Broker Oak Securities has set a target price of 0.68p for ECR Minerals (ECR ), following the announcement that ECR is to acquire Australian company Paleogold Ltd for a small up-front payment and a larger deferred consideration comprised of cash, shares and loan notes.

Oak’s valuation begins with an appraisal of ECR’s existing near-term production assets.

“We value ECR Minerals using a sum-of-the-parts method, using different techniques to reflect the development stage of each project,” said Oak. 

“We have updated our valuation to reflect the increase in the gold price from US$4,600 per ounce at the time of our previous note to its current level of US$4,800 per ounce, which has a positive effect on both our DCF valuations of the Raglan and Blue Mountain projects. We have pushed back our production expectations at Raglan by three months, and this has created an overall negative effect on our valuation of this project.”

The broker then moved on to talk about the projects coming into the company via the acquisition of Paleogold. That deal is worth A$10.6 million overall, but the initial cash component is just A$140,000.

The most significant project is a 50% stake in the six Maddens Flat Mines, which have a non-compliant mineral resource estimate of 6,322 ounces of gold. This is a relatively small resource base, but it was compiled in 1999 and is based partly on known unexploited blocks. 

ECR believes there is potential to discover additional zones of mineralisation beyond these blocks. The project also comes with existing infrastructure, including a camp, processing plant, tailings dam, three freshwater dams, workshop, and storage sheds. The transaction will also see ECR acquire a 20% interest in the Salt Bush Flat Gold Mine, which has been estimated by the owners to contain over 10,000 ounces of gold. 

ECR believes there is potential to extend the mineralisation along strike, with additional potential for parallel veins. ECR will also acquire Paleogold’s 80% interest in the Tuckanarra project, an early-stage gold exploration project,

“We have valued the more advanced interest to be acquired as part of the Paleogold transaction (Maddens and Salt Bush) using a discounted cash flow analysis, similar to that used for the Raglan and Blue Mountain Projects,” Oak said. 

“For the 80% interest in the Tuckanarra gold project, we use the same methodology used for ECR’s other early-stage projects in our previous valuation (using the transaction value of Creswick), but have used the net 80% interest in the project. The updated valuation also considers all the near-term cash payments expected as part of the acquisition, which reduces the cash position to £0.7 million from £2.3 million in our previous valuation. We also factor in the dilution from the 207 million shares issued to Paleogold shareholders on the closure of the acquisition and the 20 million shares issued to acquire a 20% interest in the Salt Bush project. The overall effect of these changes to our sum-of-the-parts valuation for ECR is an increase to £23.8 million from £18.9 million.”

“On a per share basis, our valuation has increased by 16.5% to 0.68p per share from 0.58p per share in issue. Our new price target is an upside of 145.6% or 2.5 times the current share price.”

 

View from Vox

 

This acquisition gives ECR a portfolio of 10 exploration and development stage projects across four Australian states, with three mine development projects expected to be in production this year and a fourth next year. ECR plans to move the Maddens Flat Mines into production this year, alongside the development of alluvial gold mining at the Raglan and Blue Mountain projects. That’s quite a transformation for a company that has been plugging away at exploration for the better part of two decades, and with limited success. Within short order it will be producing gold at three projects, and moving ahead with exploration on several others, all of which offer significant upside. The sum-of-the-parts valuation that Oak uses makes sense, but one can’t help get the feeling there might be a lot more than that on offer once ECR really gets moving.