Phoenix Gold Ltd (ASX: PXG) is a Kalgoorlie-based gold explorer and developer that has aggressively grown its gold resource base to 1.68 million ounces since listing on the Australian Stock Exchange in December 2010, a 182% increase from initial acquisition.
The company owns extensive landholdings on the highly prolific Zuleika and Kunanalling shear zones located to the northwest of Kalgoorlie in Western Australia and is targeting continuous gold production in 2012.
Phoenix Gold has put in place a comprehensive drilling program focused on resource growth. In late 2011 the company produced its first gold bar following toll treatment of stockpiled ore from its Catherwood project. Shallow open pit operations are expected to commence at Catherwood in the coming year generating cash flow to underwrite continuing exploration efforts.
The company is targeting a Resource of 2.5 million gold ounces by the end of 2012, with a Reserve goal of 500,000 gold ounces.
Share Price: $0.25
Issued Capital: 101.24m
Market Cap: around $35m (after Feb 2012 exercised options)
Cash: $1.4m as at December 2011, with $7.2m to be received from the 28 Feb 2012 underwritten options
Total gold resources have increased by 182% since the company initially acquired and commenced development of landholdings located along the Zuleika and Kunanalling shear zones. These now total 29.6 million tonnes at 1.8 g/t Au, of open pit resources containing 1.68 million ounces of gold, and include maiden resource estimates at Rayjax and Magdala and a resource increase at Castle Hill.
These estimates place Phoenix Gold on an Enterprise Valuation of around $13 per gold ounce, and the company falls into the lowest quartile within a peer group that carries an average EV of around $175 per ounce, and represents a very significant undervaluation for a fast growing gold explorer that is already transitioning into gold sales and cash flow.
The company commenced a 70,000 metre drilling program in September 2011 at Broads Dam, Castle Hill and Ora Banda, and expects to release additional drilling results for Castle Hill in 2012. Further resource upgrades from all drilling programs are scheduled for release in the March quarter of 2012.
Phase 1 of the program comprises 32,000 meters in the 2012 financial year through a combination of reverse circulation drilling for resource growth and rotary air blast drilling for target generation in greenfields areas.
Phoenix Gold continues to build a platform for a significant mining project pipeline. The company is in a strong position to generate early cashflow from treatment of stockpiles and self-funded development of a number of smaller open pit mines commencing with Catherwood in early 2012.
There is potential to expand production up to 100,000 ounces per year from the development of larger-scale, open pit resources in the longer term.
Cash and Funding for Operations
Phoenix Gold raised $8 million in an Initial Public Offering that funded an aggressive drilling and exploration program on the company's gold properties. In July and September of 2011 the company issued 16.09 million shares at 23 cents per share, to raise additional funds of $3.7 million to maintain the fast pace of drilling development.
At the end of the December 2011 quarter the company reported cash of $1.4 million, with the company's cash position receiving a boost of $7.2 million from the exercise of the 28 February 2012 options, which had been underwritten.
The company has 6.0 million unlisted options that are exercisable at 20 cents, and expire on 28th December,2012; and an additional 35.92 million publicly listed options that are exercisable at 25 cents on the 30th November, 2014.
Cash flow is being generated from toll treating agreements, and sale of stockpiled ore to three process plants that are situated in the vicinity of company operations. These agreements are expected to provide significant cash flows that may underwrite an aggressive drilling and development program in 2012 and into the future.
Dale Rogers serves as Non- Executive Director and Chairman, with almost 30 years experience in project development, operations and financing in Australia and overseas, and is the former Managing Director of Albidon Nickel.
Clay Gordon is Non-Executive Director and Managing Director of Mining Assets. He has 25 years experience in gold mining, business development and project valuation in Australia and overseas.
Jon Price serves as Managing Director and is a metallurgist with over 20 years experience in the gold sector. He was the former General Manager at the Paddington, and St Ives gold mines in the Western Australian goldfields.
Ian Copeland is the Geology Manager and is a Geologist and Mining Engineer who has over 25 years experience on the Western Australian goldfields, especially around the Kunanalling and Zuleika areas, and has worked as an Exploration Manager with Barrick Gold, Goldfields Ltd and Placer Dome.
The management team is highly motivated. Jon Price and Dale Rogers own about 12% of the company. The company has successfully delivered additional resource ounces on strategic targets from well designed drilling campaigns. A pipeline of projects are being prepared to include near term cash generation. The team is on track to continue building gold resources and intends to complete a three to five year mine plan in the coming year.
Zuleika and Kunanalling Projects
The company's landholdings cover over 500 square kilometres, and encompass a 100 kilometre strike, running from northwest to southeast along the parallel Zuleika and Kunanalling shears. The company believes the area holds multi-million ounce gold potential within a number of highly mineralised project areas.
JORC compliant resources are held at Castle Hill, Broads Dam, Kunanalling, Ora Banda, Carbine, Zuleika and stockpiles for Measured Mineral Resources of 0.67 million tonnes at a grade of 2.7 g/t Au for 58,000 ounces, Indicated Resources of 10.08 million tonnes at 1.7 g/t Au for 555,000 ounces, and Inferred Resources of 18.84 million tonnes at 1.8 g/t Au for 1,069,000 ounces; for a grand total of 29.59 million tonnes at 1.8 g/t Au for 1,682,000 ounces of gold.
The flagship project is Castle Hill, which hosts a JORC compliant Measured Resource of 0.18 million tonnes at 3.4 g/t Au for 20,000 ounces, Indicated Resource of 5.46 million tonnes at 1.5 g/t Au for 273,000 ounces, and an Inferred Resource of 5.35 million tonnes at 1.5 g/t Au for 266,000 ounces, for a total of 10.99 million tonnes at 1.6 g/t Au for 559,000 ounces of gold. This more than doubles the size of the resource, and significantly increases the grade that was established at the time of the Initial Public Offering.
Mineralisation at Castle Hill is defined over a strike length of 5,000 metres and width of 500 metres, and remains open at depth and along strike in both directions. Earlier drilling covered mineralisation down to a very shallow depth of 70metres but with additional testing demonstrates its emergence as a very large, near surface gold project.
Mineralisation is continuous along the shear and adjacent porphyry style intrusives that have been identified over several kilometres. Near surface mineralisation is free milling, and is contained in large tonnage base load style mineralisation, and in adjacent higher grade shear hosted lodes.
Drilling highlights within this strike line include 13 metres at 7.4 g/t Au from 57 metres, including 1 metre at 83.9 g/t Au, 7 metres at 6.9 g/t Au from 67 metres, including 3 metres at 12.4 g/t au; and 11 metres at 4.1 g/t Au from 89 metres, including 1 metre at 25.4 g/t Au.
In 2012 Phoenix Gold is undertaking a 15,000 metre drilling program at Castle Hill that will cover 5,000 metres of strike, and is probing for additional resources at depth and along strike.
The Broads Dam Project is the second major exploration project in the portfolio and contains a recently consolidated 14 kilometre strike line along the Zuleika shear. Broads Dam abuts the Bullant Gold Project to the north containing 0.6 million ounces, and the Kundana gold camp that is 10 to 30 kilometres to the south, hosting in excess of 6 million ounces of gold.
The project contains JORC compliant resources at Broads Dam and Blue Funnel for a current Indicated Resource of 1.32 million tonnes at 2.0 g/t Au for 84,000 ounces, and an Inferred Resource of 3.79 million tonnes at 1.9 g/t Au for 236,000 ounces, for a total of 5.11 million tonnes at 2.0 g/t Au for 321,000 ounces of gold.
Blue Funnel and Red Dam
Phoenix Gold purchased 95% of Blue Funnel, which contains a previously mined open pit that was developed to a depth of 60 metres, and hosts 150,000 tonnes at 3.5g/t gold within the existing pit. The company will be probing targets at depth and along strike from historic workings in a 7,500 metre drilling program planned for the first half of 2012.
The company also acquired the nearby Red Dam Prospect that covers 270 hectares and contains an Indicated Resource of 683,000 tonnes at 2.44 g/t Au, and an Inferred Resource of 1,187,000 tonnes at 2.45 g/t Au, for a total of 147,000 ounces of gold.
A drilling program of 5,000 metres is planned for the first half of 2012, and aims to validate the resource estimate and to test for extensions of mineralisation. Earlier drilling that was conducted along strike and outside the resource envelope at Red Dam reported multiple high-grade intercepts that present significant potential for a resource upgrade.
Ora Banda and Grants Patch
The Ora Banda and Grants Patch Project areas are located immediately to the north of Red Dam and contain an Indicated Resource of 1.52 million tonnes at 2.0 g/t Au for 97,000 ounces, and an Inferred Resource of 5.12 million tonnes at 1.8 g/t Au for 300,000 ounces, for a total of 6.64 million tonnes at 1.9 g/t Au for 397,000 ounces of gold.
Main targets within this area include Nazzaris, Rayjax, Boundary and Backflip, where 93,000 ounces at 2.5 g/t Au have been defined in an under explored part of the project area, with all of the prospects holding significant potential for delineation of open pit oxide gold resources.
Mining of Stockpiles, Catherwood and other open pits
A mine feasibility study was completed at the historic Catherwood Open Pit, which is located 5 kilometres to the south of Castle Hill. The study assumed a one year mine life that recovered 25,300 ounces of gold from 320,000 tonnes of ore grading 2.7 g/t Au, and generating $A15.65 million of free cash flow, at a gold price of $A1,500 per ounce. Total cash costs were estimated at $A881 per ounce, providing an operating margin of $A619 per ounce, and producing an estimated Return on Investment of 70%.
The Catherwood Open Pit has potential to contain additional resource ounces immediately around and below the existing pit, with additional resource potential sought at the adjoining Emu, Premier and Blue Bell Prospects.
Additional resources are being developed for open pit extraction at Blue Funnel, Outridge Rayjax and Nazzaris.
The company also owns surface ore stockpiles that are JORC compliant containing Indicated Resources of 0.50 million tonnes at 1.2 g/t Au for approximately 19,000 ounces of gold that may be turned into near term cash flow.
An agreement has been reached with FMR who own a process plant located near Coolgardie, and are already processing company ore and pouring gold.
FMR have agreed to process a 25,000 tonne sample from stockpiled ore at Catherwood and will provide valuable metallurgical data, confirm gold recovery values, and optimise recoveries that may lead to an agreement to process up to 150,000 tonnes of ore on an annualised basis, with Phoenix Gold paying costs plus a toll treatment charge.
An agreement has also been reached with Norton Gold Fields (ASX: NGF) to sell several surface stockpiles containing 40,000 tonnes of ore that are in close proximity to their Paddington Mill, which is capable of treating 3 million tonnes of ore per year.
The company is now working closely with all three mills to generate up to 500,000 tonnes of ore in 2012 for processing. This will provide significant cash flow to allow Phoenix to become a self funded gold explorer and developer.
Phoenix has assessed five projects for near term development that includes Catherwood with 322,000 tonnes at 2.6 g/t Au for 25,000 ounces, Blue Funnel with existing in pit resources of 15,000 ounces at 3.5 g/t Au, Rayjax with 20 to 30,000 tonnes at 4 g/t Au, Nazzaris with soft oxide open pit ore grading at +2 g/t Au, and a mining study at Outbridge that yields 106,000 ounces at 2.1 g/t Au. The total for the five projects would easily exceed 150,000 ounces of gold, and represents resources that can be rapidly developed for production over the coming calendar year.
Four major long term priority targets are being developed at Castle Hill with 559,000 ounces, Broads Dam with 321,000 ounces, Ora Banda with 397,000 ounces, and Kunanalling with 245,000 ounces. All resources would be developed at shallow depths of less than 80 metres, at a discovery cost that falls below $10 per ounce, with the Company seeking to boost total resources to 2.5 million ounces of gold.
With open pit resources containing 1.68 million ounces of gold, including maiden resource estimates at Rayjax and Magdala and a resource increase at Castle Hill, these estimates place Phoenix Gold on an Enterprise Valuation of around $A13 per gold ounce, and the company falls into the lowest quartile within a peer group that carries an average EV of around $A175 per ounce.
This represents a very significant undervaluation for a fast growing gold explorer that is already transitioning into gold sales and cash flow.