Caldera Resources Report

By Dennis Boyko
Created on: May 20, 2011
Current version 1.1.0 : June 12, 2011, minor edits/corrections.
Metrics have been updated with closing prices available on 2012-May-17.

Fair Market Valuation Summary - 2012-May-17

Projected fair market stock price for Caldera Resources Inc. at the close of trading on 2012-May-17 was C$0.15 versus the actual closing stock price of C$0.020. The assumptions, methodology and supporting rational behind the projected fair market stock price are presented in this blog.

I have also prepared a report of Caldera Resources versus gold and silver mining comparable companies which is available here.

Overview

Caldera Resources (Caldera) is reviewed from the point of view of its fair market price potential based on what the Marjan Gold-Silver project (Marjan) in southern Armenia can be expected to be worth as Caldera moves the project to production. Marjan had been extensively explored between 1964 and 1989, and has Soviet-era GKZ standard resources identified. Please visit the Caldera website and view the excellent video interviews with Mr. Mavridis (CEO) and Mr. Steel (VP Mining and Development) to learn more about the background of Marjan and its current status.

Here, briefly, is the substance of my strategy to estimate a fair market price potential, which meant first:

Estimating the metal value metrics of Marjan by making the assumption that the historical Soviet-era C1, C2 and P1 resource estimates are 100% converted to Measured, Indicated and Inferred resources respectively. The supporting rational, along with the resulting Caldera metrics, are documented in the Caldera Metal Value Report, and are updated daily with closing market prices.
Assuming Caldera will be successful in securing 100% of Marjan according to the terms of its 2009 agreement with Global Gold Corporation. Currently Caldera is in arbitration with Global Gold Corporation. A result from the arbitration process is expected by end of August 2011. When the results of arbitration are available this blog will be updated as appropriate.
Comparing Caldera metrics against the metrics of gold/silver mining companies. Agnico-Eagle is used as a fully valued reference gold producer and is the basis for a Gold Producer Valuation Line in the Gold Explorer-Developer Valuation charts introduced in the right hand column of this blog. Other gold producers are also included to provide supporting evidence for the Gold Producer Valuation Line.
Adjusting for the difference between Caldera and the reference gold producers. The valuation model is based on the simple observation that the main work (costs) in mining derives from the extraction, transport, milling and processing of tonnes of ore. To a first order approximation the costs of mining a tonne of ore is independent of the metal value that is extracted from the tonne of ore.
The basic valuation premise that follows from the above observation is, if all other things are equal, companies holding deposits with equal ore value per tonne will be valued by the market at approximately the same market capitalization per ounce of gold (or silver) equivalent.
A second premise that follows is that if all other things are equal, a company with a high grade deposit (higher average ore value per tonne) is going be valued by the market at a higher market capitalization per ounce of gold (or silver) equivalent. Of course, since there are always differences between companies and deposits, adjustments are required to complete a fair market valuation. All assumptions, and formulas used are included below.
A third premise, regarding the differences, is that the main value differences between a deposit(s) held by a gold explorer and an operating mine held by a gold producer comes down to the risks and capital costs required in the development of the deposit into a working mining complex. The gap between explorers and producers on a Gold Explorer-Producer Valuation chart should be large enough to account for the development costs, development risks, and also include a premium appropriate for the risks taken.

The above approach to estimating a fair market price for a junior explorer/developer has the advantage of using market prices of heavily traded and widely followed stocks combined with spot market metal prices and exchange rates to derive the working value of the future price of gold to be extracted from ore of a given grade (value per tonne). As a result, an explicit estimate for the future price of gold is never required. The models used are based on years of observations of gold and silver mining industry metrics and represents a 3rd generation estimation strategy.

Valuing junior explorers relative to a gold producer such as Agnico-Eagle (or any other of the major gold producers) is a conservative approach since Agnico-Eagle and the other gold majors are already significantly undervalued in the current market. Please see Why Gold Mining Stocks are Bargain Priced in the Current Market, a June 9, 2011 Seeking Alpha artilce for details.

Finally, the above methodogy provides a true alternate view with the advantage that users can easily modify assumptions based on their specific knowledge since all formulas and assumptions are detailed below.

Fair Market Valuation Price Estimate Model

Fair Market Stock Price Estimate = {

{
   { Projected Market Capitalization per
     ounce of Gold Equivalent

   × Number of Gold Equivalent Ounces

   × Discount Factor
   }

  - Capital Expenditure

  - {Capital Expenditure × Risk Premium }
}

÷ Current Fully Diluted Share Count

÷ Estimated Share Dilution Factor

}

The inputs to the above formula (including supporting rational) used to generate the projected fair market stock price of C$0.15 were:

Projected Market Capitalization per ounce of Gold Equivalent: US$187.31

The value can be read from the x-axis in the Gold Explorer-Producer Valuation chart based on where a horizontal line set at US$257.9 (the average ore value per tonne) reaches 90% of the way to the Gold Producer Valuation Line (see discussion in next paragraph for the rational for using 90%). The average ore value per tonne for Caldera is computed in the Metal Value report based on closing market prices.
In 2011, the silver producer are starting to trade at a premium to gold producers due to the recent run ups in silver prices. For the reminder of 2011, I believe it is reasonable to treat gold and silver equivalently in terms of premium potential. The combined in situ metal value from gold and silver for Caldero is 87.4% while the comparable metric at Agnico-Eagle is 97.3%. Because of the differences in percentage of gold/silver content between Caldera and the reference Agnico-Eagle, the market capitalization per ounce of gold equivalent for Caldera was set at 90% of the Gold Producer Valuation line, a reduction which roughly matches the difference between Calderao's 87.4% gold and silver value versus the 97.3% for the equivalent Agnico-Eagle metric. The supporting evidence for this approach is provided by the market driven valuations of Yamana (YRI on the chart to the right) which lies well to the right of the Gold Producer Valuation line and has gold/silver percentage total of 74.9%. Similarly, Barricks Gold also falls to the left and has a gold/silver percentage of 71.7%.
The decision to discount the base metals from the average ore value per tonne is equivalent to viewing the base metals as a byproduct credit of $0 to be applied to the cost of production. Clearly a conservative approach.
Number of Gold Equivalent Ounces: 2.254M

The number of Gold Equivalent ounces is determined by NI43-101 compliant resource disclosures (and related assumptions made for Caldera) and is documented in the Metal Value report.
Discount Factor: 80%

The discount factor is applied to account for expected reductions in the NI43-101 compliant resources due to metallurgy loses (not all metal can be recovered), mining plans (not all ore can be removed from the deposit) and like factors.
The value used is my best estimate based on available data.
I believe my estimate is conservative, since as future drill results are provided by Caldera, it may be appropriate to replace the Discount Factor with a Exploration Potential factor (greater than 100%). The January, 2011 drill results are very supportive of this view. In general, when a deposit is open (ultimate size can be expanded by further deliniation drilling), it is typical that additional drilling will yield additional resource discoveries and than an initial resource estimate can increase by a significant factor through out the mining life cycle. For an extreme example, consider the Goldcorp Red Lake mine which has typically never had more than its current 8+M oz of gold reserves and resources (and often much less) in its 50+ year life yet it has produced over 20M oz of gold and continues to produce at a rate of 600K+ ounces a year in 2011.
Capital Expeditures: US$150M

This is my estimate of the all inclusive CapEx and like costs (including contingencies) to move the Marjan deposit from its current situation to the start of production. This figure is assumed to include the funds Caldera still owes its joint venture partner to secure its 100% ownership. As Caldera advances the project my estimate should be replaced by CapEx figures from future Caldera technical reports.
Caution: I have not visited the Marjan site. Rather, I have relied on documents filed at Sedar.com, video interviews and Soviet-era document translations available at the Caldera website, and a Google map inspection of southern Armenia. The Google map I used is appended at the bottom of this blog. The user can use the Google map features to get a sense of the pre-existing infrastructure: approximate distances involved for accessing grid power, local villages for accessing labor, and the like. I have also included a photo which I believe was taken near the base of the mountain where Marjan is located.
Given the relatively high grade ore at Marjan, which at current market metal prices is US$257.9 per tonne, I expect that mine design and mill design can be kept at relatively modest levels in term of target tonne per day production capacity and as a result can be developed at a lower cost. Also the possibility may exist for incremental development, with a lower initial through put design with possibilities for future expansion.
Armenia has an existing power infrastructure which I am assuming will have capacity to support furture gold mining needs. May 2011 headlines indicate that the IFC is assisting Armenia to enhance their power grids and integrate renewable energy sources (more here plus see Energy in Armenia at Wikipedia). Also see Google Map View of the Marjan Deposit below for technical report quotes on the local infrastructure.
The labor costs in Armenia are expected to relatively low while the education level of workers is expected to be relatively high. As a result, I believe my capital expenditure estimate requirements are neutral, neither optimistic nor conservative.
Risk Premium: 100%

At this stage, there are uncertainty as to the development costs (i.e. access roads, site location, distances to grid power, development strategy as to surface only or combined surface and underground development, etc.) which justifies the risk premium being applied. As subsequence technical reports are prepared on Marjan the development cost uncertainties should be reduced and the corresponding risk premium should be reduced.
Current Fully Diluted Share Count: 65.052M

This figure documented in the Metal Value report.
Share Dilution Factor: 4

This is my rough estimate of the likely expansion of the fully diluted share count assuming Caldera issues shares to raises the required funds to move the Marjan from its current status (pre NI43-101 resource estimate) to the start of production of a future gold and silver mine. I would expect the funding activities to be completed in a series of steps with the initial funding needs to be relatively modest to support drilling and report preparation activities required to prepare a fully NI43-101 compliant resource estimate. I believe Caldera will be very efficient in the resource definition work given the historical work already available on the deposit. That is, based on the Soviet-era data available, Caldera already knows where to drill to find upwards of 2.254M ounces of gold equivalent.
If there was no dilution (not a possibility in my opinion without giving away part of the deposit to a future joint venture partner) then the projected fair market share price of C$0.15 would be 4 times greater.
If you believe the dilution would be double what I've assumed then the projected fair market price of C$0.15 would be halved. Alternatively if you believe the dilution factor can be halved then projected fair market price of C$0.15 would be doubled.
In my opinion a fully diluted share count of 260M at the start of production is a reasonable estimate.

Research Links

Caldera Resources web site.
Armenia Supplement in June, 2011 Mining Journal.
Comparables Research on Caldera Resources a PDF file that looks at the May 25, 2011 Caldera metrics against a number of gold/silver mining comparable companies. The projected fair market price in this report as also included in the comparison.
Caldera Resources Metal Value Report for the company metrics derived using the last close of trading data.
Canadian Insiders for insider trades on the TSX. When viewed in May 2011, the report showed Pinetree Capital Ltd. acquired 5M shares in October 2010. A further 12M shares were acquired by Sheldon Inventash the Pinetree Capital CEO.
StockCharts.com for price charts.
Sedar for all TSX regulator filings. Sorry but you'll have to navigate the Sedar site as they do not allow direct links to company specific lists of document filings.

About Links

I have listed the best of links for anyone interested in researching Caldera Resources Inc. further. If you have a blog or site withCaldera Resources Inc. specific pages, please send me the link for review and I will include your work in the link section as appropriate.

Comments?

Got comments? Questions? Please Talk Back.

Gold Explorer-Producer Valuation

Gold Key: AEM | AND | AUQ | G | K | RIO | YRI
Place mouse over each key symbol to read graph values.
If the key symbol is shown in bold, click to view the GoldMinerPulse valuation blog for that company.

For the chart above, which was generated using closing market prices on 2012-May-17, Caldera Resources Inc. would be plotted with an average ore value per tonne (y axis) of US$257.9 and a Market Capitalization per ounce of Gold Equivalent of US$0.57.

Reference Point for May 20, 2011 Release of this blog: Caldera with a market capitalization per historical ounce of gold equivalent of less than US$3 and an ore value well above US$200 per tonne was clearly a valuation exception relative to other gold and silver miners tracked at GoldMinerPulse. Having considered various reasons for such an exception, including the confidence in historical soviet-era data, my primary conclusion (which is detailed in the Discussion below) is that there is a potential for investors may realize an extraordinary gain from future increases in Caldera's stock price.

Caution: The reader is cautioned that GoldMinerPulse does not provide investment advise and that the author is not a qualified person as defined by the NI43-101 disclosure standards. Rather this blog is an opinion presented with supporting rational using metrics based on closing market prices. The valuation model used is fully detailed allowing potential readers the option to easily analyse any number of alternate scenarios and draw their own conclusions.

Gold Explorer-Producer Valuation Chart Background

The Gold Explorer-Producer Valuation chart is based on closing market prices and NI43-101 compliant resource disclosures. Gold producers are expected to fall near the Gold Producer Valuaton Line. Gold producers with significant base metal production are expected to fall to the left of the Gold Producer Valuation Line since the market tends to place a higher value on gold production versus base metal production.

Gold explorers and developers are expected to fall to the left of the Gold Producer Valuation line since such companies still face mine development capital expenditure charges and have higher uncertainties regarding the amount of metal that will ultimately be recovered from the mining process (not all metal can be recovered from the ore mined and not all ore can be extracted in the mining plan). Valuations for specific companies may also be reduced because of other factors such as management issues, geopolitical risks, etc. A full break down of potential risk factors are detailed in Gold Explorer-Producer Valuation Exceptions and discussed briefly in a Caldera context in the Discussion below.

For completness, the alternate version of the Gold Producer Valuation Chart optimized for average ore value per tonne figures of less than US$200 is presented below (but not used in this blog since Caldera's average ore value per tonne is off the scale on the chart).

Note: Although the Gold Producer Valuation Line is shown as a linear line, it should be clear that this linear relationship will breakdown as the ore value per tonne approaches the spot market price of gold. As the average ore value per tonne increases, the slope of the Gold Producer Valuation Line will increase. In the limit as the market capitalization per ounce approaches the spot market price of gold, the Gold Producer Valuation Line will approach the vertical. That is, if you were mining pure gold the market capitalziation per ounce of gold would not exceed the market price of gold even though your average ore value per tonne would be in the billions. Caldera Resources Inc. is being valued against the Gold Producer Valuation Line (version 2.0) which yields the more conservative estimate.

Discussion

I have reviewed Caldera's valuation against a valuation exception check list to determine if there is an alternate explanation between the current market valuation of Caldera versus the projected fair market price developed in this report.

I believe the current Caldera management team's has the right skills and expertise to work the resource definition and find appropriate options to fund the next stages of development work. Caldera appears to have excellent in country relations and Armenia appears to be open to new mine development.

I expect the Caldera share price to move upward after the Global Gold arbitration is successfully completed. That is, markets tend to sell-off in the face of uncertainty and the aribtration process is very likely to be viewed as a major uncertainty. The validity of this view should be self evident in the Caldera stock price after the current arbitration is completed and as subsequent news is released with respect to progress in advancing Marjan towards production.

Another potentially factor working against the Caldera stock prices as of May 2011 is market anticipation of future stock dilution since it is obvious that Caldera will require additional funding to keep moving Marjan forward.

Finally, I expect that Caldera is under the radar of many investors. Armenia isn't one of the typical countries North American investors think of when looking for a gold/silver miner, although as a search of Canadian Insiders (see Research Links below) shows, some very major players in the Canadian junior mining sector have taken significant positions in Caldera. As Caldera moves the Marjan project forward, I expect future progress updates will trigger an increasing stock price.

Rio Alto Financing Case Study

The Caldera situation as of May 2011 has interesting similarities with Rio Alto Mining in mid 2009. At that time, Rio Alto held options on La Arena, a Peruvian gold-copper deposit (relatively low grade relative to Marjan but with a resource definition that was fully NI43-101 compliant and a technical report detailing development costs -- see conference call transcript where the initial financing for La Arena started in May 2009 with the merger with Mexican Silver Mines (an exploration company with cash but no defined resource). At that time, the merged companies had a market capitalization of less than C$10M and a fully diluted share count of 55M. Like Marjan, La Arena did not have any infrastructure in its immediate vicinity but like Marjan there are other mining activities within a 100km radius.

My initial valuation blog on Rio Alto (an earlier version of my current estimation strategy) was released in the summer/fall of 2009 and had a projected fair market price of C$1.50 on Rio Alto which was then trading at roughly C$0.30. In Febrary 2010, I released a updated valuation model which is still available and which still update daily. As of May 20, 2011, Rio Alto has a market capitalization of close to C$400M on a fully diluted share count of 178.1M after multiple rounds of financing and the initial start of gold production. Although there are many differences surrounding the La Arena deposit and Marjan (Rio Alto started with a NI43-101 compliant resource while Marjan has a Soviet-era resource, La Arena is low grade bulk tonnage deposit surface deposit while Marjan is a high grade deposit (both surface and underground development possibilities are believed to be open at this time), La Arena is roughly 36% gold while Marjan is approximately 86% gold/silver, and perhaps most importantly, Rio Alto obtained a listing on the Lima exchange while it isn't clear if Caldera will begin trading on NASDAQ OMX Armenia), I believe Rio Alto is a good example to illustrate how a mining junior can be very significantly undervalued and ignored by the market. When it comes to junior miners, the market is far from efficient.

The time frame for Caldera to be discovered by the market may in my opinion take longer than for Rio Alto given that Rio Alto likely had a very short time frame to start of production along with a listing on the Lima exchange. However, over a longer time frame, Caldera has in my opinion the likelyhood of achieving an extraordinary Rio Alto like stock price appreciation.

Orko Silver Financing Case Study

My Orko Silver blog provides an interesting alternate view on a junior silver developer valuation. Orko's La Preciosa deposit, with 143M of silver equivalent from 100% gold/silver (May 2011) which Orko financed development of using a joint venture with Pan American Silver (PAA). In the Joint Venture, PAA received a 55% share of La Preciosa in return for Orko being fully carried to the start production. For reference, Caldera on May 20, 2011, had 112M ounces of silver equivalent and a Market Capitalization per ounce of Silver Equivalent of US$0.06 while Orko had 60.82M oz (on an ownership percentage basis) valued at US$5.82 per ounce of silver equivalent.

Marjan and La Preciosa share many similarities in terms of approximately equal ore value per tonne (US$257.9 for Marjan versus US$124.39 for La Preciosa), similar infrastructure situation, and not unlike cost structures between Armenia and Mexico. As you can see in a Silver Explorer-Producer Valuation chart, Orko (symbol OK on the chart) is close to fully valued while Caldera would be located fall at the extreme left hand edge of the chart based on May 2011 market prices.

Observation on Silver Valuation: In my opinion PAA appears well to the left of the Junior Silver Producer Valuation Line and the Major Gold Producer Valuation Line because of the fact that over 50% of the companies metal value is located in the Navidad project in Chubut, Argentina, a province that as of May 2011 bans open pit mining. Clearly there is uncertainty associated with the potential value of Navidad and the market has accordingly discounted the value of PAA (see the Metal Value Report for more details on PAA).

The valuations on IPT and AXR are believed to be a result of the fact that both companies hold under-explored silver properties and are being favorably valued in the current silver market.

Landscape Photo Near Base of Mountain on Road Up to Marjan

An image from Arevis area is shown below. The Averis area is the last labelled point on a Google map view before accessing the mountain roads up to the Marjan deposit.