1. The copper price: There project is a low margin project because of the low grades.
2. Project cost: There is a risk that a blow-out in project development costs would undermine the earnings of the project.
3. Mineral exploration: The company has a JV with Xstrata Copper, and is also exploring for uranium.
For these reasons, I see this company as high risk henceforth, yet there is no overlooking the fact that, after Mt Isa (Xstrata) and Golden Cross Resouces' Copper Hill project (NSW), this company controls arguably the 3rd largest copper resource in Australia. The current resource is 50.7Mt at 0.69% Copper, minor gold. Not bad for a company with $6mil in cash and a market capitalisation of just $29mil. But how rediculous was it for the market to value the project at $9mil after allowing for cash in Aug'07.
Interestingly, whilst we wait for the final feasibility study, its worth reflecting on the economic parameters for the similarly sized Copper Hill copper deposit. GCR is ahead of URL in its feasibility study. GCR must have considered its project marginal, as it ended up farming out the project. Copper Hill has resources of 51Mt at 0.43% copper and 0.39g/t gold. So whilst URL has 0.26% more copper, it has 0.34g/t less gold. Another point of diference is that copper prices have limited upside, whereas gold looks to have considerable upside. URL has full project equity, GCR has farmed out to a Canadian company. Both companies are close to infrastructure, as well as $6mil in cash, and a string of other interesting project targets.
Interestingly GCR is capitalised at $22mil whilst URL is capitalised at $29mil. The ultimate value of these companies depends on the price outlook. so this is where GCR's Copper Hill project analysis comes in handy. Assuming a $250mil capital cost for both (similarly sized plants 8Mtpa, same ore mix), the GCR project is break-even at a gold price of $US500/oz and $1.80/lb copper. But since I would place a long term conservative base price of $2.50/lb copper and $800/oz gold, I think the NPV of these projects is more likely to be $400mil for URL and $700mil for GCR, by virtue of GCR's higher gold grades, and the better outlook for gold prices. Also GCR has more advanced projects, though reduced equity in the project.
Based on these parameters, I'm more inclined to go with GCR because of the better outlook for its commodity mix, and because its 30% cheaper market capitalisation. The other compelling reason is that its project already has a larger equity partner - a Canadian company. For URL, Xtrata is the mostly likely partner, but is perhaps not inclined to act in accordancw with URLs time schedule. Although GCR has less equity, they will also have less debt burden as a result. Having said that URL has the more prospective exploration area, but thats less tagible. So my preference is to buy GCR. GCRs chart also looks the more safer trend. I'm concerned that URL might slip back to base to form a double bottom.
Feel free to join my forum discussion on Universal Resources or Golden Cross at Google Finance.
Feel free to join my forum discussion on Universal Resources or Golden Cross at Google Finance.
- Andrew Sheldon www.sheldonthinks.com
2 comments:
Just a cautionary note on GCR - the gold recovery of 65% is actually quite poor, which gives me reason for concern.
On a positive side, Calibre Mining Corp. (TSX-V: CXB) has commenced a second phase drilling program, comprising five diamond drill holes for 2,000m, at Golden
Cross’ Cargo copper-gold property in New South Wales.
Frankly I would not be investing in these two companies at this point in time.
I now believe that Callibre has pulled its interest from the project, so GCR now has 100% equity. GCR is now shaping up as a buy I think, and will become compelling as the gold price rises.
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