Research
Report: Capstone Gold Corporation - written by Mike Kachanovsky
August 30, 2004.
Capstone
Gold Corporation has negotiated the option to acquire six late-stage
exploration and former producing properties in
I believe that Capstone Gold
has been virtually overlooked by the market, and the company is grossly
undervalued at current prices. A resumption in production will provide the company with the
cash flow necessary to fund ongoing exploration commitments in order to
complete the terms of the acquisition.
Because the share structure is tightly held, the company is leveraged
for rapid appreciation in share values if they are successful in advancing the
business plan. I own shares of Capstone
Gold. -
Mike Kachanovsky
In an effort to increase mining activity several years ago,
Capstone Gold signed a joint venture agreement with a subsidiary of Wheaton River Minerals in April 2003 to earn a 70% interest in a former past producing silver/gold mine, the Ventanas Project. Subsequently they then announced an option agreement through their Mexican partner Compania Minera Bacis, for a 90% interest in 5 former producing properties. The combined effect of these deals has positioned Capstone to rapidly advance to become a mid-tier silver-gold producing junior. Several of the properties controlled by Capstone also contain significant resources of copper, lead and zinc.
Through an over-subscribed private placement offering completed in January 2004, the company was able to raise $9.1 million to fund operations and allow for aggressive exploration of the suite of properties.
The management team of Capstone is comprised of a balanced
mix of hands-on geologists responsible for the exploration and development of
dozens of projects throughout
Office Address:
Telephone: 604-684-8894
Exchange Listing Symbol (TSX): CSG
Website: http://www.capstonegold.com
Share Structure: Issued and Outstanding: 26,302,788
Options and Warrants: 16,347,534
Fully Diluted: 42,650,322
Market Capitalization: $13.7 million
Projects
The flagship property for the company is the Cozamin Copper-Gold Project, located in
The objective of the program is to identify a reserve
sufficient to provide feed-stock to resume operations at the mill. An estimated $660,000 USD will be required to
restart the milling operations, and a further
investment of $1.4 million USD will increase the capacity of the mill to 1,200 tpd. The facility is
ultimately capable of processing 2,000 tpd with
additional capital investment. The project benefits from superb infrastructure
and access, located less than 4 kilometres via paved
highway from the city of
The Copala Silver-Gold Project in
Through the option with Minera Bacis, the company also controls the Claudia, Montoros, and Promontorio Projects. All of these properties are past producers and are considered advanced stage exploration projects with measured and indicated resources identified through past exploration activity. The resources do not meet the requirements for reporting as defined by NI43-101, but estimates for the 5 projects total resource total 90,792 oz Au measured & indicated, and 2,282,472 oz Au inferred, plus 8,723,963 oz Ag measure & indicated, and 106,770,065 oz Ag inferred.
The
Ventanas Silver-Gold Project in
Capstone Gold is a development stage company and as such does not have current earnings. The shares of the company appear undervalued with respect to the peer group of junior precious metals exploration companies, when considering other metrics for valuation. For example, using a 60:1 silver-gold ratio, the total resource estimates equate to 4,386,475 gold equivalent ounces. Expressed as a ratio to market cap using an exchange rate of 73 cents CDN, an investor in Capstone Gold today acquires an ounce of gold for each $2.20 of market cap, an exceptionally low ratio. Due to the lack of current data supported by NI 43-101 compliant reporting, there is some doubt as to the accuracy of the resource estimates, and this may account for some of the discounted value the market has assigned to Capstone. The current round of exploration activity focused on the various properties is designed not only to confirm the resource estimates and bring them into compliance with NI 43-101 reporting standards, but also has the potential to reveal new discoveries and further increase the already impressive numbers. One would expect then that significant upside appreciation in the share price would result just from the company continuing with the exploration commitments necessary to earn their interests in the various projects.
The very low capital expenditure requirement of only $660,000 USD to bring the Cozamin Project into production represents a minor investment in comparison to the potential cash flow the project is capable of generating. With the pace of ongoing exploration on the property, the high-grade nature of the results to date, and the well-funded status of the treasury, in addition to the strong outlook for commodity pricing, it is reasonable to assume the company will be able to successfully resume operations. Further development of Cozamin is well within the capital resources of the company, and the management capabilities to execute. It should be noted that the historic data for the tonnage of the deposit estimates a resource of 5.8 million tons (not compliant within the standards of NI 43-101 reporting), and this figure does not include the recent drilling data that in all probability will result in the discovery on new zones that will increase the tonnage further.
That the management team at Capstone succeeded in
negotiating an excellent agreement to acquire the properties can be underscored
by considering the intrinsic value of the milling infrastructure included with
the properties. In recent years mining
companies that purchased used milling facilities and equipment in
As the company does not have any exposure to commodity hedging it remains fully leveraged to rising spot prices that can be expected as the bull market in precious metals continues. However, several of the properties controlled by Capstone have demonstrated the potential to become very profitable producers even in the event that commodity prices remain within a trading range close to the current levels. By advancing their Cozamin project to production, CSG will generate profitability that will create added value for shareholders.
Companies in the junior exploration sector are very much leveraged to news flow, and the aggressive exploration commitments that Capstone Gold has agreed to will ensure a steady stream of reports to maintain investor interest. The majority of outstanding warrants were issued in the private placement completed in 2004 and have an exercise price of $1.00 in the first year. These will not result in a flood of cheap paper sold off into the market below that level, suggesting CSG has the potential to at least double from current prices with limited upside resistance as the company advances their business plan. The full conversion of the warrants would result in the addition of a further $6-7.5 million to the working capital of the company.
The current share price for Capstone Gold is a product of the overly bearish sentiment in the sector, and is better regarded as an opportunity for patient investors to establish a position cheaply and wait for the inevitable recovery. The usual risks and volatility of the junior sector very much apply to CSG, so an investment here is only suitable for those risk tolerant, sophisticated investors that can sustain large swings in share value. However, taken in the context of the strong financial position of the company, the high quality suite of properties controlled, and the potential gains in share price as the company works towards their production goals, the risk in this case appears very much justified by the rewards
Disclaimer: I have made my research and opinions available to the public as a resource to provide investors and the public with basic information. My comments and opinions should not be interpreted as a recommendation or investment advice, which I am not qualified to provide. While I have made every effort to maintain accuracy in the information I provide, it is possible that there are some errors or omissions in my coverage and the accuracy cannot be guaranteed. It remains the responsibility of each individual investor to confirm if the subject of my analysis is appropriate for their investment objectives, and to conduct their own research and due diligence, and retain the services of a qualified advisor on to provide this service on their behalf. I accept no responsibility for the performance of the companies that I feature in my coverage. Junior mining and exploration companies are a risky market sector and investment in these companies can result in loss of capital. Past performance is no guarantee of future success. From time to time I may purchase stocks in the companies I feature in my reports, and I may sell some or all of my holdings. I will disclose personal ownership in those companies that I refer to at the time of my first coverage, or after follow up reports. I do not accept compensation from companies as payment to provide positive coverage or opinions.