RBC Capital initiates coverage of Trelawney

Analysts Stephen Walker and Richard Bishop of RBC Capital Markets estimate that when Trelawney Mining and Exploration (trr-v) releases its initial resource estimate in the first or second quarter of this year, the junior gold explorer will have outlined at least 3 million oz. of inferred gold resources at its Cote Lake deposit in Ontario.

They also see potential for more gold ounces as winter drilling on the property continues. The two analysts initiated coverage of Trelawney on Feb. 8 and have published a 52-week target price of $4 per share. (At presstime in Toronto the junior was trading at $3.71 per share.)

“With the 75,000 metres of drilling budgeted for 2011, and a deposit that still remains open along strike and at depth, we expect further resource additions beyond the initial resource estimate,” they wrote in a note. “Our valuation target is based on 4.5 million ounces at an estimated grade of 1 gram gold per tonne and we estimate each additional 12 million oz. to add 79¢ per share to our target.”

Cote Lake is a low-grade, bulk-tonnage gold deposit and comprises part of the company’s Chester complex, about 100 km southwest of Timmins and 200 km northwest of Sudbury, in northern Ontario. 

The analysts outlined a potential mining scenario that incorporates production from an open-pit mine at Cote Lake in 2016 and from underground at the Chester mine starting in 2012. 

Trelawney is currently dewatering and rehabilitating the Chester 1 underground mine, which was developed in the 1980s but never went into production. The Chester 1 mine has an existing 5,500-foot decline and a non-43-101 compliant historical resource of 159,000 tonnes at 13.4 grams gold for contained gold of about 68,400 oz.

Walker and Bishop argue that they don’t expect “significant production” from Chester 1 but that getting it up and running “would show Trelawney’s development and operational expertise.”

In addition to Chester 1, there is Chester 2, which is about a few hundred metres from the east end of Cote Lake and has a historical resource of 222,000 tonnes grading 11 grams gold for contained gold of about 77,900 oz. The company is considering plans to drive an access drift from the Chester 1 mine, or possibly a new, separate decline into Chester 2.

Meanwhile, once the Cote Lake open pit starts, Trelawney could produce about 300,000 oz. gold per year over the life of the mine at a total cash cost in the US$450 to US$550 per oz. range, the analysts believe.

“We expect the Cote Lake deposit will likely advance through feasibility, permitting and financing over the next four years, with potential for Trelawney to successfully transition from a junior miner to a significant gold producer in 2016.”

The same day RBC announced it was initiating coverage of Trelawney, the junior put out additional drill results from Cote Lake with highlights such as 192.4 metres of 1.09 grams gold per tonne in hole 44; 141.5 metres of 1.89 grams gold in hole 45; 388 metres of 0.90 gram gold in hole 46; and 243.1 metres of 1.31 grams gold in hole 47.  

The Cote Lake deposit comprises low- to moderate-grade gold, plus or minus copper mineralization, which is associated with brecciated intermediate to felsic, and locally mafic intrusive rocks.  

Mineralization is in the form of disseminated and fracture-controlled sulphides. Trelawney believes the nature of the alteration and mineralization is indicative of a porphyry-style deposit. 

Currently there are five drills at work on the deposit and a sixth drill is expected to start shortly on the extension of the Chester 2 zone, under a small lake.