Para Resources Update – This is What a Ten-Bagger Looks Like

Palisade Research May 1, 2018
Category: Research

Seasoned resource investors will often tout the success of small gold producers in their portfolio – particularly as bull market cycles play out.

David Skarica, a repeat guest on Palisade Radio believes finding such opportunities is one of the best ways to invest in the space. These companies have minuscule market caps, with the potential for huge cash flow. What we like to call asymmetric

Even a small move up in the commodity price can mean a major upgrade in the stock.

We believe such a situation exists with Para Resources (Mkt Cap: C$30M, CVE:PBR, FRA:8PR) .

Today, Para Resources (Mkt Cap: C$30M, CVE:PBR, FRA:8PR) published a PEA on their Gold Road project that we believe will significantly change the outlook for the company and will directly translate into a major re-rating in the stock.

Para’s other project – El Limon – has also seen incredible progress, which will be a key contributor to production mix.

 

El Limon, Colombia

 

Para’s 80%-owned ‘El Limon’ mine is in Colombia – and it’s a high-grade, narrow vein operation.

After a substantial investment of $10 million and a large rehabilitation, milling finally began in December 2017 – with ramp up to full production by June 2018.

Currently, Para’s optimizing the metal recovery by utilizing lower-grade feed.

But moving forward, the focus will be on re-commencing mining underground in addition to sourcing ore from the local miners working on the property.

In Q4/2018, Para estimates to operate at 255 TPD (tons-per-day) with an average grade of 8 g/t Au to achieve annual production of 17,280 ounces per year, or $7.0 million in operating cash flow.

This means payback of initial investment is just ~1.5 years.

In addition to El Limon, Para owns ~21,000 hectares of mineral rights surrounding the property.

The main structure in the area is the Otu Fault that crosses the area from North to South. Artisanal workers are working on a 12-kilometer strike, giving the property a blue-sky, district-size play.

While Para already has enough ore for 5-6 years, it plans on conducting an exploration program to establish a NI 43-101 resource to justify increasing the size of the processing plant and developing a more robust regional play.

 

(El Limon Mine in Zaragoza, Colombia, Source: Corporate Presentation)

 

Gold Road, Arizona

Para Resources acquired the assets of Mojave Desert Minerals LLC, which included the Gold Road mine, back in August 2017. Gold Road is a fully-permitted mine, with past production over 700,000 ounces of gold averaging 8.8 g/t – operating as recently as 2016.

In early 2018, Para also acquired adjacent claims on the TR-UE vein where historical production has been 2.2 million ounces at an average grade of 24 g/t. The potential expansion of high-grade material from TR-UE vein can significantly increase production of gold with minimal investment.

When Gold Road was in production, the operator utilized traditional shrinkage and long-hole stoping. The shrinkage stopes were efficient but the long-hole stoping generated excessive dilution. This problem was exaggerated by lower gold prices before the mine was placed on “care and maintenance”.

Para remedies this problem using a ‘raise stope’ mining method. The PEA contemplates full production of 500 TPD and an inferred resource of 977,784 tons at 6.82 g/t Au. The mine life is 7 years; however, Gold road is still open for exploration at depth and on strike.

At a 5% discount rate, Gold Road yields an AT-NPV (net present value) of C$73 million and an impressive 174% IRR (internal rate of return).

Moving forward, there is an opportunity to increase resources at the Gold Road Mine. Ore shoots are open at depth and on strike. Para plans on exploration drilling from underground and is targeting delineation of 1-2 million ounces.

We believe the PEA considers overly conservative head grades. The addition of the TR-UE vein into production will significantly increase the gold grade. Deposits through-out the district are classic ‘volcanic-hosted’ epithermal gold veins.

TR-UE vein is on strike and only 6 miles away from Northern Vertex’ Moss Mine, which recently started up with a 435,000 AuEq ounce resource. Our readers should know this story very well – following the project from development to production and making a lot of money along the way.

 

(Gold Road Mine, Arizona, Source: Website)

 

Attractive Team and Valuation

Para Resources’ share structure remains very attractive. Management owns ~62% of shares outstanding – all of which are locked up in a pooling agreement. That’s a lot of skin in the game.

As a reminder, CEO, Geoff Hampson, founded several private and public companies since 1978, including Peer 1 Network, where as CEO, he grew annual revenues to $130 million before selling the company for $565 million.

Randy Martin, COO, is an accomplished mine builder and an expert in Latin and South American production – having built and sold several high-profile mines.

When combining El Limon and Gold Road, Para’s to produce 50,000 oz and generate $28 million of cash flow in 2019. Mid-tier producers currently trade at 3.6x 2019 EBITDA – and when applied to Para, this equates to a valuation of C$129 million, or a share price C$0.89.

This is a 380% gain from current levels for a project that’s already fairly de-risked.

Gold Road’s PEA was done at $1,200/oz gold, and our analysis uses conservative assumptions as well. Para has significant leverage to gold – when gold moves $200, our target share price increases to C$1.20.

 

Palisade Global Investments Limited holds shares of Para Resources. We receive either monetary or securities compensation for our services. We stand to benefit from any volume this write-up may generate. The information contained in such write-ups is not intended as individual investment advice and is not designed to meet your personal financial situation. Information contained in this report’s from sources we believe to be reliable, but its accuracy cannot be guaranteed. The opinions expressed in this report are those of Palisade Global Investments and are subject to change without notice. The information in this report may become outdated and there is no obligation to update any such information. Do your own due diligence.

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