Brazil production in sight, Carpathian says

Gold production at Carpathian Gold’s (CPN-T) Riacho dos Machados project in Brazil will start at the end of the third quarter of this year, making the Toronto-based junior the South American nation’s newest producer of the metal.

And while the price of gold is meeting resistance at the US$1,400 per oz. level, Carpathian Gold designed the project using a US$950 per oz. gold price and has sold forward about 216,000 ounces at US$1,600 per oz.

Not only that, says the company’s chief executive, Dino Titaro, but Carpathian has only drawn down about US$62.5 million of a US$90 million loan facility arrangement it has with Macquarie Bank.

The RDM project is about 80% complete and is expected to produce about 100,000 ounces of gold for an initial period of eight years. RDM will treat 7,000 tonnes of ore a day from an open pit operation using a standard crush, grind, carbon-in-leach and ADR processing facility.

Once initial production gets under the company will update the market with guidance for this year as well as estimates of cash costs. 

Carpathian has moved quickly since acquiring the project in mid-2008 and making a production decision in 2011. “In terms of speed,” Titaro says, “we took it from a non-43-101 compliant project with maybe/could be ounces, to a 43-101 compliant resource, reserves, feasibility, permitting, financing and a construction decision, all within four years so that itself is a major accomplishment. It didn’t feel like it at the time, but it was. We really didn’t get going heavy on the ground until 11 or 12 months ago…this thing has gone at lightening speed.”

Like other junior companies and a number of seniors, however, Carpathian’s stock has been pummeled in recent months.

“The stock is down about 40-50% from the $0.35-0.40 range it had been trading at for the last year prior to April 2013 and the sharp move down in gold prices,” writes mining analyst Michael Siperco of Macquarie Capital Markets in a research note entitled: “Carpathian Gold: Home stretch in Brazil.”

But the Toronto mining analyst also believes Carpathian’s shares will get re-rated as production nears. “While the macro environment has not helped, we believe the stock has been under pressure due to the prospect of an imminent financing, prior to the completion of RDM. If we see news of initial gold production within the next few months, we believe the stock will re-rate back up towards the prior trading range even with a potential financing later in the year.”

Siperco also points to other companies whose share prices have bounced back after shoring up their balance sheets or showing improvements in their operations, despite the gold price.

“We highlight Kirkland Lake, up almost 100% since 1 May after positive operating results and spending cuts,” he notes, “and Detour Gold, up 30% since the financing announced 21 May. We believe Carpathian Gold is in an excellent position for a similar rebound.”

Carpathian owns 100% of RDM in Brazil’s Minas Gerais state. The project is expected to yield an after-tax net present value at a 5% discount rate and at a gold price of US$1,500 per oz. of US$226 million, and an after-tax internal rate of return of 34%. (Those numbers do not include the US$90 million debt facility.)

Total capital costs are estimated at about US$160 million, although Titaro says they may end up slightly higher than that.   

Open-pit resources in the measured and indicated category stand at 19.36 million tonnes grading 1.50 grams gold per tonne for 936,000 oz. contained gold and inferred resources of 9.45 million tonnes grading 1.93 grams gold for 587,000 oz.

There also appears to be some potential for underground mining. According to a 2010 preliminary economic assessment,  RDM has a potential (non-43-101 compliant) mineable underground resource of 4 million tonnes grading 2.57 grams gold that extends roughly 250 metres below the open pit. But Titaro says the priority is to extend the open-pit along strike rather than to explore for underground resources.

“In 2010 we wanted to see if there is an opportunity to go around and based on non-compliant 43-101 resources it seemed viable,” Titaro explains. “So we said, great, we know it’s there, but let’s focus on construction, on the open pit and on strike extension and then maybe halfway through the mine life as we’ve generated more cash flow we can go back and look at the opportunity that exists from an underground operation. That needs an awful lot of drilling so it’s better to spend our money to extend exploration along strike to extend the mine life first.”

And should the time come to move it underground, he adds, the current mill has the capacity to move from a rate of 7,000 tonnes per day to 9,000 tonnes a day.

Carpathian also owns 100% of the Rovina Valley project in Romania. It has completed a feasibility study on that project, which has yet to be announced because it’s still in draft form, but Titaro says management wants to sit on it for the time being so that a) the market can focus on its production profile in Brazil and b) the company can optimize the results. Carpathian is also in the process of converting the Rovina Valley’s exploration licence to a mining licence and hopes to accomplish that before the end of this year.

At presstime in Toronto Carpathian was trading at 20.5¢ within a 52-week range of 18¢-39¢ per share and has a little more than 555 million shares outstanding.

Siperco of Maquarie has a 12-month target price on the stock of 75¢ per share. “Carpathian had $9 million in cash exiting the first quarter of 2013 and has $27.5 million available under its $90 million project debt facility,” he says. “We estimate that RDM will enter production with room to spare on the balance sheet (about $5 million). Depending on production in 2013 and the gold price, we still forecast a $10-20 million raise is coming for working capital during the initial ramp up, debt payback and for corporate purposes, including Romania.”

Titaro says Carpathian would be reluctant to raise that kind of money and would only consider doing so in the unlikely event of unexpected delays. “Our balance sheet we have is still pretty good,” he says. “I believe we can get this done but if we had unforseen delays, like unseasonable weather that comes and delay us, it might be prudent for us to get additional capital, but that can be done in a variety of ways including structured investments. There are many ways to get that done, should that be the case.”