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This Junior Miner Is A Good Investment In Gold

The price of gold has relatively steadied after the price volatility in the first nine months of 2013. Gold price since October is now range bound between $1250 and $1320 per ounce. As outlook for gold heats up as reflected by gold futures, investors are looking at traditional as well as alternative means of investing in gold.

Investment in a junior mining company engaged in exploration and development of gold properties is one such way of benefiting from the upside expected in gold price. Sacre-Coeur Minerals, Ltd. (CVE: SCM) is one such Canada-based junior mining company that presents an opportunity for investors looking for short as well as long term appreciation expected in gold prices.

Junior mining companies

In mining business, after the initial expense by prospectors on looking for veins and quartz and staking claims, a time comes when there is a need of spending a good amount of money - in millions of dollars - to evaluate the extent and the value of a discovery. This is generally done through an organization that can raise venture capital for the purpose of carrying on such activities.

The focus of these organizations, known as junior mining companies, is not on to build mines or dig gold or minerals but on advancing mines from mere prospects to a position where reserves have been established through certified audits via Canadian government approved 43-101 report. (Since the primary exchanges where such mining venture capital can be raised are located in Canada, most junior mining companies are based in Canada.

Once approved, the reserves are, in most of the cases, sold to major mining companies engaged in the business of building and running mines.

Sacre-Coeur Minerals, Ltd.

Founded in 2004 and based in Vancouver, Canada, Sacre-Coeur Minerals is a junior mining company engaged in exploration, development and also production of gold, metals and diamonds focused on exploration of gold in Guyana.

The company owns 100% interest in mineral properties (roughly 850 sq. km.) including Million Mountain property north-central Guyana where it is exploring hard-rock gold resources.

The company raised $804,218 in October 2012 on closure two tranches of its brokered offering announced in September 2012. The offering represented a total of 6,701,819 units at $0.12, with each unit representing one common share and a purchase warrant for one-half of one share of the company. The purchase warrant entitles the holder the right to purchase one common Sacre-Coeur share at $0.18 until October 19, 2014. [http://www.scminerals.com/news/index.php]

After a series of private placements at $0.15 a share, the company had issued 59,316,433 shares (issued and outstanding), and 70,004,703 shares fully diluted. [http://www.reuters.com/finance/stocks/SCM.V/key-developments/article/2655366 ]

In February 2013, the company announced the closure of private placement of Gold Participating Bonds for $6,148,000. [http://www.scminerals.com/news/index.php?&content_id=177]

Investment thesis

  1. Although generally termed as such, Sacre-Coeur is not truly a junior mining company as it is already producing low-cost alluvial gold from near the Million Mountain exploration site with annual revenue running into a few million dollars. One of the reasons that the market is ignoring this is the fact that the company seems to be satisfied posing as a junior miner and prefers not to show the proceeds of gold sales by offsetting them against exploration costs of the Million Mountain Zone 1.
  2. The hard rock reserves in the Million Mountain project is NI 43-101 compliant for 451,397 troy ounces of gold and the company is pretty sanguine that there is scope for 50,000 additional ounces.
  3. Production cost for the Million Mountain property is as low as $450-$500 per ounce, not taking into account royalties, which puts Sacre-Coeur at an advantage over other junior miners in the area with established gold deposits such as Guyana Goldfield (TSE: GUY) (3.5 million oz) and Sandspring's Toroparu (5 million oz).
  4. The economics of the project are strong with NPV of $145.5 million at a discount rate of 5% and annualized effective compounded return rate of 123% [http://www.proactiveinvestors.com/companies/news/44014/sacre-coeur-minerals-constant-work-to-refine-procedures-pays-off-with-low-cash-costs-44014.html ]. This translates into a situation where the company is protected even if the price of gold goes down to as low as $1,000 for an ounce due.
  5. The recent offerings of the company including the Gold Participating Bonds and private placements elicited a positive response and some of them were oversubscribed. The company is thus not only well funded but the oversubscription also reflects investor interest in the potential of the company's current project and future expansion into other Guyana properties.

Conclusion

Production of gold from the Million Mountain project should start anytime in 2014, with full capacity operations expected by 2015. Given the exploitation of the full potential of the 43-101 approved reserves with 50% recovery rate and average mine life of seven years, Sacre-Coeur should be valued at $73 million.

In my opinion, the clobbering that the share price of Sacre-Coeur has been meted out by the market is not justified and actually offers an opportunity for investors looking for an indirect long term investment in gold.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long CVX:SCM.