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-X) 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 Para State 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 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 Colossus a purchase price equal to the lesser of US$200 per oz. platinum, US$100 per oz. palladium and US$400 per oz. 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-metal 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 writes 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 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 eight-percent upside potential to our target price, we are lowering our recommendation to a ‘hold,’ from a ‘speculative buy,’” he explains in a separate research note.

“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,” he says.

Campbell estimates that Sandstorm’s annual gold-equivalent production should rise from 37,000 oz. gold this year to 78,000 oz. in 2014. The company has gold streams on the Aurizona mine (Brazil), Santa Elena mine (Mexico), Black Fox mine (Ontario), Ming project (Newfoundland), Bachelor Lake project (Quebec), Summit mine (New Mexico) and Bracemac-McLeod project (Quebec).

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