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Mining News Review: Week of October 18th

|Includes: AUY, CSFFF, GYSLF, HBM, HTHXF, Minera Andes Inc (MNEAF), PEZGF

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Minera Andes
Hochschild Mining
(LSE: HOC; Pink Sheets: HCHDF)
Resource Life Up at San Jose
- October 19, 2010

Hochschild helps bring some additional context to the recent announcement by Minera Andes, telling us that the resource at San Jose has increased about 50% as a result of these vein discoveries. Assuming all resource categories can be converted into reserves, this increases the mine life at San Jose from roughly 8.4 years to 12.5 years as at September 30, 2010. The extended mine life gives us a base case valuation target for Minera Andes of about C$2.00 per share based on San Jose alone, i.e. zero value given to the early stage Los Azules copper development project. [Zurbo]

Extorre Gold Mines (TSX: XG; Pink Sheets: EXGMF)
Results for Cerro Moro Preliminary Economic Assessment
- October 19, 2010

When estimated undiscounted, pre-tax cash flow from a company’s flagship development project at current gold and silver prices comes in at barely more than the current market capitalization of the company it is probably fair to say that the company in question is overvalued. Cerro Moro does have exploration upside, but a project like Minera Andes’ San Jose arguably has more exploration upside and is already in production at a similar scale (factoring in for Minera Andes’ 49% interest). Since both companies trade at a similar market capitalization, Minera Andes seems like the smarter choice. And considering that there seem to be even better values out there than Minera Andes, we see no compelling reason to own Extorre at this time. [Zurbo]

Greystar Resources (TSX: GSL; Pink Sheets: GYSLF)
Greystar Announces Angostura Environmental Impact Study Public Hearing Date
- October 18, 2010

It is unclear what the time line will be for a decision to be made following the public hearing on November 21, 2010 to consider Greystar’s Angostura Project Environmental Impact Study, but hopefully we’ll have a better idea after the hearing takes place. More than likely trading in Greystar is likely to be relatively subdued over the next month barring any negative surprises as a result of the informational hearings to be held in early November. Following the formal hearing volatility is likely to pick up as speculators move into the stock in anticipation of a decision being made. Soon we expect to publish a more detailed analysis of Greystar for subscribers. [Zurbo]

Argonaut Gold (TSX: AR; Pink Sheets: ARNGF)
Pediment Gold
Friendly Business Combination
- October 19, 2010

It was no secret that Argonaut was on the prowl for M&A targets, and as luck would have it a few days after plugging in both Argonaut and Pediment into our comparative valuation model they announced a friendly business combination.

Our calculated fair value for both Argonaut and Pediment happens to comes in at about C$4.40 per share. Considering that the calculated base case value for Pediment gives only minimal value to La Colorada (since it has not yet been the subject of an economic study) this transaction should be highly accretive to Argonaut even when only considering the more advanced San Antonio project. [Zurbo]

Callinan Mines (TSX-V: CAA; Pink Sheets: CCNMF)
Hudbay Minerals
(TSX: HBM; Pink Sheets: HBMFF)
Callinan to Appeal Order of the Manitoba Court of Queen’s Bench
- October 20, 2010

It was a volatile ride for Callinan today, with shares trading as high as C$2.52 before closing near the low at C$2.16. There has always been a lot of talk about the potential behind the suit with Hudbay, and this decision by the Manitoba court of Queens Bench does not bode well for the likelihood of any sort of back payments or windfall payments being made in the near future. More delays to the process. Business as usual.

Frankly we’re not sure how strong of a case Callinan has against Hudbay, but slow as the process may be it should prove interesting to watch the audit unfold. Meanwhile Callinan’s 6.67% net profits interest in Hudbay’s 777 mine is currently producing cash flow of over $4 million per quarter, such that with or without any settlement this royalty already more than justifies the current share price at current metal prices. For this shareholders can be thankful. Look for our upcoming report on royalty companies to see how Callinan’s current valuation compares to a group of its peers. [Zurbo]

Hathor Exploration (TSX-V: HAT: Pink Sheets: HTHXF)
Hathor’s Roughrider East Delivers Best Hole to Date, Intersecting 63.5 m of 7.75 % U3O8, including a 17.5 m interval of 24.3 % U3O8, with assays as high as 87.2 % U3O8 - October 21, 2010

The results of this hole were roughly in line with our expectation that the preliminary scintillometer readings — released earlier — would not adequately foretell the eventual U3O8 assays for at least one of the drill holes from the summer 2010 program at Roughrider. That said, this hole is an infill and does not represent an extension of the mineralized system at Roughrider East, so its importance is mainly in helping to better define the uranium-bearing envelope for resource modeling. In my estimate, it does that quite adequately: possibly adding as much as 2.5 million pounds of U3O8 inferred resources to the initial Roughrider East estimate of 7.5 million to 15 million pounds. Combined with the main Roughrider zone where the sophomore resource estimate will probably come in around 15 million pounds, Hathor’s Midwest-Northeast project is reaching a critical stage as it knocks on the elite 30 million pound threshold. Combined with Fission’s (TSX-V: FIS; Pink Sheets: FSSIF) recent discoveries to the west in the J-Zone where an additional 5-10 million pounds have been delineated so far, we are definitely looking at a world-class uranium deposit.

Hathor’s share price has rallied nicely in the past few weeks in sympathy with rising uranium prices and the uranium sector in general while the start of drilling at Russell Lake plus anticipation of new resource numbers at Roughrider and Roughrider East are keeping the market interested. This is a welcome change from the summer lows around C$1.40 and indeed we are inclined to square our sizeable position a bit on this recent strength. Our expectation remains for a C$3.50 to C$5.00 price level to be achieved in the medium term although at this pace we could get there sooner than later. More for subscribers. [Silverax]

Oro Gold (TSX-V: OGR; Pink Sheets: OGRSF)
Oro Gold Completes 1200-Metre Drill Campaign at Cimarron Gold Project in Rosario Mining District, Mexico - October 20, 2010

Oro Gold is merging with sister Oro Silver (no longer trading as of today) in a clawback that reunites two small but decent flagship gold-silver projects under a single umbrella — El Compas in Zacatecas and Trinidad in Sinaloa, Mexico. This was a case where a spinout did not return significant value for shareholders — Oro Silver had been spun off Oro Gold in 2007. In any case, Trinidad is hosted on the same regional trend as Cimarron (which itself appears to be on the same local trend as the historic Rosario Mine) where Oro Gold has just completed 1,200 meters of shallow RC drilling. No doubt some of this drilling will return decent grades when the assays are reported in a few weeks due to being set up near historic gold-bearing holes but interestingly the company is also stating that they expect to have expanded the known mineralized zone with several stepout holes. At the end of the day, we are not likely to see barnburner results from this impromptu drilling campaign but owing to the near-surface and likely-oxidized nature of the gold, it does represent a valid exploration target. We are in the process of evaluating the speculative opportunities presented by the combined entity and will report our opinion shortly. [Silverax]

Grayd Resource Corp. (TSX-V: GYD)
Completion of PEA on La India Gold Project
- October 21, 2010

The economics of La India are impressive, and the share price of Grayd has largely reflected this reality. Although we calculate fair value at the current gold price to be about C$2.50 per share, since many other gold developers show similar upside to their base case targets we’re most comfortable on the sidelines for now. [Zurbo]

Capstone Mining (TSX: CS; Pink Sheets: CSFFF)
Significant Results in 200m Step-out Drilling on Mala Noche Footwall Zone, Cozamin Mine
- October 20, 2010

Using the term “significant” was not an exaggeration. The new zone being defined at Cozamin has the potential to greatly improve the economics of Capstone’s flagship mining operation. The company isn’t cheap, and remains vulnerable to a decline in copper prices. But if hole U235 is proves to be the tip of a much higher grade iceberg of mineralization at depth, then valuations will need to be revised upwards. [Zurbo]

Virginia Energy Resources (TSX-V: VAE; Pink Sheets: VAERF)
Preliminary Economic Assessment Indicated Outstanding Profitability Potential for the Coles Hill Uranium Project in Virginia
- October 18, 2010

The use of “outstanding” here is a bit deceptive considering that Coles Hill’s economics are actually quite marginal at the current spot price for uranium. To be fair such vulnerability/leverage is typical among uranium developers, where the success of a project is heavily reliant upon a higher uranium price. But be careful not to get carried away here. While the net present value figures given the in press release look very attractive when reported on a 100% basis, investors should be aware that Virginia Energy only holds about a 30% interest in the project. Oh, and don’t forget to factor in for the moratorium on uranium mining in Virginia? [Zurbo]

Minera Andes (TSX: MAI; OTCBB: MNEAF)
Hochschild Mining
(LSE: HOC; Pink Sheets: HCHDF)
Production Results from the San Jose Mine for Q3 2010
- October 20, 2010

Silver and gold production increased for the quarter, along with recoveries.



As you can see from the above charts, recoveries are improving and greatly exceeding expectations. Meanwhile production is growing but still not quite up to the levels assumed in the 2009 technical report. [Zurbo]

Antares Minerals (TSX-V: ANM; Pink Sheets: ANMFF)
First Quantum Minerals (TSX: FQM; Pink Sheets: FQVLF)
First Quantum Minerals to Acquire Antares Minerals in Cash and Share Transaction Valued at Approximately C$460 Million - October 18, 2010

It was a great day for shareholders of Antares and it is hard to imagine anyone is complaining about the proposed arrangement with First Quantum. However, we would note that at the current copper price Antares’ Haquira project has a pre-tax net present value north of $5 billion using an 8% discount rate, which implies fair value of over C$30 per share. This is precisely what we mean when we say that it is not unusual for copper companies in this environment, especially developers, to trade at significant discounts to their calculated base case valuation. While extreme, this discount isn’t uncalled for in the case of Haquira. After all, the capital cost of Haquira is estimated to be over $2 billion, and since it is a higher cost operation the project fails to break even with copper prices of less than $2/lb (i.e. there is significant price risk). Another way to look at this arrangement is to determine what copper price results in a base case value for Antares of roughly $6 per share. This happens to be about $2.10/lb copper. The only other copper developer currently in our valuation model that boasts a base case valuation at $2.10/lb copper that is greater than 100% its current share price is Coro Mining (TSX: COP; Pink Sheets: CROJF). Coro would probably be one of our top picks if it were not for the particular risks associated with its project. It is now in the midst of some important public hearings on its flagship San Jorge project. It needs these to go smoothly, and then it needs a positive decision from the Ministry of the Environment. If that happens, the share price should do very well. We’ll be monitoring the situation closely to take advantage of any low risk entry opportunities. Our subscribers will be the first to know should we officially enter a position. [Zurbo]

Jaguar Mining (NYSE: JAG; TSX: JAG)
Jaguar Mining Declares Caete Operation Commercial; Provides Q3 2010 Operations Overview
- October 20, 2010

Another disappointing quarter from Jaguar, with increasing cash costs and lower than expected production. What else is new?



For a moment there we thought Jaguar might find a spot in our speculative gold and silver portfolio, but results like this continue to repel us. Even assuming the September 2010 production targets are attainable and cash costs fall back in line with earlier expectations, our base case valuation target for the company is under $10. That’s not enough to interest us at this point, especially since a considerable amount of our valuation relies upon the successful development of the Gurupi project in 2013. That said, Jaguar is very leveraged to higher gold prices due to its high cash cost of operations, and this might open up some compelling options speculation opportunities if gold looks like it is about to move much higher. [Zurbo]

Disclaimer:  We own shares in several of the companies mentioned in this analysis (Metal Augmentor subscribers know which ones), but no compensation has been received from any of the companies mentioned. This is not investment advice; should you seek investment advice we recommend you discuss the company with a licensed investment advisor or broker.