Magellan Minerals - A High Potential Gold Explorer in Brazil?

The CEO of Magellan Minerals (MNM.V), Dr. Alan Carter, was at New York City giving a presentation about his company (7/10). Magellan is a junior gold exploration company headquartered in Vancouver, B.C. but it has all its mining activities in Brazil. The Company has 100% interest in 11 projects in the Tapajos province of Para state of Northern Brazil, a historical gold production region.

Magellan just had its IPO at TSX in February this year, only 5 months ago. The IPO price was at 1 CDN and it has traded as high as 2 CDN, then got hammered to 0.85 CDN right now. However, the exploration activities have been going well for the last 4 months since its IPO, according to Dr. Carter, especially at its Cuiu Cuiu project where five large gold-in-soil anomalies have been identified. Newmont Mining owns 8.1% of this Company, which is a big plus and shows Newmont's interest in this Company and their projects. In addition, Magellan reports that several companies have offered it deals on Cuiu Cuiu, valuing the project at significantly more than the current market cap of the company, suggesting excellent upside. And we are only talking about one of a number of projects.

Cuiu Cuiu is one of the two largest historic gold producers in Tapajos. The adjacent area within Tapajos is Tocantinzinho (25 km southeast of Cuiu Cuiu) with estimated 2 million ounces of gold. Cuiu Cuiu is expected to be a larger gold producing area, and should have a much larger gold deposits than Tocantinzinho. Even with 2 million ounces of gold, same as Tocantinzinho, today Magellan's market cap is only about 1-2% of the gold value there. Magellan is quite undervalued.

Then there is another project 100km south of Cuiu Cuiu called Uniao. Magellan also controls 100% interest and it is estimated to have produced 1 million ounces of alluvial gold. Uniao is a 4km long trend with stockwork quartz veining and high grade veins, suggesting bulk tonnage open pit and high grade vein targets. Drilling is scheduled to start toward the end of the 3rd quarter this year.

Besides gold, Magellan has four bauxite (a mixture of aluminum oxides and hydroxides) projects in Para including the Nhamunda project where recent auger drilling intersected economic concentrations of bauxite over minable width. Brazil is the world's second largest producer of bauxite which is used to make aluminum. If these bauxite projects become economically feasible for mining, Magellan will be likely to join forces with another larger mining company.

Through its IPO, Magellan has raised $11M and now has $9M cash reserves. The cash burn rate is around $3-4M this year, but will likely be higher next year due to more drilling programs. More financing is possible next year. But at the same time,they can also sell a partial interest in one of their projects to a major miner such as Newmont or Kinross.

This Company has an experienced management team with the founders and top mangers who are ex-employees of BHP Billiton, Rio Tinto, Barrick and Newmont, and have most of their working experience in South America, especially Brazil. They also have a large number of high potential and diversified exploration projects going on in this geopolitically stable and mining-friendly country.

Mining exploration is always a high-risk high-reward business. Since there is no production, unlike Endeavor Silver described in my previous articles, they don't have revenue,  and have negative earnings. However, they are not like internet companies in the late 1990s, which have only phantom ideas and day dreams, almost all of which didn't materialize. Mining exploration is totally different. With probability adjusted, some of these high potential properties and projects will become real commodities, and in this case, Magellan currently owns 100% interest on all of their projects. Here management's experience, credibility and integrity become very important. Just like any other business, luck will also play a role here. This is why investors should adjust these kind of investments by probability and maintain a diversified portfolio to minimize risk.

Even Magellan's 100% interest on their projects may be diluted and reduced in the future in exchange for investment and joint venture with other miners. However, what we are investing in here is hopefully the substantial growth of their discovery and reserves of real commodities, in this case gold, which the majors will have a strong interest to acquire due to reduction in reserves and a lack of ability to discover more on their own. You can't sell internet daydreams or phantom AAA CDOs to investors these days anymore, but you can sell them the real money of gold easily. Once investors realize the scarcity in its supply vs. its unlimited investment demand, a large gap that gold exploration firms are trying to fill, investors will recognize the true value of Magellan.

I always want to be conservative, especially in the junior mining sector. If Cuiu Cuiu alone has been conservatively valued by major mining companies at significantly more than $25M, we should see the Magellan share price move to $2, back to its all time high, or better, as we come out of the current slump in the precious metal mining sector.

Comments

[PastTense]

Isn't the author of an article such as this supposed to state if he has a position in the stock?

[thomast2]

Yes, I am long MNM. Thanks for the reminder.