I’m starting coverage on this client by doing something I have never done since this blog started -urging speculators to become shareholders (thinly traded so don’t chase from here $5.23). While its clearly high-risk/high-reward, WITS Gold is drastically undervalued in my highly biased eyes.

WITS GOLD:  STEP-CHANGE FROM EXPLORER TO MID-TIER PRODUCER

• Gold entry at US$1/oz
• Two shallow Wits Basin projects to be fast-tracked into production
• Extensive exploration footprint to leverage from
• Judicious acquisition of existing operations to spur cashflow and growth

Wits Gold (Listed on JSE, North American speculators can find it on the Toronto Stock Exchange under symbol WGR $5.23; and in the U.S. as an ADR: WIWTY), established in 2003 as a gold and uranium explorer focused on resource delineation in South Africa’s world-renowned Witwatersrand (Wits) Basin, is coming rapidly to the fore – in pursuit of a new growth strategy and under new leadership – as a South African junior gold producer with excellent growth potential. 

The company was listed in 2006 with the share price rapidly running up to a high of close to $27 per share as new resources were delineated through a focused exploration strategy. At $5.23 (Canadian), the stock price has been heavily discounted from its highs; mainly due to perceptions that most of the resources are very deep and will require major capital to extract, and that the necessary mining skills were not in place to develop the exploration projects into operating mines. (This values the stock at an unbelievable $1 per total resource ounce, significantly cheaper than the average of $80 per resource oz for other listed juniors with gold projects in Africa. A significant re-rating of the stock can be in the cards with the implementation of the new growth strategy outlined below.) 

These concerns have been addressed by recent developments announced at Wits Gold. Firstly, a positive scoping study has been released at its DBM Project, where the orebody starts at a shallow 1,500 ft and therefore implies a significantly shorter development period and lower capital required. This compares with the average mining depth of 8,000 ft for underground operations in the Wits Basin, where the deepest shafts mine to 13,000 ft. 

The company also recently appointed Chief Executive Officer Philip Kotze, a mining engineer with over 25 years’ experience at senior and executive levels in underground gold and platinum mining in South Africa, to oversee the implementation of a new concurrent three-phase growth strategy. Exploration will remain a cornerstone of this new strategy, with the second, Project Building phase, aiming to fast track into production the shallow DBM Project. At the same time, the judicious Acquisition of cash flow positive gold mining operations deemed as non-core by the major producer’s, will comprise the third phase. 

1. Exploration 

Wits Gold holds title to prospecting rights over areas totaling 742 square miles, all adjacent to existing Wits Basin mines, with a NI43-101 compliant total resource of 156Moz of gold and 268Mlbs of uranium. This ensures a strong project pipeline that will be advanced through ongoing  exploration. 

The company has historical core and data from more than 200 boreholes totaling some 311 miles, supplemented with that from its own drilling of 40 boreholes over 35 miles, carried out since 2006. This is housed under one roof at Wits Gold’s exploration facility in South Africa, believed to be one the largest and most comprehensive in the country. 

The company plans to take its internal projects up the value curve by developing the assets on its own, or through joint ventures with existing operators. 

2. Project Development 

De Bron-Merriespruit (DBM) Project 

The DBM Project’s resource is contained in four gold-bearing conglomerate reefs starting at just 1,500 ft below surface. While a recently completed scoping study, based on conventional mining methods, has indicated that at current gold price levels the project has a pre-tax IRR in excess of 50%, significant upside to this is envisaged through application of more efficient and safer mechanized mining methods. 

A pre-feasibility study (PFS) is now in progress at the DBM Project, which should be completed by May 2012. An 11-hole pre-feasibility drilling program was completed in September 2011 and the results are being utilized to update the current Resource Estimate. The revised NI43-101 compliant Resource Estimate is expected in to be released this month. The PFS should be followed by a definitive feasibility study, which is expected to the completed by mid-2013, after which development will commence at the DBM Project. 

Bloemhoek Project 

Bloemhoek is situated immediately adjacent to the DBM Project and the Beatrix Mine operated by Gold Fields, allowing for regional synergies. Additional drilling at Bloemhoek – targeting the southern, high-grade extension of the ore body – is under way at present and the results of this will inform an update of the existing, independent PFS released in October 2009. In terms of the existing PFS, it is envisaged mining will start 4,000 ft below surface – shallow, when compared to other Wits Basin operations. The project has a 23-year life of mine, with production levels exceeding 220 000oz/pa. At current gold prices, the IRR is in excess of 25%. 

3. Acquisition 

The third phase of the new growth strategy anticipates judicious acquisition of existing producing operations in the Wits Basin that are no longer considered to be core by their existing owners. Key criteria informing the acquisition of such operations should include: quality of the orebody, extent and depth of the remaining mineable ore body; cash generation; state of existing infrastructure; contiguity to Wits Gold’s own mining and exploration projects; and, of course, price. Wits Gold would expect to bring its own pool of expertise to bear in the mining of assets fitting its acquisition criteria, to deliver higher margins through flatter structures, mechanized mining where appropriate, and tight cost controls. 

Acquisition of cash flow positive assets should also contribute towards funding of the projects within the company. 

Investment case 

The new growth strategy, underpinned by two excellent projects that can be fast-tracked into development and production over the short term, an exploration project pipeline over a vast area of the Wits Basin, and an experienced management team, should see Wits Gold transform from an exploration company to a value-adding gold option that offers exposure to production through development and cash generative acquisitions. The company can then see a re-rating of its share price within the next year and with cash generative operations, could be in a position where they start paying dividends in the near future. 

This entry was posted on January 4, 2012 at 9:41 AM. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

Posted in A Grandich Company All Posts Canadian Stocks Exploration Shares Gold Mining Shares Precious Metals Uranium WITS Gold by jojo