Ramelius Resources was another stock asked about by a reader. The company has 181mil stock on issue worth $111mil at the current share price $0.60. The company will generate revenues of $A110mil from the Wattle Dam mine once production reaches 70,000 oz per annum, so we are likely looking at earnings of $50-60 mil. This mine is the highest grade mine in Australia. We do need to be careful to factor in the possibility of a 'nugget effect'. Being an underground mine I don't see the scalability in future production even if they can extend the orebody at depth. That's not to say there is not more upside. There recent performance however suggests predicted ore grades are 'understated', so thats a positive, plus the upside I expect in gold prices. Given the possibility of $50mil earnings and a conservative PE ratio of 5, I would expect RMS to reach $1.20 in the medium term, with a long term target of $1.80 (its previous high) in the long term as the gold boom moves into full swing. The problem with this stock is the inability to scale up production...unless I am missing something. If they find adjoining resources., i.e. parallel structures..that adds upside, but thats hopeful wishing.The further I investigate though, the more concerned I become. These are very narrow veins and high grade, so there will be a nuggest effect. One is of course reminded of Bendigo Goldfields. Grade control (predictability) issues, though it does win on easier accessibility. The very high gold cut-off grade of 400g/t does not give confidence. Really until this company gets down into the high grade ore and does bulk sampling, there is no way of predicting the bulk grade of the ore. The company has just $6.1 million in the bank, so perhaps they are looking at an issue because their options expiring in June are well out of the money. For this reason I would expect the shares to fall back to 40c support. Perhaps 50c will be the 'discounted' issue price. This stock is certainly one I would watch, though I'd want more certainly over grades.
Andrew Sheldon www.sheldonthinks.com
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