In June last year, this piece argued that simple supply and demand economics dictated the price of gold could not fall much below $1,200 per oz. The piece focused on the all in sustainable cash costs of a number of mining companies, and suggested that below this price, many junior miners would go bust, exploration would slow, supply would contract and price would rise. It also suggested that the bankruptcies would present those that survived with an opportunity to acquire discounted assets that would, in time, reap rewards for their acquirers that vastly outweighed their costs. Over the past six months this scenario looks to have played out almost to the note. A number of high profile bankruptcies have taken place (Jaguar, Batista, Blyvoor etc.) and leading analysts are reporting that 2014 will leave numerous juniors requiring white knights. In addition, industry leaders like Barrick (NYSE:ABX) and Newmont (NYSE:NEM) have cut back exploration, which will lead to a supply constriction over the next two years. This presents investors with a two-fold opportunity. The first, to acquire the stock of the survivors at a discount rate. The second, to derive benefit from the rising value of these companies' resources as supply constriction fuels an increase in the price of gold. There is one company that looks to have survived the worst of the decline and is currently embarking on a discount acquisition spree, which could offer large potential upside. That company is Brazil Resources Inc. (BRIZF).
What is Brazil Resources?
Brazil Resources is a publicly listed mining and exploration company. As stated in its February 2014 corporate presentation, the company's core strategy is the acquisition of advanced-stage gold projects during the current commodity downturn. The company focuses primarily on the acquisition and development of mines in Brazil, and currently has four NI 43-101 compliant resources and five as-yet unexplored projects across the country. The sections below offer a brief introduction to each of the NI 43-101 compliant resources. All resource estimates are taken from the company's corporate presentation.
Resource One - Sao Jorge, Para State.
Brazil Resources acquired the Sao Jorge project, a 56,000 hectares resource in the eastern area of the Novo Progresso Gold District, through its acquisition of Brazilian Gold in 2013. The first company to initiate exploration at the site was Rio Tinto in 1993, but the first company to mine it was Tapajos Mineracao Ltda, with the site producing an estimated 1,500 oz. of artisanal oxide gold per year during 2001-2005.
Sao Jorge holds an indicated mineral resource of 14.42 near mint (MT) at 1.54 g/t gold, equating to approximately 715,000 oz. gold in total. The inferred mineral resource of the site is 28.19 Mt at 1.14 g/t gold, or approximately 1,035,200 oz. gold.
In March last year, mining industry consultancy firm Coffey Mining reported the project has a pre-tax net present value (NPV) (5% discount rate) of $485.1M and a pre-tax NPV (10% discount rate) of $331.8M.
Resource Two - Cachoeira, Para State.
Located in the same region as Sao Jorge, the Cachoeira project comprises three separate deposits along a 5km north-south trending shear zone. Brazil Resources acquired the property in 2012, through the simultaneous purchase of BRI international and BRI Brazil Corp, both of which were wholly owned subsidiaries of Luna Gold (OTCPK:LGCUF).
Kinross (NYSE:KGC), Luna and a number of other companies have completed more than 31,000m of drilling at the Cachoeira resource since 1946, spread over 285 holes. Mineralization at the site is near surface, meaning it can be accessed via an open-pit mine, and Brazil Resources reports that the site has an inferred mineral resource of 8.47 Mt at 1.23 g/t gold, totaling 336,000 oz. gold.
Resource Three - Boa Vista, Para State.
The third resource is Boa Vista, again located in the Para State region in northeast Brazil. The site lies on the Southern border of the Tapajós Gold District, which is famous in Brazil for the garimpo gold rush during the 1970-80s. A Coffey mining report, published in 2011, reported that thousands of garimpeiros (Brazilian prospectors) extracted somewhere between 500,000 oz. and 1M oz. of alluvial gold from the district between 1983 and 1989.
The company acquired the resource as part of the Brazilian Gold acquisition in 2013, and estimates an inferred mineral resource of 8.47 Mt at 1.23 g/t gold, totaling 336,000 oz. gold. The company bases this estimate on 3,007m of drilling spread across 15 shallow holes, and 12 trenches spanning 2,299m.
Resource Four - Surubim, Para State.
Also acquired as part of the Brazilian Gold acquisition, the fourth NI43-101 compliant resource is Surubim, located approximately 65KM southwest of Sao Jorge. Brazil Resources estimates an inferred mineral resource at the Surubim project of 19.44 Mt at 0.81 g/t gold, totaling approximately 503,000 oz. gold.
Of the five remaining projects Montes Aureos and Trinita, 2,000 hectares and 8,884 hectares respectively, are located in the Para State region; Artulandia, 5,022 hectares, is located in the Goias State region; Batistao, 19,551 hectares, is located in the Mato Grosso State; and Apa High, 57,696, is located in Paraguay. To-date, Brazil Resources has released no estimate as to the resources these locations house.
The company has e strong management team, all of whom have top-level experience in the mining industry.
Amir Adnani, Chairman, is the founder and CEO of Uranium Energy Corp (NYSEMKT:UEC), a NYSE listed, U.S.-based uranium mining and exploration company. Fortune Magazine recently announced him as one of the magazines 40 under 40 for 2013. Stephen Swatton, President and CEO is the former head of BHP Billiton's (NYSE:BHP) Global Business Development and Technical Divisions. Mario Garnero, Director, is the Founder and current Chairman of Brasilinvest Group, a private merchant bank that has attracted investments up to $16B to Brazil, and currently manages more than $6B. Finally, Herb Dhaliwal, Director, is the former Canadian Minister of Natural Resources and Minister of National Revenue in the Federal Cabinet.
Finances and Share Structure
As of August 31, 2013, Brazil Resources had $1.5M cash, and the company completed an equity financing round in December 2013 that raised $6.4M. At February 26, 2014, the company had 72.4M shares outstanding, giving it a market capitalization at that date of $83.2M. This lies in line with its market capitalization at yesterday's close of $1.15. The company has an enterprise value of $75.3M and zero debt.
Management own approximately 25%, institutions (notably KCR Fund/KCO Fund, Brasilinvest Group, Luna Gold Corp, Regent Pacific Group, U.S. Global Investors and Encompass Fund) own approximately 30% and retail investors own the remaining 45%.
Even with indicated resources totaling 1.5M oz. and inferred resources totaling 2.4M oz., there are numerous risks associated with Brazilian Resources. The main risk relates to the price of gold. If the price of gold falls below December lows around $1,200, it could significantly impact the company's ability to fund exploration of its resources and any further acquisition, however low-cost.
In addition, there is risk surrounding the inferred resources. They are, after all, just estimates based on small drilling samples at each project. There is a risk that the estimates overexpress the true value of each resource, which would invalidate the estimates as to the value of the company as a whole.
There is also exploration risk associated with each of the as-yet unexplored assets the company holds. Without drilling, the Brazilian Resources does not yet know whether these assets contain gold, and the company must spend large amounts of money drilling to produce assay results before it uncovers the true value of its assets.
The final risk is one of dilution. The company will undoubtedly require further financing before it can maximise production at its four NI 43-101 projects; financing that will likely come in the form of equity issue. Such issues will dilute the holdings of any early stage investors, at least until the mines they fund start to produce.
Brazilian Resources is a junior gold miner that could be perfectly placed to take advantage of overarching macroeconomic conditions in the gold mining industry. A publicly stated strategy of discount acquisition in a rising market, an experienced, proven management team and an inferred gold resource at today's prices that exceeds $2B, suggests the market is undervaluing the company at its current market capitalization.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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