San Gold Corp.
(SGR-T) C$2.79
007 Zone Bulk Sample Disappoints
Event
Last week, San Gold reported on preliminary mine development and bulk
sampling within the 007 and 007 East Zones at its Rice Lake Mine complex.
The company processed 15,405 tons of material and estimated a mill head
grade of 11.3 g/t, which is approximately 45% below the June 2010 reserve
grade of 20.7 g/t.
Impact - NEGATIVE
We understand from speaking to the company that the bulk sample consisted
primarily of development material, which tends to be lower grade than
stoping material. As stoping material normally makes up the bulk of mill feed
in a commercial mining scenario, this suggests that future head grades from
the 007 Zone could be higher. We note, however, the opposite occurred with
the company’s Hinge Zone, which has recently delivered head grades of
approximately 6 g/t – far below the bulk sample grade of 17 g/t.
In an effort to be prudent, we are revising our model for the 007 Zone to
reflect the bulk sample grades. We had previously assumed a mill head grade
of approximately 10 g/t this year to reflect the potential for higher dilution
when mining commenced and 20 g/t over the balance of the reserve life. We
have also taken the opportunity to revise our forecasts to reflect lowered
production guidance disclosed in a recent company presentation.
The company now forecasts production of 80,000 oz at a total cash cost of
approximately US$650/oz in 2011, which increases to 180,000 oz at a total
cash cost of approximately US$500/oz by 2013. We believe the reduced
guidance is more achievable, but the company has a history of reducing
guidance over the course of the year. Net of these changes, our corporate
NAV5% decreases to $2.13/share (from $2.57) and our 12-month target price
decreases to $3.25/share (from $3.75). We maintain our HOLD recommendation.