The discharge of its obligations at the Chassoul mine
and mill has long been a priority of Ascot’s and with
private equity group Equita Global having indicated their
interest in forwarding $4.5 million in financing, all
appeared settled. However, with final details frustrating
a deal, up stepped small cap investors Andrew Bell and
Tom Winnifrith (CEO of GECR’s parent company RSH)
to provide the cash to fund Ascot’s rapidly expanding
gold operation.
A total placing of £3 million in £1 loan notes, yielding
10%, and each convertible into 5 new ordinary shares,
have been issued to Red Rock Resources* (Andrew
Bell) and the SF t1ps Smaller Companies Gold Fund
(Chief Fund Manager Tom Winnifrith). 21 million
warrants are being issued to the same group,
exercisable at 20p each and £700,000 of these
warrants have been exercised immediately meaning
that Ascot Mining has raised a total of £3.7 million ($5.9
million). This cash will settle the $5 million balance
owing on the purchase of Chassoul, while also
providing working capital to ramp up production
aggressively at the mine. The management believes
that it will be producing at 1,200 ounces per month by
March. The cash flow that generates, and any cash
raised by subsequent warrant exercises, will be used to drive production to 2,250 ounces per
month by June 2011. Ascot plans to use the cash it generates to bolt on other small producing or
near production prospects in Costa Rica, and has already identified several suitable targets.
The Chassoul mill has recently been through an upgrade with nameplate capacity lifted from 50
tonnes per day (tpd) to 150 tpd. Production ramp up is ongoing and will be completed shortly,
producing 1,200 ounces of gold per month. With output currently sold at a 5% discount to the spot
price (although spot prices will soon be achieved), and operating cash costs of $350 per ounce
($427 per ounce including all overheads), current margins are in excess of $1,000 per
ounce. Thus Chassoul will soon be providing Ascot with cash of $1.2 million per month or $14.4 million per annum.
As the company has previously mentioned, once steady state production has been achieved at
Chassoul, development will move to Tres Hermanos, El Recio and Las Juntas, where 50 tpd is
expected from each. Current plans have the ore being trucked to Chassoul for processing, but the
company is optimistic of a deal being struck at its Boston concession which would allow for a more
convenient and expeditious processing method. Either way, an additional 1,050 ounces of gold per
month will contribute another $1 million per month to Ascot’s cash position.
The issue of equity and the further potential dilution from the exercise of warrants is an obvious
dampener to the share price, but for a company currently capitalised on a fully diluted basis at
under £18 million to be generating in excess of $26 million (£16 million) in annualised pre-tax cash
within the next 6-12 months is remarkable.
Comparing Ascot (Costa Rica) with fellow gold producers Minera IRL* (Peru) and Orosur Mining*
(Uruguay) gives an indication as to the discount Ascot is currently trading. Production in the 3
months to 30th September 2010 at Minera was an annualised 35,000 ounces of gold, and with the
company currently capitalised at £102.3 million, represents a valuation of £2,922 per ounce of
annual gold production. Orosur, whose annualised production rate in the 3 months to 31st August
2010 was 52,000, has a market capitalisation of £47 million, and is thus valued at £908 per ounce
of annual gold production. Ascot’s current enterprise value is £15 million and, with annualised
production of 27,000 ounces on its doorstep, is valued at £555 per ounce of production. Thus
compared to Orosur, valuations would imply an increase in Ascot’s market capitalisation of 63% or,
compared to Minera, an increase of 426%.
GECR’s valuation is confined to extrapolating near term production rates into the future and leaving
the likely expansion, particularly at Chassoul, to the future upside category. Assuming 19,700
ounces of gold is produced in the year to 30th Sep 2011, and then 27,000 ounces per annum for
the subsequent 6 years, at a flat gold price of $1,200 per ounce and $350 operating cost, we derive
a target price of 65p per share on a diluted basis (40.7 million current shares, plus 15 million
placing shares, plus 21 million warrants). However, at the current gold price of $1,350 per ounce,
and hypothetical future prices of $1,500 and $1,800 per ounce, our valuation jumps to 77p, 89p
and 112p respectively.
Ascot’s ambition is to become a 60,000+ ounce per annum gold producer through the contribution
of ore from many of the small operations in the rich Central Gold Belt of Costa Rica. With its major
obligations soon to be settled and strong operational cash flows on the way, the need for external
funding is dramatically reduced and we expect the majority of future development to be funded
internally - good for shareholders. Also good for shareholders will be the company’s planned move
from PLUS to AIM, and thus we rate Ascot a buy with a near term target price of 65p.
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