Serra Pelada fully funded to production in 2013

Canaccord Genuity analyst Nicholas Campbell has raised his 12-month target price on Colossus Minerals (CSI-T, COLUF-O) by $1 to $10 per share after the junior exploration and development company signed an agreement with Sandstorm Gold (SSL-V, SAND-N) last week to sell a gold, platinum and palladium stream over the life of its Serra Pelada mine in northern Brazil.

The investment is Sandstorm Gold’s largest to date and initial production is expected in mid-2013. Between 1980 and 1986 Serra Pelada was the site of the largest precious metals rush in Latin American history. The deposit in the Carajas region of Brazil’s State of Pará is one of the highest grade gold and platinum group metals deposits in the world.

Under the deal Sandstorm will provide a US$75 million deposit to Colossus and in return Colossus will deliver to Sandstorm life-of-mine payable metal equal to 35% of the platinum, 35% of the palladium and 1.5% of the gold from Serra Pelada.

In addition to the upfront deposit, Sandstorm will also pay to Colossus a purchase price equal to the lesser of US$200 per oz. of platinum, US$100 per oz. of palladium and US$400 per oz. of gold (subject to inflation adjustments of 1% per year) and the prevailing market price. The balance of production from Colossus’ 75% of the Serra Pelada project, as well as its partner COOMIGASP’s 25% portion of production, will be sold at prevailing market prices.

Colossus has the option to buy back 50% of Sandstorm’s precious metals streams for US$48.75 million, open until April 1, 2015.

“Prior to this announcement we had forecast a funding gap of roughly US$40 million for Colossus as it advances the Serra Pelada project through to production in mid-2013 (E),” Campbell wrote in a Sept. 20 research note. “With this transaction we now forecast that Colossus is fully funded to bring the Serra Pelada project through to production. We have removed an assumed equity financing of 12.5 million shares from our valuation of CSI.”

The US$75 million in immediate funds are more than Colossus requires to complete construction and ramp up of production, but management says it will use the excess as a construction contingency and may also use a portion of it for  regional exploration.

Campbell has raised his 12-month target price on Sandstorm  from $12 per share to $12.75, but lowered his rating on the stock. “With 8% upside potential to our target price, we are lowering our recommendation to a hold from a speculative buy previously,” he explained in a separate research note entitled: “Positive acquisition, but shares approaching fair value.”

“With US$84 million in cash and available credit of US$50 million, we believe Sandstorm remains well positioned to continue to grow through acquisition.”

At presstime in Toronto, Sandstorm was trading at $12.19 per share within a 52-week range of $4.65-$12.44. Colossus Minerals was trading at $5.59 per share within a 52-week range of $3.09-$7.99.