An undeveloped Gold Mine with the second largest gold reserves in Canada, trading well below the value of its peers!

Feb. 14, 2010 1:57 PM ET2 Comments
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Contributor Since 2010

Daniel Paolone has a Bachelor of Applied Science in Mining Engineering from the University of British Columbia. He currently is working for DeBeers Canada Ltd in the Diamond industry and previously worked in the Oil Sands for Syncrude Canada Ltd. in Fort McMurray AB. He has had previous work experience in the Copper, Gold, Molybdenum, Silver, Lead, and Zinc Mining Industry.

Terrane Metal Corporation’s (CVE:TRX) Mt. Milligan Project is one of the few hidden gems left in the mining industry. Terrane is 60 percent owned by Gold Corp, which proves to be a huge benefit, especially during the last downturn.  It could also lead to a possible buyout in the future... 

The Mt. Milligan project has a 6.0 million oz gold reserve, the second largest in Canada, and a copper reserve of 2.1 billion lb. The current mine plan is based on a conventional truck-shovel open pit mine and 60,000 tonnes per day copper flotation concentrator to be built over a 30-month period at a capital cost of $915 million and a strip ratio 0.84/1. Commercial production is scheduled to commence in the first quarter of 2013. Average annual metal production over a 22-year mine life is forecast to be 81 million pounds of copper and 194,500 ounces gold. The mine plan has been designed for extraction of higher grade and gold-rich reserves in the early years. In the first six years of the mine plan gold production will average 262,100 oz per year and account for 55% of the revenue.

With these reserves and mine plan, this project has a Net Present Value (NPV) of C$1.05 billion with a 5% discount rate, a 4.1 year payback, and a pre-tax Internal Rate of Return (IRR) of 17.2%. These numbers are based on a gold price of 800 USD/oz and copper price of 2.00 USD/lb, their current values are 1150 USD/oz of Au and 3.40 USD/lb of Cu. Current values of Copper and Gold would double the current NPV of this investment.  The mine is not scheduled for production until 2013, and the long term forecasts for Gold and Copper show a possible correction in 2010, with steady gains in the following years.

The current Market Capitalization of Terrane (CVE:TRX) is about 150 million and the current NPV should be 2 billion, therefore this investment based on current metal prices is undervalued by about ten times, even with the US dollar conversion, making it a great investment in the mining industry!

Terrane Mine Investment NPV Chart

For the sake of comparison, on January 7, 2010, Goldcorp bought a 70% interest in the El Morro property, from New Gold. They paid 463 million (USD) for a property with about the same amount of gold. Even without an operating mine, Terrane’s share price should be around 2 dollars a share.

*Full Disclosure: I do own shares in CVE:TRX and I will be adding to my position in the next few months.

Disclosure: Long TRX

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