Chalice Gold looks to sell its main asset

Chalice Gold Mines (cxn-t, chn-a) could potentially sell its 60% stake in the Zara gold project in northern Eritrea.  

The country’s state mining company, ENAMCO, holds 30% of the project, while the Eritrean government has a 10% free-carried interest.

The company’s chief asset sits 160 km northwest of the country’s capital, Asmara.

The junior said it inked a non-binding letter of intent with an unnamed entity on Dec. 12, adding it will update shareholders on the tentative deal in two weeks.

Haywood Securities’ analyst Joe Mazumdar says he sees the potential agreement as a “positive” because it indicates that other companies are taking notice of the project’s robust economics.

Zara hosts a large high-grade gold deposit with simple metallurgy. The Koka deposit has reserves of 4.6 million tonnes grading 5.1 grams for 760,000 oz. A July 2010 feasibility study envisions Koka producing 104,000 oz. gold a year for seven years.

Along with the project’s high-grade and plus a million-ounce potential, Koka has a low startup cost and is almost permitted.

The study pegs the cost to build the project at US$122 million, while Haywood Securities estimates that figure to be slightly higher at US$150 million.

The tentative agreement with a third-party arose while the Perth-based company sought financing alternatives to fund its 67% share of the project’s cost, writes Mazumdar in a Dec. 13 note.  

When asked about Zara’s potential buyers, he suggests it could be a major or a Chinese company with a bigger appetite for risk than the current market.  

“You got some majors working there, like Anglo American that has done some joint-ventures in Eritrea and is active in the region. Eritrea lies within the highly prospective Arabian Nubian Shield which hosts resources of over 20 million ounces,” he says in an email to The Northern Miner. “What you want to think of are companies or countries that do not consider Eritrea a high risk. So for South African gold producers, who already have a significant portion of their asset base in high-risk jurisdictions Eritrea might not be a big leap. But for an entity that is more accustomed to operating in lower risk jurisdictions such as Canada, U.S. or Australia, Eritrea may be considered very risky.”

A Chinese state-owned miner may also be interested in Chalice Gold’s asset, he adds, pointing out how Chinese companies, such as China National Gold, have recently been scouring Africa for gold projects.

In March 2011, China’s largest gold producer teamed up with Iamgold (img-t, iag-n) to focus on project acquisitions in regions such as Africa.

China Gold International (cgg-t), which is held 39% by China National Gold, signed a non-binding agreement in April to form a joint-venture at Banro‘s (baa-t, baa-x) Twangiza property in the Democratic Republic of the Congo.

Mazumdar assumes the growing fear of risk coupled with UN’s recent sanctions on the country’s government makes Gold Chalice’s project a good buy for suitors.

“If you are unfazed by Eritrea you could get [Zara] at a significant discount because [Chalice] hasn’t traded very well over the last year because of the risk aversion in the investment community,” says Mazumdar.   

He values Chalice’s 60%-equity portion of the Koka deposit at US$198 million, applying a 7% discount.

On the day the potential agreement was announced, investors pushed the company’s shares up 5% to 33.5¢ in Toronto. The following day it gained another 10% to close at 37¢.

Haywood Securities has a target price of A60¢ on the stock