Shares digital

Central Rand Gold (CRND) – 119p, stop loss 95p

SHARES SUMMARY

Floated just a few months ago amid considerable institutional interest, the premium has since evaporated. Now recovering as gold prices rise and project risk decreases.

Business:

Gold exploration in South Africa

Vital stats:

Market value: £300 million

Historic PE 2007: n/a

Prospective PE 2008: n/a

Prospective PE 2009: n/a

Sector PE: 12

1-month relative strength: 13.4%

1-year relative strength: n/a

Yield 2008: n/a

NMS: 5,000

Spread: 0.6%

Almost half of all the world’s gold produced in the past 140 years has come from the Witwatersrand Basin in South Africa. Central Rand has painstakingly assembled a substantial acreage of prospecting rights on the edge of this basin, just south of Johannesburg, over the past five years.

Some of this acreage was abandoned 40 years ago, when deep mines closed as low-cost gold ran out. Most is virgin land where recent surveying established a spur off the main gold reef, providing massive new gold mining potential.

The doubling of the gold price this decade means older workings that were uneconomic should now be money spinners depending on the depth new shafts need to be and other costs.

But the best news is that drilling confirms substantial ore reserves near the surface, which can be recovered through open-cast mining starting in 2009. Underground production should begin in 2010, with full-scale production starting in 2011, reaching some one million ounces a year.

The cost per ounce is expected to average $320, providing a $500-an-ounce profit at current prices, or $230 if house broker Evolution’s conservative long-term gold forecast of $550 proves correct.

Indicated reserves total 20 million ounces, with a further 14 million ounces in the ‘inferred’ category. There could be a further 26 million ounces of reserves in Central Rand’s permit zone. Much of the extra resource could be confirmed later this year. There is a six-month delay as assay labs cannot cope with thousands of drill samples.

Central Rand is planning to buy its own lab for £4 million to speed up the process, as only half its samples have been analysed to date.

The group has assembled an extremely experienced management team with a strong record of achievement for blue chips such as BHP Billiton (BLT), Anglo American (AAL) and Glencore. This was a major reason for Central Rand being able to raise £70 million from its recent flotation.

Evolution reckons the shares are currently worth 147p with a twelve-month target of 200p. The higher valuation rests on positive results from assay samples. Other key newsflow will be completion of the feasibility study by May and obtaining mining rights before the end of the year.

This is quite a tight timetable but looks achievable. Maiden gold output could amount to around 60,000 ounces next year, rising to 600,000 ounces in 2010, as underground production kicks in. Peak output of around one million ounces a year could be achieved in 2012, with some 20 years of production at this level.

More money will need to be raised in the next couple of years to finance the underground mines, which could go as deep as three kilometres.

by: Timon Day