Magellan just had its IPO at TSX in February this year, only 5 months ago. The IPO price was at 1 CDN and it has traded as high as 2 CDN, then got hammered to 0.85 CDN right now. However, the exploration activities are going well for the last 4 months since its IPO, according to Dr. Carter, especially at its Cuiu Cuiu project which five large gold-in-soil anomalies have been identified. Newmont Mining owns 8.1% of this Company, which is a big plus and shows Newmont's interest in this Company and their projects. In addition, Magellan reports that several companies have offered it deals on Cuiu Cuiu valuing the project at significantly more than the current market cap of the company, suggesting excellent upside. And we are only talking about one of a number of projects!
Cuiu Cuiu is one of the two largest historic gold producers in Tapajos. The adjacent area within Tapajos is Tocantinzinho (25 km southeast of Cuiu Cuiu) with estimated 2 million ounces of gold. Cuiu Cuiu is expected to be a larger gold producing area, and should have a much larger gold deposits than Tocantinzinho. Even with 2 million ounces of gold, same as Tocantinzinho, today's Magellan market cap is only about 1-2% of the gold value there. Another way shows that Magellan is quite undervalued.
Then there is another project 100km south of Cuiu Cuiu called Uniao, which Magellan also controls 100% interest and is estimated to have produced 1 million ounce of alluvial gold. Uniao is a 4km long trend with stockwork quartz veining and high grade veins, suggesting bulk tonnage open pit and high grade vein targets. Drilling is scheduled to start toward the end of the 3rd quarter this year.
Besides gold, Magellan has four bauxite (a mixture of aluminum oxides and hydroxides) projects in Para including the Nhamunda project where recent auger drilling intersected economic concentrations of bauxite over minable width. Brazil is the world's second largest producer of bauxite which is used to make aluminum. If these bauxite projects become economically feasible to be mined, Magellan will be likely to join force with another larger mining company.
Through its IPO, Magellan has raised $11M and now has $9M cash reserves. The cash burn rate is around $3-4M this year, but likely higher next year due to more drilling programs. It is possible for the need of more financing next year. But at the same time, it is also possible to sell a partial interest in one of their projects to a major minor such as Newmont or Kinross.
This Company has an experienced management team with the founders and top mangers who are ex-BHP Billiton, Rio Tinto, Barrick and Newmont, and have most of their working experience in South America, especially Brazil. They also have a large number of high potential and diversified exploration projects going on in this geopolitically stable and mining friendly country.
Mining exploration is always a high risk high reward business. Since there is no production, unlike Endeavor Silver described in my previous articles, they don't have revenue, thus with negative earnings. However, they are not like internet companies in the late 1990s, which have only phantom ideas and day dreams, almost all of which wouldn't be materialized. Mining exploration is totally different. With probability adjusted, some of these high potential properties and projects will become real commodities, and in this case, Magellan currently owns 100% interest on all of their projects. Here management's experience, credibility and integrity become very important. Just like any other business, luck will also play a role here. This is why investors should adjust this kind of investments by probability and maintain a diversified portfolio to minimize risk.
Even Magellan's 100% interest on their projects may be diluted and reduced in the future in exchange for investment and joint venture with other miners. However, what we are investing here is hopefully the substantial growth of their discovery and reserves of real commodities, in this case gold, which the majors will have a strong interest to acquire due to their reducing reserves and lack of ability to discover on their own. You can't sell internet day dreams or phantom AAA CDOs to investors these days anymore, but you can sell them the real money of gold easily. Once investors realize the scarcity in its supply vs. its unlimited investment demand, a large gap that gold exploration firms are trying to fill, investors will recognize the true value of Magellan.
I always want to be conservative, especially in the junior mining sector. If Cuiu Cuiu alone has been conservatively valued by major mining companies at significantly more than $25M, we should see the Magellan share price move to $2, back to its all time high, or better, as we come out of the current slump in the precious metal mining sector.
Source: By Thomas Tan, CFA : See his profile at Vestopia
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