According to Dundee Securities:
April 16, 2013
Visit Confirms our Expectations; Volta Grande is the Real Deal
• On April 11th, we had the opportunity to visit Belo Sun's (BSX) 100%-owned Volta Grande project in Brazil. In short, the trip confirmed most of our expectations and reinforced our view that the project has the potential to ultimately become a mine. Despite our positive site visit, the share price remains under pressure (like most of its peers) and recently slipped below the ninety cent mark on Monday. Given the recent volatility, predicting the direction of gold from here is challenging to say the least. However, investors with a tolerance for risk are likely to find compelling opportunities in the junior space though we believe the emphasis should remain on higher quality producers and developers. As we believe BSX falls into this category given its sizeable resource base and attractive grade profile, we maintain our BUY, Speculative Risk rating and $2.50/share price target.
New Resources Upgrades & Expands Volta Grande
• Overnight, BSX announced the results of an updated, internally calculated resource for the Volta Grande project. The update included an additional 72 holes which were received after the calculation of the last resource and up to January 30, 2013. It reflects a $1,400/oz gold price assumption while retaining the 0.5 g/t cut-off for the open pit material. In the new resource (Figure 1), BSX has upgraded a significant portion of Inferred ounces into the Measured category while also increasing the size of the Total Mineral Inventory (TMI) by 5% to 7.2MM oz. BSX anticipates completing one more resource update in Q3/13 which will form the basis for the Definitive Feasibility Study, expected to be released by year-end.
Our Key Site Visit Takeaways:
• Permitting Remains the Focal Point: During our site tour, we spoke with staff about the permitting process given its high level of importance at this time. As noted previously, the process generally takes up to 120 days from last public consultation which took place in mid-January. We understand that BSX remains in close contact with the local Environmental Ministry (SEMA) and given the positive relations and economic benefits which would be conferred on the local community, we see no fatal flaws to derail the process. We anticipate a permit update by the end of Q2/13.
• Project Still Resilient at Current Gold Prices: Were we to use a spot gold price assumption (~US$1,346/oz) in our model for the entire mine life, our Net Asset Value for BSX would decline from C$3.17/share to C$2.32/share (Figure 2). While we don't expect that the gold price is sustainable at current levels as this would shutter many operations, we provide the sensitivity to demonstrate that the project still works at lower gold prices. We attribute the majority of this resilience to the project's average resource grade of ~1.76 g/t (our model assumes LOM head grades of 1.5 g/t). While it's difficult to forecast the turning point in the gold market, BSX currently trades at C$0.82/share (a significant discount to its NAV at spot) and thus, could provide considerable torque when the market turns.
• Pre-Feasibility Remains On-Track for Release by Mid-Year: We understand that the Pre-Feasibility study is on track for release in the second quarter and will be based on the December 2012 resource estimate. We expect that the results of the study will demonstrate a 10-12 year mine life with production of just over 300k oz/a and total cash costs on the order of ~US$650/oz. We estimate development capex of circa-US$725MM. However, given the recent gold price environment, we also see potential to scale down the project in order to reduce the initial capex requirements.
• Positive Garimpeiro Relations with Demobilization Underway: Despite the presence of garimpeiro activity dating back to the early 1900's, BSX reached an agreement with each of the artisanal mining communities on site back in May 2012. With 50% of the consideration only being paid after all artisanal mining on-site had ceased, some garimpeiros have already demobilized with others expected to depart in the months ahead.
• Current Garimpeiro Work Focused on Mineralization at Depth: During our tour, we had the chance to visit several garimpeiro operations with photos included below (Figure 3). In short, we note that most garimpeiro activity is focused on higher grade, quartz-rich material at depth with one shaft estimated to extend more than 400 metres below surface. While BSX is focused on near-surface mineralization amenable to open-pit mining, garimpeiro activity has us encouraged for additional resource growth potential at depth.
• Competent Rock Supportive of Steeper Pit Walls: In our tour of the core shack, we had the opportunity to review some core from Ouro Verde, Grota Seca and the South Block (Figure 4). As expected, the core samples across the deposits demonstrated fine grained gold hosted within hard rock. Given the competence of the host rock at both Ouro Verde and Grota Seca, this should help to support steeper pit walls which could help reduce the strip ratio from our current estimate 6.5:1 (w:o).
• Drilling Continues in Support of Q3/13 Resource Update: With the last resource update completed as at January 30, 2013, drilling continues to take place with the focus on infilling the North Block (Ouro Verde & Grota Seca). This is being supplemented by geotechnical drilling (Figure 5) which will provide data required in the Definitive Feasibility Study (DFS), expected to be released before the end of the year.
• While Recognizing the Opportunity, Risk Remains Elevated: Despite our appreciation for the project's operational parameters and potential economics, we remind investors that the company remains a development stage entity and thus, carries a Speculative Risk rating. At this time, the company has not yet produced a Technical Feasibility Study to demonstrate the project's economics. In addition, BSX has not yet raised the capital required to construct the mine and has no other sources of cash flow at this time.