to be producer Chaarat Gold ( CGH). I first tipped the shares at 45p in May 2010 and indeed gave them another bullish write up at 24.375p just a couple of weeks ago.

The shares are just 21.5p today valuing Chaarat at a mere £53.8 million. That is despite the company today releasing an incredibly encouraging set of drill results from its Tulkubash gold project in the Kyrgyz Republic. The shares are worth at least 48p and here is why.

The grades today come from 37 holes. Selected drill hole results released are:

·    T07149: Section 1000  12.50m at 3.07 g/t Au

·    T07152: Section 1040  16.24m at 2.10 g/t Au

·    T07146: Section 1080    8.75m at 3.77 g/t Au

·    T07136: Section 1120  13.74m at 3.22 g/t Au

·    T07136: Section 1120 10.00m at 3.62 g/t Au

·    T07155: Section 1120    5.00m at 4.81 g/t Au

·    T07134: Section 1200  11.25m at 2.66 g/t Au

·    T07129: Section 1240  14.99m at 3.27 g/t Au

·    T07126: Section 1280    8.75m at 11.08 g/t Au

·    T07148: Section 1320  17.49m at 8.36 g/t Au

·    T07160: Section 1360  12.08m at 3.13 g/t Au

·    T07131: Section 1400    6.25m at 6.16 g/t Au

This might all seem like an awful lot of meaningless numbers designed to impress but conveying little of value. But that would be a mistake.  Because the drill holes confirm two things:

1. They extend the length of the strike at Tulkubash.
2. Since the depths were relatively shallow, they indicate that during the early years  of operation the strip ratio will be lower than had been anticipated thus reducing ( albeit marginally) the cash cost per ounce.

In fact on the basis of these grades the company speculated that it could increase the size of its first mine on the site ( an open pit) thus bringing forward the ramp up to production levels of 180,000-200,000 oz per annum.

So what are the maths? What free cashflow could this mine throw off. In a recent article published HERE I outlined a number of scenarios for the gold price, cash cost per ounce (based on output levels) and output levels as the company builds towards peak output.

Year & Output $1200 Gold $1500 Gold $1750 Gold $2000 Gold $2500 Gold
2014 – 30,000 oz $15m $24m $31.5m $39m $54m
2015 – 70,000 oz $35m $56m $73.5m $91m $124m
2017 onwards 200,000 oz $140m $200m $250m $300m $400m

Today’s news means that you might just knock a few dollars off the cash cost per ounce and also bring forward the ramp up in production.  There is nothing concrete enough to cause me to alter those numbers for now but the risks are increasingly on the upside.

What risks are there for Chaarat? Well the Kyrgyz Republic is not East Surrey. There is a political risk. The company will also need to find about $20 million of debt to bring the mine into production. That is well advanced. It currently sits on c$50 million of cash so is almost fully funded.

Personally I expect gold prices to head to well over $2000 oz. But being a prudent fellow if I use a $1500 price the company would (without the upside implied by today’s news) be chucking off $56 million within three years and $200 million within five years. Valuing the company on a multiple of just three and discounting back with a 5% discount rate gives me a one year target valuation of $488 million which is around 120p per share. So this is a potential six bagger.

You know the risks but on a risk/reward basis this has got to be a very attractive play. I have a lunch with the CEO and FD later this month and will report back in more detail then.


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