Arizona Star Resources AZSRF
October 19, 2004 - 7:23am EST by
2004 2005
Price: 3.77 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 157 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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SUMMARY: Arizona Star owns 25% of one of the biggest undeveloped gold-copper deposits in the world – Cerro Casale in Chile, which comprises 25.4 million oz. of gold and 6.4 billion pounds of cooper. Therefore, AZS´ share is respectively 6.35 millions oz. of gold and 1.6 billion pounds of cooper. AZS is trading at price of $ 25/oz. which is well below the replacement value or the price paid for comparable gold deposits, so it is one of the cheapest gold stocks around.


There are at least two ways to play the dollar weakness, one is the route choosen by Warren Buffett , which is to purchase other currencies that could appreciate against the dollar. This option is appropriate when you have an huge amount of money , as is the case of Berkshire Hathaway, and only the currency markets can accomadate that, however this is a more defensive measure. Another way, is to purchase a basket of undervalued gold assets, at prices below replacement value, so you can have a double whamming: gains propelled by higher gold prices and appreciation of the asset due a tender offer or a change in market perception to the unrealized value. A variation of that, is to purchase cheap companies in foreign stock exchanges which its main business is focused on the local market, and an example is also Berkshire Hathaway that owns a big stake in Petrochina.

For the former option, three ideas posted at VIC qualified for that: Crystalex (NYSE: KRY) posted by Omar810, Gold Reserve (AMEX: GRZ) posted by Clancy836 and Arizona Star (TSXV: AZS.V) or (OTC: AZSRF), and I suggest that you reread both write ups. IT WILL BE NICE IF WE HAVE MORE IDEAS SIMILAR TO THOSE ABOVE.

There is a good catalyst that will unlock the value of these stocks, which is the need of the large gold producers to replace reserves and extend reserve life, so this will fuel acquisition of large undeveloped gold deposits. According to geologist H.R. Bullis in his paper “Gold Deposits, Exploration Realities, and the Unsustainability of Very Large Gold Producers”, Exploration and Mining Geology Journal (EMG) , volume 10, No. 4 – Published July 11, 2003 , the large gold mining companies are unlikely to discover or acquire new gold deposits of sufficient size to allow them to replace extracted reserves. Besides that, he mentions that discoveries of new gold deposits continue to be made, they are predominantly in the 0.5 to 2.0 million ounce range. Soon or later the large producers will go after the large deposits with proven & probable reserves, because the time span to develop a mine, from discovery to production, is around 7 (seven) years in average.

In the last 3 years happened a lot of M&A and formation of Joint-ventures in the sector, a few examples:

- Newmont acquired Normandy and merged with Franco-Nevada;
- Barrick bought Homestake;
- Placer-Dome acquired Aurion Gold;
- Kinross merged with Echo Bay Mines and TVX Gold;
- AngloGold purchased Ashanti;
- Meridian Gold bought Brancote Holdings;
- Dundee Precious Metals purchased a gold project in Romenia and transformed itself from a closed-end fund into an operating mining company;
- Yamana Gold is formed by purchasing a gold mine from Cia. Vale do Rio Doce and mine assets from Santa Adelina Mines Ltd.;
- Norilsk Nickel purchased from AngloAmerican a 20% stake in GoldFields;
- Coeur D’Alene made an hostile tender offer for Wheaton River;
- Golden Star made an attempt to take over Iamgold.

Today (October 18, 2004), Harmony Gold announced its hostile offer for GoldFields, and this could be 27th Harmony´s gold mining acquisition in the last 9 years.

The drives for the M & A activity in the sector are:

- diversify country risks;
- reduce fixed costs/expenses;
- rationalize mine production;
- increase reserve life /replace reserves;
- increase mining output;
- increase size (market cap) in order to attract new investors and financing for new projects.


Arizona Star is an American-Canadian gold mining and exploration company that owns an stake in one of largest undevelopd gold-copper deposit in the world. It is traded in Vancouver and USA´s OTC market.

Arizona Star owns 25% of the Cerro Casale Project in Chile. The other partners are: Bema Gold with 24% and Placer Dome with 51%. It is important to mention that PDG will get the 51%, if they arrange the necessary financing for the project, otherwise it will revert to Arizona Star (51%) and Bema (49%). Besides that, Bema owns 5% of AZS´shares.

The Cerro Casale deposit was discovered by Bema in 1995 and it is located in the Aldebaran property in the northern Chile, 100 km southeast of Copiapo city and 30 Km south of the Refugio mine, that is being restarted by Bema (50%) and Kinross (50%).

According the the announcement made by the partners in September 28, 2004 , Placer Dome has 15 months to arrange $1.3 billion in financing, including $200 million in equity on behalf of all partners. Placer Dome is required to provide a pre-completion guarantee for an amount not greater than $1.1 billion in senior loans. The senior loans are required to be an amount that is not less than 50% of the initial project capital requirements. Any capital requirements exceeding $1.3 billion of the financing provided or arranged by Placer Dome would be funded pro-rata by the partners.

The project hosts measured and indicated mineral resources estimated at 25.4 million ounces of gold and 6.4 billion pounds of copper, and contemplates a large-scale open pit mine that could produce approximately 975,000 ounces of gold and 130,000 tonnes of copper per year over an 18-year mine life. Capital costs for the project are estimated at $1.65 billion. Assuming a copper price of $0.95 per pound and a gold price of $ 350 per ounce, Cerro Casale’s cash costs are projected at approximately $115 per ounce (net of copper credits). Total costs, including amortization and depreciation of capital, are projected at approximately $225.00 per ounce.

The first feasibility study was released in January 2000 and updated in March/2004 by Placer Dome Technical Services.

There is a presentation made by Bema´s CEO in March 3rd, 2004 , at BMO Global Resources Conference in Tampa Bay where he presents a sensitivity matrix of the potential returns for Cerro Casale given gold and copper price level, unfortunately its refers to the feasibility study made in 2000, but can give us an idea. The address is:

Regarding Cerro Casale, Bema´s CEO said at Mineweb in March /2004 ( "If Placer is concerned about having 51% of the asset and not 100% of the cash flow they could always make an offer to Arizona Star. It's a single entity company, it's dead easy to figure out the value; it's a 25% carried interest in the project. At a sensible price I'm sure Arizona shareholders would be happy to take Placer shares." In addition to that, he said in the same article: "If you take the $60 million they have put in so far in drilling and feasibility, and some payments, and the $99 million they must put in for us and Arizona Star, you end up at about $13/oz [for Placer's share of the reserve ounces]”.


I think that a good approach for valuing this deposit is to use a comparable transaction and /or the replacement value. For the first alternative I will use as comparable the Brancote Holdings Plc´s acquisition made by Meridian Gold, and for the latter, the info provided by Clancy836 in his write up of Gold Reserve (ticker:GRZ).

Regarding relacement value, Clancy836 mentioned the following: “ Another way of valuing reserve gold assets is via a replacement cost approach. In a May 2004 address to the Global Mining Forum, industry analyst Trevor Steel noted that 348 million ounces of gold reserves have been discovered since 1990 at an exploration cost of $22 billion, or $63 per ounce discovered. Although this replacement cost is below the price per ounce at which the average gold firm is currently valued (nowadays $ 152.00 / oz. ) based on Mineweb database.“

Meridian Gold (NYSE: MDG) acquired Brancote Holdings Plc. in pril/2002 , because the company owned a large undeveloped gold deposit in the south of Argentina. The Esquel project is having troubles with the community of Esquel city and is suspended until they get a solution for the issues. The problem is that the projected mine is far around 5 to 7 Km from downtown.

Unfortunately, I don´t know any other transaction envolving a large undeveloped gold deposit for comparison purpose, and in a country with a similar risk to Chile.

Meridian paid US$ 310 million for Brancote, and the deposit has the following kind of reserves in thousand ounces:

Gold Reserves

Proven & Probable Reserves 2,315

Measured & Indicated Resources 346

Inferred Resources 434

Total 3,095

Price Paid per Ounce US$ 100/oz.

If we consider only the P&P reserves the price will be US$ 134/oz. I think that the price paid has to be adjusted by gold price variation from 2002 to 2004, because a key issue in this kind of deal is the prevailing gold price at time of the transaction. The average gold price in 2002, based on end of month prices, was $ 310/oz. and the average for 2004 until the end of September was $ 402.5, this means a 30% increase.

Actually AZS has a market value of $ 157 million with 40,3 million shares plus 1,4 million options outstanding, and it has $ 2.8 million in cash and no debt.

The AZS share (25%) in Cerro Casale reserves are the following in thousand ounces:

Gold Reserves

Measured & Indicated Resources 6,355

Inferred Resources 853

Total 7,208

AZS Market Value (million) $ 157

Implied Price per Ounce $ 25/oz. ( measured & indicated resouces )

I am using the measured and indicated resource figure because it was used in the feasibility study, however we have to keep in mind as gold price increase more reserves become economically minable.

The stock is very cheap, but GRZ is cheaper than AZS; on the other hand, Chile is a country with low risks and Cerro Casale feasibility study is ready for getting financing.


- Project start-up/financing depends on that the gold price stays above $ 350.00 per ounce, and for my views on gold price, please reread my write up for Dundee Precious Metals Inc. (TSX: DPM) posted at VIC , which most of the catalysts presented there for higher gold prices are still valid.

- Potential dilution if capital requirements exceeds $ 1.3 billion financing plus equity arranged by Placer Dome.

- Chilean´s royalty law was defeated at Congress, however nobody can guarantee that it will not be resubmited, the proposal was for 3% on sales. However, at high gold prices the impact will not empair so much the project feasibility/profitability. Besides that, if the royalty expense could be deducted for tax purpose its impact will be around 10% increase on total costs per ounce.


- The property is located in Chile, a friendly mining country, which has low political risks; and according the Fraser Institute (Canada) , Chile is ranked in the third place in an index that measures the polices for promoting mining investments and is the first for mining potential ;

- The deposit has a reserve life of 18 years, well above 12 years average, based on the Mineweb database;

- Dollar weakness will propel higher the gold price as well copper price;

- It is an attractive asset with low price in comparison to replacement value or to a price paid in a comparable transaction.

- It is one of the few large undeveloped deposits located in a stable country.

- There are no environmental problems in the area, the deposit is located only 30 Km from the Refugio mine which has all licenses for restarting production.


- Attractive valuation in comparison to comparable transaction & replacement value;
- Potential acquisition target;
- Cerro Casale project gets the necessary financing.
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