Colossus Minerals Inc (COLUF)

[Tommy]

$COLUF - $CSI.V - The Colossus Is Twitching

http://seekingalpha.com/article/1515172-the-colossus-is-twitching?source=email_investing_ideas&ifp=0

The greatest gold rush in South America took place in northern Brazil in the 1980s at a place called Serra Pelada. About 80,000 artisan miners, or garimpeiros, flocked to the area and dug a hole 400m by 300m across and 120m deep. Apparently about 2M ounces of gold were pulled from the earth during a 10 year period. Some got rich, most didn't. A highly entertaining documentary was made about this time and place which is free to view here (wait, read on and watch later). Brazilian mining giant Vale (VALE) held the formal title and explored the area until February 2007. Then COOMINGASP, a local cooperative company, was granted the exploration license for the area surrounding the historic pit.

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(photo taken from company web site)

Colossus Minerals (COLUF.PK) entered the scene by signing a joint venture agreement with COOMINGASP only a few months after the cooperative took control of Serra Pelada. Colossus Minerals is earning its share of the project by financing exploration and mine development capex. Furthermore, Colossus is making monthly payments of around $175,000 to COOMINGASP until start of production, after which COOMINGASP is entitled to a royalty of 1.3% to 2.1% of precious metal sales depending on production. Further exploration licenses were added over time covering the surrounding area with numerous interesting near mine and regional exploration targets already identified.

Reported grades from various drill core assays include some truly spectacular results in the double digits g/t for all three present precious metals - gold, platinum and palladium - over significant lengths. The geology of the area is complex. Gold-platinum-palladium mineralization has been traced to depths of up to 350m under the southern end of the historic pit and remains open along strike. Colossus is currently developing an underground mine to access what has been termed the Central Mineralized Zone (CMZ). Difficult ground conditions in combination with ground water had been a concern but turned out to be better than expected allowing for ongoing optimization of intended mining methods. Additional mineralization has been encountered during underground exploration from the decline suggesting a lower grade halo around the CMZ. A bulk sample has been extracted and will be processed on site as soon as the plant is functional. The technical challenges of building this mine are not to be underestimated, but so far construction has been executed with great precision.

Gold is presently under a great deal of pressure and the spot price has been correcting for over a year and a half. The present spot price of $1,300 seems a long way from the tops of $1,900+ and gold investor sentiment is shot to pieces. Platinum and palladium are also precious metals and attract increasing investment interest. Additionally, these two metals also have industrial applications especially in the car industry. Moreover, almost 80% of world supply of platinum and palladium is produced in South African mines. These mines are facing some serious challenges as is evidenced by numerous news reports during past months. Analysts such as Peter Hug of kitco.com have become very bullish on platinum and palladium recently based on the assumption of an upcoming supply squeeze. We view the platinum and palladium concentrate to be produced at Serra Pelada as a very attractive hedge against the gold correction turning into a proper bear market.

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An unusual decision was taken by the company to develop this mine without prior preparation of a NI 43-101 compliant reserve statement. The nature of the mineralization at Serra Pelada creates significant uncertainties with reporting to this standard and release of a NI 43-101 report has been postponed to later this year when sufficiently closely spaced drill data from underground exploration will be available, and results from the bulk sample can be incorporated. For potential investors this represents an additional risk. However, it did not stop Sandstorm Gold (SAND) to participate in the financing of the mine by providing $60M of upfront cash toward mine development in exchange for a streaming agreement that will allow them to purchase 15% of the gold production for $400 per ounce, and 35% of the platinum for $200 per ounce. Sibling company Sandstorm Metals & Energy (STTYF.PK) paid $15M upfront in exchange for 35% of the palladium production at $100 per ounce. It can be assumed that the Sandstorms performed significant due diligence before committing to this so-called streaming arrangement which could also be taken as some re-assurance by interested investors. Colossus has the right to buy back half of the precious metal stream until April 1, 2015, at a total cost of $58.5M to the two Sandstorms.

Colossus Minerals have been very forthcoming in reporting on mine development and has been releasing detailed monthly updates. The latest instalment on June 18 made for very interesting and encouraging reading once again. Construction is 85% complete and the company confirmed that the project is still on track for first production at an initial rate of 250 tpd in the third quarter this year. Production is scheduled to ramp up to 1000 tpd by Q1 2014. The decline has reached the CMZ and 2,500 tonnes of material have already been stockpiled on the ROM pad. Construction of the plant is on track for commissioning in the third quarter. The plant will process gold first, followed by PGM flotation a year later in Q3/2014. Serra Pelada is fully licensed and well serviced with roads, water and power and also has access to skilled local labor.

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Brazil is a mining friendly jurisdiction with a modern mining code, welcoming to foreign investment and a stable political and fiscal system. It's the sixth-largest economy world-wide and the undisputed economic power house in South America. Inflation has been high and increasing which warrants close monitoring. There are a number of operating gold mines in Brazil including the Aurizona mine by Luna Gold (LGCUF.PK), several mines operated by Yamana Gold (AUY) or operations by the local mining giant Vale.

Colossus is a development company. The company has gone through a speculative exploration phase during which the share price has soared to $9 and above. Such exuberance is typical for exploration companies with promising projects, and it is often followed by a drop when reality settles in with the concrete necessities of financing and mine development. Brent Cook of explorationinsights.com calls the bottom in the share price that is often associated with this development phase the "orphan period." This is exactly where we find Colossus Minerals at the moment. Consider the diagram below for an illustration of where Colossus Minerals may be heading if it managed to bring the Serra Pelada mine into production.


(taken from explorationinsights.com)

Colossus Minerals presently has a market capitalization of $138M with 125M outstanding shares (139M fully diluted) trading at multi-year lows of $1.29 at the time of writing. Institutions own about 62% of the company and insiders about 13% - there has been some heavy insider buying very recently. The company just raised $28.75M in a bought deal which should be sufficient to get to production with some contingency to spare. The shares issued in this offering are not yet considered on Yahoo.com or other trading information platforms. Furthermore, the company has $75M worth of unsecured notes trading on the Toronto stock exchange under the ticker CSI.NT maturing December 2016. Each note has a face value of $1,000 and has 60 warrants with an exercise price of $8.50 each attached to it. Interest depends on the gold price and varies between 6% and 13%. These notes are currently trading at just under C$70.00.

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The share price has been locked in a downtrend since April 2011 as evidenced by the weekly chart above. There are various weak support levels below the present share price, but from a technical perspective the trend might continue and test strong support at $0.34 later in the year. From a chart perspective this would be a healthy move since it would fill a few gaps that have remained open from 2009.

Finishing up we would like to present our present investment thesis for Colossus Minerals. This stock represents a very high risk/reward opportunity with the company presently in a very vulnerable position. The project is a high risk undertaking and even though execution has been managed in an exemplary manner there are still many risks that could manifest themselves before the mine will go into production and a NI 43-101 reserve will be presented. Investors interested in this company need a very high risk tolerance, but looking at the potential of this project we believe that rewards could be handsome. Catalysts to turn around the downtrend and put an end to the orphan phase are coming up later in the year giving interested parties ample time to research and monitor Colossus Minerals over the coming weeks and months.