Merrill Lynch on Gabriel:
"Fall From Grace"
Gabriel's Rosia Montant gold-silver deposit is one of the largest undeveloped gold deposits in the world with resources of over 13 million ounces of gold and 60 million ounces of silver.
Today, the company provided an update on the development of the project, including revised capital and operating cost forecasts:
Capital Costs: +69%
Cash operating costs +35%
IRR -48%
NPV -55%
Payback period +56%
Capital Costs Rise up
Capital costs to vuild the Rosia Monatna have increased 69%, from 253 million to $437 million in the recent update.
Almost $40 million of the increase is a positive result of the local communities desire to participate in the resettlement/relocation plan to aquire the land whcih hosts the deposit and surrounding facilities of processing plant construction and tailings mngmt system. Detailed Geotechnical work conducted over the past 12 months resulted in higher forcasts for te cost of the tailings managemnet facility, as well as the need for additional expenditures relating to the environmental management of the project (including acid rock)
Operating Costs... Low, but 5 vs 16
The Rosia Montana mine is forcasst to average over 500,000 oz of gold production per annum over a 16 ear minelife. However, the recent update envisions total cash costs of $152/oz vs year ago $115/oz, but only for an initial 5 year period when higher-grade ore sees production average of 679,000 oz yr.
Timing... both ahead and behind
The Rosia Montana has fallen behind it's Feb02 forcast to commence construction in Q2 03. As a result, our previous forcasst of production commencing in 05 has been delatyed to H2 06.
On the relocaton/resettlement effort, the time required to organize the process and procedures has taken longer than expected, but ultimately, the acceptance and pressure from the local residents seems to be for quicker, not slower implementaton. As a result, almost $40 millionof the expenditures budgeted for continued or ongoiong resettlement/relocation post sstartup has now been brought forward into initial capital expenditures to deal with locals who want to mover/sell earlier.
Net Impact on our Valuation
The forecst of higher capital and operating costs, as well as the delayed starup to Rosia Montana hae a significant and negative impact on our DCF-model based valuation of Gabriel Resources.
IN OUR OPINION, THE HIGHER CAPITAL COST FORECAST TO DEVELP ROSIA MONTANA ALSO RAISES THE FINANCIAL RISK RELATING TO THE TERMS, TIMING, AND AVAILABILITY OF FUNDING FOR GABRIEL TO "GO IT ALONE" IN THE DEVELOPMENT OF THE DEPOSIT. Our modeling assumes CD$ 450 million of debt [7%, 2004) and $CD 180 new equity (2 tranches of $CD 80million 2003, and CD$100million in 2005).
Our NAV declines 47% from $5.61 shr to 2.96 shr. Since the recent update provides a higher degree of confidence in the parameters of a potential ining operation at Rosia Montana, we are raising our P/NAV multiple on Gabriel, from 1.0 to 1.5 times. Our revised valuation of $4.43 (2.96 X 1.5) reflects less than a 20% appreciation from current stock level.
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