Ovoca Gold: A fully-funded development and exploration play

The stock market throws up some ludicrous anomalies sometimes. Take the share price of Ovoca Gold (LON:OVG), which values the company at around 80 per cent of the cash and liquid investments.

It completely ignores the interesting near-term gold production story, and some pretty exciting exploration projects in Russia’s Magadan Province in the far east of the country.  

It is a cause of frustration and irritation for the company’s chief executive Tim McCutcheon, who has drawn up plans for a stock repurchase programme in a bid to close the valuation gap. 

Not that Ovoca should need this sort of catalyst as it ticks three important boxes with investors. 

It has a simple, achievable mine development story, some potentially very interesting exploration upside and crucially the financial wherewithal to achieve its aims. 

The firm had around US$50 million in liquid assets when it last updated the market, consisting of shares and cash. 

McCutcheon believes the reason for Ovoca’s discount rating is a very simple one: “The fund managers love the story, but the people I know are big funds and they can’t buy equity in a company of Ovoca’s size. This puts the emphasis for share based appreciation on retail investors.”

Ovoca’s predicament is a familiar one, though it can change very rapidly for the better as followers of stocks such as Ormonde Mining, Metminco and Red Rock Resources will attest.

However McCutcheon is keen to talk about the things he can control, rather than those he can’t directly such as the wayward share price.

The focus of late for the group has been the Olcha licence, part of the 2,460 square kilometre Rassoshinskya project in the north of Magadan.

A maiden resource of 344,000 ounces of gold has been established on a small fraction of the 26 kilometre target. 

Rather than broadening out the drilling, Ovoca has embarked on a targeted infill programme as it bids to gain an exploitation licence.

McCutcheon explains: “In the West you would do a very wide exploration effort and you would only infill very late in the game. Under the Russian system you don’t have that luxury.

“You have to start infill drilling rather quickly to prove up a certain amount of gold to have some semblance of economic value in order to get the exploitation licence.”

A new resource statement should be published “relatively soon” which will include 2010 drilling and fieldwork. 

Otherwise Olcha will go on the back burner as management assesses the full array of data, considers its next move, and of course waits for that all important exploitation licence.   

“We have always made it very clear to everyone we want to get exploitation licence and look at all of data,” McCutcheon said.

“It is a very complicated ore body, there’s a lot of fracturing and fault zones. It is not an easy target. The grade is there, the problem is the volume. I don’t want to throw money at it and have nothing to show for it.”

The same goes for the Zet target, 35 kilometres from Olcha, where it will carry out some “follow-up work” on the trenching done last year, which will include 2,000 metres of drilling.

“On the basis of that we will know how much money we will spend next year,” the Ovoca chief executive adds.

Currently a drill rig is headed to Podgorniy, to the north-west of Zet, where the geology looks promising and the region’s history of placer mining suggests there ought to be gold. Here the company plans a 5,000 metre programme.

“The gold soil anomalies line up with the silver soil anomalies and other minerals that are indicative of gold bearing deposits,” McCutcheon says.

“They all line up in same block of the map. You take the geophysics and put that with the geo-magnetics and you can see it – the fault zones of the structures below the soil anomalies really line up. 

“We are very excited about Podgorniy and we definitely want to take that forward. The drill rig is on its way to the site – but of course until you drill it you don’t know what’s there.”

The development story focuses on the Stakhanovsky, a 72 square kilometre project with a 350,000 ounce resource in the inferred category. The aim is to be producing 30-50,000 ounces of gold a year starting in 2013.

A 260 tonne bulk sample carried out in 2009 by the project’s former owners revealed the grade to be 2 grams per tonne with greater than 60 per cent recovery through gravitation. 

However the maiden JORC resource estimate published last November put the grade at 1.2 grams a tonne with a cut-off of 0.5 grams.

However this is due to be updated by consultants SRK by the end of the year, but only once Ovoca has completed an ambitious 20,000 tonnes of bulk sampling and 4,000 metres of diamond drilling.

“We think Stakhanovsky is a 2 gram per tonne deposit and open pittable,” McCutcheon reveals. “And we think the bulk sampling will accurately reflect the true grade of the project.” 

The beauty of Stakhanovsky is it is next to a power sub-station and there is a ready supply of water on-site.

This and the fact that the gold recovery process will use simple gravitational techniques, means the capital costs of the project are likely to be relatively cheap at US$15-20 million.

This has an upside for investors as Ovoca is likely to be able to fund most of the capex from its existing resources, which means it won’t be issuing new paper like confetti, as seems to be the general rule elsewhere in the sector.

“With good infrastructure by way of road and power readily available, the Stakhanovsky property has the potential to convert into a low-cost open pit starter mining project for Ovoca with production output of 30,000 to 50,000 ounces per annum,” said Davy analyst Job Langbroek recently.

“Such development could commence as early as 2012 with exploitation in 2013. Work in the current year will focus on improving the resource status to measured and indicated to facilitate the commercialisation of the project.” 

The pre-feasibility study and updated resource estimate expected by the end of 2011 ought to provide the final confirmation, if it was needed, that Stakhanovsky is a viable project. Let’s hope the market wakes up before then, and investors begin to recognise the true potential of Ovoca.