Continuation14 Jul 2011 12:56
The deposit itself is made up of circa 10 sizeable structures of mineralisation interspersed with 190 narrow and sinuous zones. Following the most recent intersects the company has revised its average thickness estimate to 5.5 metres, a significant move forward, which should lead to an increased economically viable resource base, extraction, and mine-ability. The information from the initial 4,800 metres of the total 25,000 metres programme will be used in the current geological modelling of Sekisovskoye which will form the basis for the detailed mine engineering plan which is expected to be disseminated to the market, along with the underground mineable reserve statement, in last quarter of the current year.
With the most recent drill results in line with, and in some cases, better than what the management had expected, the investment case here is developing. The interim between start up production and full output is inevitably a difficult period for junior miners, and subsequently their valuations typically suffer at this point due to the lower production numbers associated with operational development. What should be remembered in the case of Hambeldon is that although operating costs have, over the past year, increased due to lower output and an erratic mix of grades (and most recently the cleanup of the open pit waste), the placing announced on 14th March 2011 should see cost savings of at least $120/oz made with higher grade ore from deeper in the open pit, and ore from the underground operation, also coming on stream by the fourth quarter, increasing the economic attractiveness of the project. Moving toward the fourth quarter of 2011 the company can conservatively expect a typically harsh Kazak winter. But having completed phase one of the winterisation programme, with phase two being undertaken alongside the underground mine construction, operations should progress steadily.
Having struggled since 2008 with a myriad of disappointments, investor confidence in Hambledon is poor. However, we believe that the company has now begun to position itself well in regard to the ultimate focus of output from Sekisovskoye reaching circa 110,000 ounces a year by 2016. With the shares currently trading at 4p, we believe the current market valuation of £29.74 million continues to heavily reflect the past record of non-delivery and the short term production disappointments, and does not account for the evidently strong future potential of the developing mining operation. With the investment case here becoming far less speculative compared to non producing mine developers, and assuming a prudently risk weighted DCF valuation (using a discount rate of 20%) at 4p we retain our stance of buy. We also revise our target price, attributable to the projected Net Present Value of the Sekisovskoye project, to 11p.
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