BMO gives thumbs up to Continental Gold’s Buritica

“If grade is king,” Continental Gold’s (TSX: CNL) Buritica project in Colombia “is a grand prince,” Brian Quast of BMO Capital Markets writes in a research note.

The mining analyst is initiating coverage of the company with a $5.00 target price—significantly higher than the $3.38 per share price the company currently commands.

“With 5.4 million oz. at a grade of about 10 grams gold per tonne, Buritica is one of the few premier undeveloped gold projects in the world,” Quast reasons, adding that the project is a “‘last man standing’ type of asset with cash costs in the lower quartile of world production, relatively low capex and high geological potential.”

Quast argues that even at current gold prices, it makes sense to build the project and that Continental Gold has “takeout potential.”

“Buritica, either built by Continental Gold or by an acquirer, will likely be one of a select few new gold mines that make sense in this type of market,” he asserts.

On July 9 Continental Gold reported assay results for the initial four underground diamond drill holes from the Veta Sur vein system at the Buritica project in Antioquia, Colombia, along with two additional surface holes from the high-grade project’s La Estera vein system. 

Highlights from Veta Sur included 16.7 metres grading 58.7 grams gold per tonne and 233 grams silver per tonne, including 5.15 metres of 184 grams gold and 671 grams silver from hole BUUY121 and 18.7 metres grading 22.4 grams gold and 80 grams silver, including 3.8 metres of 99.6 grams gold and 254 grams silver in hole BUUY18.

Of the two holes from La Estera, the most significant intercepts were 0.4 metres of 23 grams gold and 53 grams silver and 1.25 metres of 5.7 grams gold and 17 grams silver in hole BUSY337.

The company has eight drills on site—three surface and five underground—as part of its Phase IV diamond drill program for this year and next with the priority drilling at Veta Sur. The 2013 drill program has been scaled back by about 33% to 62,000 metres due to lower metal prices, the company said.

Buritica—a 57,594 hectare project in northwestern Colombia about 60 km northwest of Medellin and about 500 km northwest of the Bogota—contains several areas of high-grade gold and silver mineralization. The two most extensively explored areas are the Veta Sur and Yaragua vein systems, which are characterized by multiple, steeply-dipping veins and broader, more dissemination mineralization and both are open at depth and along strike.

Yaragua has been drill-outlined along 900 metres of strike and 1,300 vertical metres and partially sampled in underground developments. Veta Sur has been drill intersected along 570 metres of strike and 1,180 metres.

Buritica hosts measured and indicated resources of 3.74 million tonnes grading 13.6 grams gold for 1.64 million ounces of contained gold, 38 grams silver per tonne for 4.6 million ounces of contained silver, and 0.7% zinc for 55.8 million pounds of contained zinc.

Inferred resources stand at 13.33 million tonnes grading 8.8 grams gold for 3.76 million ounces of contained gold, 33 grams silver for 14.2 million ounces of contained silver, and 0.5% zinc for 156.50 million pounds of zinc.

Quast forecasts that over its 21-year mine life Buritica should produce about 165,000 ounces of gold a year at cash costs of US$536 per oz. gold. He expects initial production will start at 1,000 tonnes per day in the first quarter of 2016 and increase to 2,000 tonnes per day in the second quarter of 2017. He also notes that the project has “a relatively modest capex requirement of $400 million to get into production” and that currently the company has about $146 million in cash on its balance sheet.

He estimates the company will have to raise about $300 million over the next 12-18 months if it is to reach first production in 2016.

“One of the truly exceptional features of Buritica is the grade,” he continues. “Despite modelling a relatively conservative 20% dilution into the grade, and not including any uncharacterized ounces, Continental Gold should build Buritica at any gold price above US$800 per oz.,” he states.

In August 2012, Continental received approval to amend its Environmental Impact Assessment to build a six-km switchback road and begin underground development by building a one-km access tunnel.

Over the last year Continental has traded in a range of $2.71- $10.03 and has about 126 million shares outstanding.

Major shareholders include Robert W. Allen (14.2%); GCIC Ltd. (14.2%); Wellington Management (12.8%); and Van Eck Associates (9.4%).