Align Research initiation of coverage

Cradle Arc

Conviction Buy - Price target 28.38p

Transformational deal acquiring key copper mine at a low price

Cradle Arc originally listed on AIM in 2006 as Cue Energy, with the company's focus switching from energy to gold in 2011. Over the last two years, under the name of Alecto Minerals, the company has been transformed from a gold exploration play into a highly compelling, diversified African miner by acquiring the Matala gold project and now the economically robust Mowana Copper Mine.

Copper production capacity expected to double within 18 months

The acquisition of the Mowana Copper Mine looks like an exceptional deal. A 60% stake is being bought for £12.3 million, while more than US$170 million was invested in the mine to originally get it commissioned. Reassuringly, project debt is down to a manageable level, with upgrades to allow nameplate production capacity to double in 2019.

Low risk entry into gold mining which could now be funded

Vendor financing has already been agreed for a 30,000oz per annum gold mine at Matala. The acquisition of Mowana, with its cash flow and assets, provides the security for the financing, which had previously been a stumbling block.

 Value to be added to gold exploration portfolio by JV partners

The move into mining production has seen Cradle Arc stop funding basic exploration work. Now, the gold exploration projects are being funded to key milestones with well-established joint-venture partners including Randgold Resources and Kola Gold.

Our analysis suggests a very conservative risked target price of 28.38p

We have prepared a valuation based on the combined NPVs for the expanded Mowana Copper Mine, the Matala Gold Mine and exploration assets, and calculate a fair value of 28.38p per share on a fully diluted basis. We continue our coverage of Cradle Arc with a Conviction Buy stance.

To download the full research note visit http://www.alignresearch.co.uk/cpt-company/cradle-arc/