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Angel Mining – Reiterate Strong Buy at 2,125p: Price Target increased from 5.1p to 7.1p

Greenland focussed Angel Mining served up news on gold pours at its gold mine at Nalunaq which – although it is not the company’s main asset – prompts us to increase our target price from 5.1p to 7.1p. With the shares trading at 2,125p the value is clear and our stance remains “strong buy.”

At Nalunaq the first pour was announced on May 31st and the second, which produced a 1.2kg dore bar was announced on 8th July. Unfortunately a failure of a key piece of laboratory equipment means that it cannot  monitor the performance of the plant and  there will be no further pours for a fortnight until this is rectified. However the company maintains that it is now on track for a rapid ramp up to output of 2,000 ounces per months and it is this which has prompted our upgrade.

With the teething problems at Nalunaq now almost solved it could be pumping out cash at a rate of $1.7 million a month after costs from gold sales which equates to $20 million in a full twelve months ( roughly equating to the current market capitalisation). The company’s more valuable asset is the Black Angel zinc and lead mine which (belatedly) could come into production as soon as the summer of 2013. There have been several false dawns here, but all the delays seem to have allowed a really cost-effective operation to be designed without all the luxury items that were conceived in the past. In fact the costs of bring the Black Angel back to life have been so pared down that it looks as though it could be funded to a large extent by the cash flow from Nalunaq.

There is no doubt that Nalunaq is now the key to the short term unlocking value at Angel. In the early days this project was seen to be an interesting small gold project that would provide some useful cash flow and give the team the experience of developing a mine in Greenland before beginning work on the more complex Black Angel. Reading through RNS announcements over the years it seems clear that the management has not had much luck; but that all seems to have changed as the economics of Nalunaq has been transformed by the high gold price and the discovery of additional high grade material. The Nalunaq gold mine was acquired from Crew Gold Corporation in 2009 for $1.5m. Crew had poured some $100 million into the project and had operated the mine for less than four years before closing it down because it needed a cut-off grade of 20g/t to make money and were only hitting 14.5g/t. Ahead of the acquisition, the board ensured that it could gain approval to operate a mill within the underground mine to save sending all the material to Canada for processing which had made Crew’s operation uneconomic.

Black Angel is an old high grade zinc and lead mine that is perched 600 metres up a rock face on the edge of a fjord that needs to be reached by a 1.7 kilometre cable car. If it wasn’t such high grade it would not be worth the effort. The mine was operated by Cominco for seventeen years until it was closed in 1990. The company acquired the mine in 2003 and went onto establish a JORC-compliant resource which is sufficient to justify the re-opening of the mine; as well as exploring satellite deposits which nicely bulked up the project and gave it a much longer life of mine. By 2008, the team had gained the mining licence and had produced a compelling; Bankable Feasibility Study. Nedbank were in place to fund the capital expenditure but this was subsequently withdrawn as the project became another victim of the credit crunch. Lack of available capital in the system and depressed metal price meant that all plans were put on hold.

These days Angel is under a different management team that has taken a completely fresh look at the Black Angel and set about designing an operation where it would have a chance of raising the necessary capital expenditure. The previous mine and plant design was a “Rolls Royce solution” that came in at $157million.  The new team has painstakingly looked at every item and has been able to make substantially savings and believes that it can have Black Angel up and running for $63 million with pay back coming from mining the high grade pillars in the mine in the early years. Due to successive delays and the budget overruns in beginning gold production at Nalunaq, investors might be wary of such plans. However, the management did learn a lot at Nalunaq and real progress was made there when highly experienced international mining and mineral processing engineers were brought in. The board is in the midst of beginning that process at Black Angel.

Greenland seldom comes to the attention of resource investors but this large island looks like an attractive place to operate in. With 95% of the ground covered by ice, the country is very much under explored. The company has been involved in Greenland for almost a decade and has been able to take its pick of projects. It is known that the island has a large potential mineral wealth with known deposits of coal, iron ore, molybdenum, diamonds, gold, platinum, niobium, tantalite and uranium. Mining legislation was borrowed from the Danish and mineral exploration licences are granted for five year periods and are extendable; mining licences are granted for thirty years.

Shares in Angel appear unloved at the moment which would seem to offer the astute investor the opportunity to take a stake at an attractive level. During recent months the share price has more than halved and been dragged down to artificially low level because of a spat with a former equity draw down funder which unravelled for all to see in a string of RNS announcements. To end that spat and secure the short term funding it needs Angel recently raised £2.2 million at a deeply discounted 2p but with Nalunaq now generating cash  we have increased our target price from 5.1p to 7.1p and reiterate our stance of strong buy.

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