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With production on a rising trend in Chile, Xtract looks at capital growth in Africa

Published: 10:10 05 Apr 2016 BST

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Xtract Resources Ltd (LON:XTR)
With production on a rising trend in Chile, Xtract looks at capital growth in Africa
AIM-listed Xtract Resources is building towards a mid-tier diversified mining house using a portfolio of limited capital projects to generate revenue and bootstrap larger projects through access to low cost, short-term debt.
Strategy: Xtract’s strategy is to optimise projects at an easily manageable scale and leverage their increased value. Its focus is on low capital cost gold and copper projects in low political risk environments.
Portfolio:  At the Chépica gold/copper mine in Chile, Xtract is generating profit and increasing that profit through organic growth. In Mozambique a significant shear-hosted gold resource and nearby alluvial gold resource are in advanced planning stages after their acquisitions were recently finalised.
Valuation: Our fair valuation for the Chépica gold/copper mine remains a risked NPV5 of £27.6m, based on a 10-year Discounted Cash Flow with upside. The Fair Bride (Manica) gold project in Mozambique supports a fair value that we estimate at £12.5m based on a risked NPV10 built on a modelled 12-year Discounted Cash Flow. The Manica alluvial project carries a high geological risk against a low start-up capital so we will leave it entirely as upside. Our sum of parts valuation on current issue is then increased to £40.1m or 0.39p/share.
Risks: As we previously noted, geotechnical risks dominate the operation of small underground mines, but the additional access adits and strengthening of the mine infrastructure at Chépica go a long way to mitigate any future issues as the mine grows. The development of a comprehensive geological model is a big step forward technically and in terms of risk management. The projects in Mozambique both carry financing risk, and the alluvial project carries a significant risk in terms of grade continuity due to the nature of the resource. We consider the political and licensing risks to be low in both constituencies.
Investment summary: Chépica is now producing gold and copper under ‘normal’ mining conditions after its restart period and the regional earthquake. Management is working to optimise both cashflow and operational control. At the corporate level the deals to acquire gold properties in Africa, that are very well known to the board, should provide a substantial capital uplift as they approach production, scheduled for Q4 2017 and subject to finance.
 

 

Ian Falconer

+44 (0)207 186 9952

scsb@shardcapital.com

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