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Crusader Resources IPO should see plenty of interest

By Gary Newman | Tuesday 13 March 2018

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.

Generally, I’m wary of the reasons for companies which are already listed on other exchanges deciding that they want to be dual-listed on the AIM market. This is especially the case when it comes to ASX companies operating in the natural resources sector, as in general the track record for those hasn’t been great, with often very little of substance being achieved despite large sums being raised on AIM. There are exceptions though...

And in the case of junior gold miner Crusader Resources (listed as CAS on the ASX) – exact details of its IPO are yet to be released – it would seem that there is justification for wanting a listing in London. Its 100% owned Borborema gold asset in Brazil is already known to the market here, as during 2017 a merger between it and AIM-listed Stratex (STI) was being considered before that all ultimately fell through and Stratex CEO Marcus Engelbrecht left to become managing director of Crusader.

When it comes to mining he certainly has the track record to back up his position, having been CEO of Archipelago Resources which he built up from a gold explorer to a producer and eventually sold for nearly £340 million. There is certainly no argument when it comes to the fact that he, and other board members, have a proven track record when it comes to raising capital in London, and that is where their connections are. So that at least gives us some answers as to why the company would want to list on AIM, other than just the fact that it is easier to raise capital and the regulation isn’t as stringent.

Crusader had already raised A$3.3 million at the end of 2017, but given the stage that Borborema is reaching that isn’t going to go far, and it is easy to see why the company is expected to be seeking at least £10 million when it dual lists. The ultimate success of the company though will still all come down to how good the asset is, and far from being an early stage prospect which is yet to have any meaningful exploration carried out, Borborema has actually had a pre-feasibility study done on it, following over 95km of drilling, and actually has reserves of around 1.6 million ounces of gold. There is also further upside potential as resources stand at over 2.4 million ounces.

The next stage is for a bankable feasibility study showing the economics of the project – grades at Borborema are actually quite low at just 1.1g/t, but on the flip-side it is an open pit project and is in an area which already has all the infrastructure in place, and the up-front capex to reach production could be as little as $95 million. The projections are for an operation producing 70,000 ounces per annum, but we could also see a staged development ultimately resulting in higher levels of annual production – although at present a 2Mtpa mine is seen as optimal in terms of stripping ratios. The current model suggests a net present value(8) of $111.3 million for the project based on a gold price of $1,300/oz.

Projections are for an 11 year mine life producing around 690,000 ounces of gold at an average all-in sustaining cash cost of $888/oz, and if all goes to plan it would be expected to generate cash flow of around $33 million per annum. With expectations that Borborema will be producing within the next two to three years, it would have a significant effect on the valuation of the company, considering that its current market cap is just $18 million odd, and the amount of capital required to get things underway does also look achievable, given the economics of the project. The biggest problem for Crusader has been lack of cash, but if it is able to unlock the capital it needs to get things moving, then I can see plenty of potential value here – just be aware that you are likely to be diluted further down the line, but if that occurs at a higher share price level then it isn’t a problem for those getting in at this stage.

Aside from Borborema, the company does have several other assets in Brazil, but at this stage none of them really stand out as adding significant value as they are so early stage. Jurena has high grades of gold resources, with 260,000 ounces at 6.3g/t - and including 206,000 ounces at 14.7g/t – but extensive exploration is needed to understand more about it, and over the next couple of years the company is hoping to prove up resources of at least half-a-million ounces. That will of course cost money, and is also partly what any funding from an AIM listing will go towards. At an even earlier stage is its Novo Astro gold project, where sampling has returned high grades so far, and its Manga lithium and tin prospect, but both will currently contribute very little, if any, value to the company.

The AIM IPO seems to be drumming up a fair bit of interest and support already, and recently The Copulos Group agreed that it would convert an outstanding A$1.5 million loan into shares at whatever price they are issued at when it joins AIM. It will be interesting to see what Stratex does with its A$1.575 million convertible loan which is still outstanding. It will also be interesting to see how well it is able to keep a lid on its running costs – whilst of course still managing to progress its projects – as during 2017 it spent A$3.6 million (just over £2 million) on staff, admin and corporate costs, and it has been racking up big losses annually – although often a substantial chunk of that has been as a result of the amount being spent on exploration and evaluation.

The IPO on AIM is expected to be completed during this month, so news could come at any time. Of course, until we see what share price the IPO has taken place at and where trading opens on the first day, it is very hard to accurately assess the potential. But it does seem very likely that if the Borborema project does work out as forecast, then the share price will be substantially higher in years to come. Shorter term share price drivers should include the completion of the BFS in the second half of 2018.

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