Calidus Resources vs Capricorn Metals: a tale of two miners

Gold’s 10% fall over the past three months has rubbed some of the gloss off the metal, but not the investment case of an emerging producer as this tale of two miners demonstrates.

In Capricorn Metals (ASX: CMM) versus Calidus Resources (ASX: CAI) a number of interesting parallels (and one disconnection) can be seen with the primary cause of the difference being timing, though that’s an issue which invariably fixes itself.

The key to understanding what’s happened (and likely to happen next) is that Capricorn has finished building its Karlawinda project in Western Australia’s Pilbara, poured first gold, and enjoyed a share price boost.

Calidus’ Warrawoona development is also in the Pilbara, 200 kilometres north of Karlawinda, has a roughly similar ore grade, but is 10-months behind Capricorn’s timetable which means Calidus’ share price has not risen this year.

The similarities are interesting, but what’s particularly important from an investment perspective is that Capricorn, which has fully de-risked its mine and is now in business, has a stock market value of around $773 million versus Calidus, which is halfway through the building process and is valued at $182 million.

It is possible, after allowing for Karlawinda’s bigger resource, somewhat longer life expectancy, slightly lower costs per ounce, and extra ounces of production in the early years, that Capricorn is a business worth twice as much as Calidus – but it’s hard to argue that Capricorn should be four-times more valuable than Calidus.

Project comparisons

The key metrics of the two projects are:

• Ore grade, Karlawinda 0.9 grams a tonne compared to Warrawoona 0.89g/t (rising to 1.21g/t in stage two when high grade ore from the Blue Spec mine will be added to the mix).
• Karlawinda has a mineral resource estimate of 2.15 million ounces, Warrawoona’s resource is 1.5Moz.
• Annual gold output of Karlawinda is between 110,000- 125,000oz, while Warrawoona’s is 90,000oz, rising to 130,000oz in stage two.
• Life expectancy, Karlawinda 10-to-12 years versus Warrawoona eight years (with both likely to add years as exploration continues), and
• All-in sustaining cost, Karlawinda A$1,140-1,190/oz compared to Warrawoona A$1,290/oz.

Timing is key

Timing, as mentioned earlier is the key to the four-fold value gap which lies between Calidus and Capricorn, because the two gold stocks appear to have more in common than differences.

The question for investors is to judge is whether (or when) the value gap will close and that’s a process of assessing risks which have multiple moving parts, not least the gold price itself and the discount always applied to mines yet to pour first gold.

Capricorn’s share price trend could be a useful starting point for a curious investor because it might also provide a clue to the future direction of Calidus’ share price.

In late March, as Capricorn’s Karlawinda mine moved within sight of completion the stock was trading at $1.41.

As the finishing touches were applied to the project the share price started to rise, as did the price of gold, which was US$1,691/oz on 31 March.

In early July, when Capricorn announced its first gold pour the company’s share price had risen by 34% to $1.89 even though the gold price (which did rise strongly over May and June) was up just US$90/oz (5%) at $1,781/oz.

Capricorn’s share price continued to move up last month, aided by a deal to buy what could become the company’s second mine.

At the time of writing, the price was $2.14 – almost 65% higher than its April low point of $1.30.

The purpose of analysing Capricorn is that it’s share price movements are a classic example of what happens to a mine developer as it de-risks an asset and investors acquire a greater comfort level which can be boiled down to a single observation about a new asset: “it works as promised”.

Calidus’ gold road

Calidus is travelling on the same road, in more ways than one, because both Karlawinda and Warrawoona are serviced by trucks using the Great Northern Highway, which runs from BHP’s (ASX: BHP) iron ore mining centre of Newman to Port Hedland.

The projects are also in the born-again Pilbara gold province which is starting the reveal world-class assets such as De Grey Mining’s (ASX: DEG) 9Moz Mallina project.

But the critical question for investors is whether Capricorn is a business that is four-times better than Calidus and while that might be true today because one company has a producing mine and the other is yet to start production it will probably not be true by the second quarter of next year with Warrawoona expected to pour first gold in April or May.

The re-rating to Calidus if/when it occurs could be similar to the re-rating enjoyed by Capricorn because they are companies with more in common than their differences.

One of the most important common points is that they both built their mines before costs started to rise which means they’ve dodged one side of the pincer which can squeeze all gold producers. The other side of the squeeze is the gold price and there’s not much which can be done about that except lock in forward sales.

Calidus managing director David Reeves told Small Caps the cost issue for miners starting construction today was a significant problem – citing a 30% increase in the polypipe used extensively on an outback mine site as an example, with the cost of steel also rising sharply.

“There are tougher times coming, but we’re more than 50% complete and have locked in hedges (forward sales) covering 125,000oz of gold at a price of A$2,355/oz,” Reeves said.

That forward price is almost identical to the current Australian gold price of A$2,352/oz.

Because Calidus is a small cap it hasn’t attracted the attention of many stockbrokers though two recent reports are interesting.

Canaccord Genuity has a speculative buy on Calidus and a price target of $0.60, but the broker also raised the possibility of a capital raising through the ramp up of Warrawoona.

Blue Ocean Equities pushed the boat out further with a price target of $1.10, telling clients: “In our view, Calidus’ share price is on track to double over the next 12 months as the company brings Warrawoona into production, even if the gold price simply stays where it is today.”