Cerrado Gold: A Tale of Two Deposits

Cerrado Gold’s (CERT.V) Monte do Carmo gold project in Brazil could become one of the lowest cost mines in the world. Meanwhile, despite recent operating challenges, its Minera Don Nicolas gold mine on its vast land package in Argentina is posed for a turnaround with heap leach operations slated to begin in April 2023.

We believe the worst may be behind Cerrado. At current prices of around .88 cents, Cerrado Gold is a high-risk, but very high-reward gold developer with extremely favorable economics as the gold price advances above $US 1,800.


Tuesday, January 3, 2023

For junior mining investors, Cerrado Gold (CERT.V) has resembled a Charles Dickens novel: “It was the best of the times” and “it was the worst of times”.

On one hand, the exploration and development of its original project, the Monte do Carmo (MDC) gold project in Tocantins State Brazil, has gone exceedingly well. The company plans to deliver a feasibility study in early Q2 2023 and to begin construction on what may be one of the lowest cost gold producing mines in the world. It has been the best of times!

On the other hand, in March 2020, Cerrado made what it believed to be a very opportunistic acquisition of a massive 333,4000 hectares land package in Santa Cruz, Argentina, headlined by the Minera don Nicolas operating mine in Santa Cruz Province, Argentina, for $45 million USD.

At the time, Cerrado projected that the mine would produce over 50,000 ounces per year at all-in-sustaining costs (AISC) of less than US $1,000/oz per year for at least 7 years.

However, the mine produced only 11,284 ounces in 2023 Q3 at US $1,494 AISC. This generated a $C 6 million quarterly loss.  As a result, Cerrado Gold has accepted millions of USD in promissory notes to fund the development of its heap leach operations – when it had hoped to fund the heap leach out of internal cashflow.  It has been the worst of times!

Despite these challenges, we believe investors are overlooking the considerable likelihood of a strong turnaround.

We consider Cerrado Gold to be a high-risk, but very high-reward gold developer with extremely favorable economics as the gold price advances above $US 1,800.

(In Bull Markets Start with a Bang, we mentioned Cerrado Gold as one of several developers that we liked.) 

Cerrado Gold: The Team that Built Largo Resources and Sold Desert Sun Mining

Cerrado Gold is a new story. The company went public in February 2021. It only acquired its Argentina assets in 2020. At recent investor conferences, management says most of its meetings are with investors who do not know the company.

Management is led by an experienced and previously successful team. CEO Mark Brennan was a founder of Largo Resources, which achieved a C $1 Billion market capitalization.

In addition to success in Brazil with Largo Resources, as part of Desert Sun Resources the management team developed the Jacobina asset which was acquired by Yamana for US $500 million.

This shows that the Cerrado team understands how to develop, operate and sell assets in Brazil.

Cerrado management owns 40% of the shares outstanding, which demonstrates that they are strong believers in the project.

Institutions, including 5 larger mining funds and about 15 smaller funds, own 27%.

The stock currently trades only 55,000 shares per day. As a result, liquidity for institutions is not great, but patient individual investors can easily build a position.

Developing One of the World’s Lowest Cost Mines in Brazil

Cerrado Gold’s 100% owned Monte do Carmo Gold Project consists of 82,000 hectares. To date, exploration and development is focusing on the Serra Alta Deposit. The August 2021 mineral estimate for this deposit was 541K ounces of indicated gold and 780k ounces inferred.

In October 2020, Cerrado Gold announced a preliminary economic assessment (PEA) for Serra Alta. The PEA was US $432M (NPV 5%) with a 76.4% IRR at $1,5500/oz gold, consisting of $110M initial capex (of which 30% was classified as contingency costs). The life of mine was 7 years, with a total resource of approximately 800K ounces of gold, mined at an average cash cost of US $498 AISC. As a result, at $1,550 gold, payback was in 1 ½  years!

At $1,850/oz gold, the IRR was over 112%. 

Since announcing the PEA, Cerrado Gold has drilled to expand its resource, converting inferred resources to the indicated category and exploring for potential satellite deposits.

It aims to demonstrate a mineral resource of 2 million ounces of gold, with the potential to define 5 million ounces.

In Q2 2023, Cerrado will announce the results of its feasibility study.  It is expected that the results will confirm a high IRR (approximately 70% or more), with relatively low initial capital expenditure of around C $125 million.

Given that the size of the deposit has increased significantly, annual production could approach 150,000 ounces of gold per year for 10 years.

Finally, MDC has massive exploration potential. As one example, in September 2022, Cerrado confirmed over 250 meters of mineralized strike at its Gogo da Onҫa target, with results such as 25.1 meters of 3.38 g/t gold from 56.5 meters depth and 11.7 meters of 5.37 g/t gold from 93.6 meters depth. The satellite deposit will be incorporated into the feasibility study.

As of November 2022, the company had drilled 172 holes, totaling 42,000 meters, of which 137 holes were at Serra Alta, while 35 holes were intended to explore satellite areas. In December 2022, it had five drill rigs on site to complete its current phase of the drill program.  Results may come in January 2023.

Cerrado Gold could publish a mineral resource estimate by the end of February 2023. Its focus has been to convert inferred resources into the measured and indicated category.

 Optimizing Production in Argentina

Cerrado is still trying to figure out exactly what it has in the mineral rich Deseado Massif, in Santa Cruz Argentina, a world class gold and silver province. (In the last 15 years, seven mines have been constructed in Santa Cruz.)  

It acquired MDN because it believed the mine could produce 50,000 ounces of gold for 8 years. It now sees an opportunity to create a more significant mine, perhaps like neighboring mines held by Anglogold Ashanti, Yamana Gold or Newmont. MDN is essentially still a young project that the company is molding into a mine with a potentially longer mine life.

Cerrado Gold’s objective is to demonstrate a steady and profitable state of 90,000 ounces production per year, while proving up significant mineral resources at underground and satellite targets.  It is projecting to produce 70,000 ounces of gold in 2023 and 90,000 ounces in 2024.

To achieve these objectives, Cerrado Gold needs to successfully put its heap leach operations into place and reduce its ASIC. Within the next nine months, it expects to spend US $30 million to fund its heap leach operations. Some of it will be funded by internal cashflow, but it is also offering several millions in promissory notes (potentially up to US$20 million) to Argentine investors to plug the gap.

The company expects to generate US $100 million in cashflow over the next 3 years from its expanded operations. It also expects that the expansion of underground operations represents the best operational growth in Argentina moving forward.

Its first heap leach operation should begin in April 2023 and Cerrado hopes to start mining underground in the summer of 2023, which could lead to an increase in mining grades. Its second heap leach operation will come online in 2024.

Minera Don Nicolas is currently producing between 40,000 – 50,000 ounces of gold per year. By adding two heap leach operations in 2023, Cerrado hopes to produce 90,000 ounces of gold by year-end 2024, while reducing ASIC.

Its Argentina land package is immense – Cerrado Gold is the biggest land holder of any mining company in the Deseado Massif.

The ground surrounding the Minera Don Nicolas gold mine is highly prospective. Cerrado has 12 brownfield targets where limited drilling has taken place and numerous less developed greenfield targets. Most of the drilling to date has focused only on open pittable targets and most drilling has only been between 50 and 100 meters, so there is significant underground potential to expand the resource.

 How to Overcome Capital Controls in Argentina?

Argentina is subject to capital controls and consequently Cerrado Gold cannot export earnings from Argentina without paying a significant penalty (approximately around 30% of any amounts exported).

The capital controls in Argentina have resulted in an interesting situation. Gold producers have optimized their operations and are generating even more cash than they could export. Inflation of the Argentine Peso is more than 80% per year, so money held is money lost.

This has provided the impetus for larger gold producers such as Yamana Gold and Anglogold Ashanti to reinvest their earnings in the country as opposed to paying the heavy penalties to export their profits.

Cerrado believes that Argentina will either drop their capital controls in the next 18 – 36 months or the large gold companies in the country will elect to acquire developers.

If Cerrado successfully optimizes its operations and expands its resources, it is possible that Cerrado Gold may sell its Argentinian holdings to a larger company in exchange for shares. 

Investors Attribute Argentina No Value

In the meantime, Cerrado’s holdings in Argentina are attributed no value by investors.

On a fully diluted basis, the market capitalization of Cerrado Gold is around C $80 million.

In comparison, Australian-listed E2 Minerals Limited (E2M.AX), following its bonanza discovery in the Deseado Massif, currently has a market capitalization of A $37 million.

However, Cerrado holds 37,400 hectares of permits on its Michelle Property. The Michelle Property borders E2 Minerals Limited (E2M.AX) bonanza discovery at Mia and Malvina and is between and adjacent to Anglogold Ashanti’s Cerro Vanguardia Mine (+ 8.5 million ounces of gold, +85M ounces of silver.)

Argentina is essentially a call option for Cerrado shareholders, in addition to its robust project in Brazil.  This significant undervaluation provides an investment opportunity for brave speculators.

Cerrado Gold is Projecting Significant Growth

If Cerrado Gold hits its benchmarks, it has a very strong growth profile into 2026.

Once Monte do Carmo begins production and Minera Don Nicolas’ production is optimized, Cerrado Gold can project annual production of 250,000 ounces of gold per year at a low-cost production profile. This would equal a 5x increase over its current production.

In the meantime, we expect regular news releases concerning the optimization of the heap leach program, the positive feasibility study and the announcement of financing for construction of Monte do Carmo to occur.

The Bottom Line: Lowest Cost Production Potential at a Discount

The bottom line is that Cerrado Gold owns an asset in Brazil that has the potential to be one of the lowest cost mines in the world, while producing 100 – 150k ounces of gold. At the same time, its massive land package in the Deseado Massif and its operational mine in Argentina have value – certainly more than the negative value the market currently attributes to the project.

Cerrado Gold presently trades around .75 - .90 cents, which is less than the price at which it went public, as well as significantly below all its recent financings.

At around .88 cents a share, its price/net asset value is around .23x NAV, versus peers that sell at .46x NAV. Its shares represent a high-risk, but high-reward investment opportunity.

We therefore believe that the company has significant turnaround potential. It has a place in the portfolios of junior mining speculators who are seeking a developer with an aggressive growth profile.

Disclaimer: SGL does not provide investment advice and is not a registered investment advisor. Always do your own due diligence before making an investment. Investing in securities, especially junior miners, can be risky and never invest money you cannot afford to lose. SGL cannot guarantee the accuracy of the information in this post. SGL has attempted to present the information fairly, but it may own shares of Cerrado Gold so bias cannot be excluded. SGL has no relationship with Cerrado Gold. SGL may buy or sell shares at any time.

SGL makes no representations, and specifically disclaims all warranties, express, implied, or statutory, regarding the accuracy, timeliness, or completeness of any material on this website. You should seek the advice of a securities professional regarding any stock transactions. SGL cannot guarantee in any way that it is providing all of the information that may be available. Please do your own due diligence before buying or selling any security.

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