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Aug 2006 - Kingsgate Cons

Kingsgate Consolidated Limited (KCN) – Expanding to ~300,000ozpa gold and ~2mozpa silver from 2008

  • Kingsgate appears to be emerging as one of the main mid-cap gold producers in the Australian Gold Sector, offering potentially long-life, low cost growth beyond 300,000ozpa gold and ~2Mozpa silver (or ~335,000ozpa gold equivalent).
  • Production has already increased by 40% during the past year from 1.8mtpa to an annualised rate based on June 2006 of 2.52mtpa. The engineering plans have been drawn to install a 2.7mtpa plant on the western side of the existing plant, with a silver recovery circuit designed to handle average silver grades of up to 35g/t for the whole 5mtpa plant. A gravity circuit has already been installed too.
  • The timing of the mill expansion depends on receiving Mining Lease approvals for Chatree North. Assuming that they are received in SQ06, the 15 month construction could start, commissioning the mill in MQ08, and reducing risks for completing an IPO in JQ08 (also with a possible cornerstone investment in SQ06).
  • At a gold price of US$600/oz and a gold/silver price ratio of 55 to 1, KCN’s 5% NPV with 100% of Chatree on an ERA scenario is ~A$9.75/share, which infers that the market is only valuing KCN on holding 50% to 60% of Chatree, and assuming that $0 (nothing) is received for the remaining 40% to 50%, (and/partly or, it has overlooked the potential ~US$25mpa from silver revenues).
  • Post 1 July 2008, assuming under an ERA scenario that 40% is divested in an IPO, KCN shareholders could have 60% of Akara and its near mine tenements, 100% of an “exploration company” with regional tenements that could be floated in a separate IPO at some stage, and ~A$200m (based on KCN being between A$5/share and A$8/share in May/June 2008 with gold possibly above US$1000/oz).
  • KCN’s Chatree appears to be located within a super-volcano complex of numerous volcanic centres. We have visited a number of the exploration areas that show potential, but await SPL approval before drilling can start and verify them.
  • Written by: Keith Goode
  • Tuesday, 01 August 2006