The past month has seen a 33% rise in the value of Condor Gold (LON:CNR), but at just over 85p a share there is an argument that the current price barely recognises the potential of the business and its flagship asset, La India, in Nicaragua.
A recent research note by the highly rated mining team at Numis Securities reckons the stock is worth a “base case” 110p, while the “take-out” valuation is 139p.
The target rises to 161p at a gold price of US$1,400 an ounce and 231p at US$1,600, according to the broker’s sensitivity analysis.
Numis also used a 12% discount rate in their model compared to 5% used in many studies. Using an 8% discount rate boosts it by 30%.
There is a school of thought that the 110p and 139p targets are a little conservative even at today’s gold price given the potential size of La India, where the current resource base has been eked from just 10% of Condor’s land position.
As the recent trench work on five new targets close to the planned La India open pit reveal, the asset is the gift that keeps on giving.
So, there are opportunities to layer on significant additional value.
But rather than getting busy with the drill rig, Condor appears to be taking heed of the new realities of a mining sector strapped for cash.
It is in the process of putting together a pre-feasibility study (PFS) that will assess the costs and economics of fast-tracking La India into production with a starter open-pit base only 35% of its 2.33mln oz gold resource.
According to Numis the costs of constructing such a facility that might process a base 75-80,000 ounces (oz) of gold a year, based on 840,000 oz gold in the Indicated category, could be around the US$120mln mark.
The ore for the open pit is high-grade (3.1 grams per tonne), the cash costs are put at US$640 an ounce, meaning the all-in sustaining figure would be a lower quartile US$850 an ounce.
There is the opportunity to add a further 300,000 ounces by converting Inferred to Indicated open pit resources via the drill bit, upgrading around 80,000 ounces from the main pit while tapping the potential of two satellite pits.
This, then, might have the potential to bring output to 100,000 ounces, or perhaps 110,000 if, as expected, Condor can persuade the local artisanal miners to tip up what they’ve been excavating.
So even literally scraping the surface of this opportunity, you have potential to create a mine that would move the dial by adding 20% production for an established mid-tier gold miner producing 500,000 ounces a year.
The PFS, which is due to be published in September, will ostensibly assess the economics of base case production of 75-80,000 ounces.
Although the report is also likely to look at the impact of adding additional above surface resources and how the group might make the most of the 1.2mln ounces that would require underground mining.
Numis reckons the move to underground mining could add a further 41p a share to the price target.
Meanwhile, the results of the recent 3,500 metres of trench work, expected in the next month or so, will give some indication of the La India’s blue sky potential and ought to vindicate the geophysical work undertaken last year.
The company is funded to completion of the PFS, which it is hoped will be followed by a bankable study.
The current anomalously low share price, which values the group at $23 an ounce, not only reflects the poor regard in which gold miners are held, it probably also factors in a potential fund-raise.
The reality is the group will probably have to tap the market for an injection of cash – it is the bane of the small-cap miner.
The alternative, of course, would be to bring in a partner with deeper pockets and perhaps the technical wherewithal and personnel to actually build the mine.
Furthermore, Condor could minimise equity dilution by securing funding via a gold royalty, gold streaming or pre-development capital from a bank.
However, once the funding issue is cleared up, you’d expect the market to unwind the discount rating the shares have endured.
In fact, Numis reckons if the market doesn’t recognise Condor’s potential, a cash-rich predator might.
“Given La India’s advanced stage, high grade and proximity to infrastructure in a pro-mining country, we believe Condor could be a takeover target for a larger player,” it told investors.