Carpathian sinks on financing

Carpathian Gold’s shares (TSX: CPN; US-OTC: CPNFF) fell 26% after the company announced a bought-deal financing to finish developing its Riacho dos Machados (RDM) gold project in Minas Gerais, Brazil.

After markets closed on Aug. 19 the junior — slated to become Brazil’s newest gold producer— said Cormark Securities and Macquarie Capital Markets Canada have agreed to buy 114.5 million Carpathian shares at 14¢ apiece for net proceeds of $16 million. Carpathian has also granted the co-lead underwriters an option to buy up to another 24.3 million shares at the same price two days before the offering closes to raise $3.4 million in gross proceeds. The financing should have been concluded on Sept. 5, 2013, following regulatory approvals.

In mid-August, Carpathian told investors it had a working capital deficit of $19 million at the end of June and needed to secure more money for RDM’s construction and debt repayments. However, investors appeared unhappy with the equity raise, and pushed the stock down 26%, or 5¢, to close Aug. 20 at 14¢.

“The funds from this deal should allow Carpathian to complete the RDM project and maintain a working capital cushion to deal with its current liabilities,” says Christos Doulis, an analyst at Stonecap Securities. “However, the pricing on the deal is significantly net asset-value dilutive, and has resulted in a 25% decrease to our net asset value per share estimate for Carpathian,” he adds. Doulis has maintained his “outperform” rating on the stock, but has reduced his 50¢ price target to 35¢. 

As for construction, the company said in its Aug. 14 management discussion and analysis that 85% of RDM’s gold production line has been completed. Miners are extracting 2 million tonnes of material from the fully operating open-pit mine each month, and are stockpiling ore for start-up. The crushing system has been commissioned and bedding the fine-ore silo is underway, while the tailings impoundment area is nearly complete.

The junior is expecting wet commissioning and start-up of the processing plant and its ADR plant, and the wholly owned RDM project should be ready to start producing gold, before ramping up to 7,000 tonnes per day in the fourth quarter.

 “I am hoping to see gold production in September, but suspect that October is likely for first pour,” Doulis comments in an email. With the slower start-up, Doulis has trimmed his estimated gold production from RDM this year to 15,000 from 19,000 oz. 

Once RDM is running at full capacity, it should generate 100,000 oz. gold on an annualized basis for at least eight years. Capital costs for the company’s first producing asset are estimated at $160 million, with cash costs expected to come in at $560 per oz. gold.

Doulis says that the company’s share price should increase once it transitions into a gold producer, with a potential re-rating by year-end. Along with RDM, the company owns the Rovina Valley gold-copper project in Romania, where production is targeted for 2016. A prefeasibility study for Rovina is due later this year.