Despite Esperanza Resources’ (EPZ – $1.65) stock price going up 45% since our previous report, we feel the Canadian resource Company still has plenty of upward potential as it’s moving closer towards becoming a gold producer.
A September 2012 resource estimate for EPZ’ 100% owned Cerro Jumil silver/gold project in Morelos State, Mexico, increased the project’s gold equivalent ounces to approximately 1.85 million ounces, up 55 percent compared with the previous resource estimate from September 2010.
In a September 2011 Preliminary Economic Assessment, based on the September 2010 resource estimate, Cerro Jumil was described as a typical open pit, heap leachable project with an estimated average production of 106,000 ounces of gold per year, which can be mined at $499 per ounce.
The PEA also concluded that at a very conservative gold price of $1,150 per ounce, Cerro Jumil has an after tax Net Present Value (NPV) of $122 million at a 5% discount rate generating an Internal Rate of Return (IRR) of 26%. At a near present gold price of $1,700 per ounce, the project produces an after tax NPV of $309 million and an IRR of 53%. The new increased resource estimate should make the PEA economics of the project even better.
The Company now focuses on bringing Cerro Jumil into production. It’s preparing a Bankable Feasibility Study, started work on a Environmental Impact Statement and is in the process of obtaining all the necessary permits with the goal of becoming a gold producer in 2014.
Early May 2012, Esperanza appointed Mr. Greg Smith as the new President and Chief Executive Officer and Mr. Laurence Morris as the new Chief Operating Officer of the Company. Both were previously engaged at Minefinders Corporation, which was acquired by Pan American Silver (TSX: PAA) in a deal valued at approximately $1.5 billion. Their Minefinders past shows they have the knowledge and the necessary skills to move a project like Cerro Jumil towards production.
And finally, Esperanza Resources is extremely well funded. It currently has more than $40 million cash in the bank, and it has close to $13 million in marketable Global Minerals securities. This is enough to bring Cerro Jumil into full feasibility with the ultimate goal of advancing the property to production in 2014.
We believe there’s very little that would block Esperanza Resources from becoming a gold and silver producer in the foreseeable future.
As a result, we reiterate our buy recommendation for Esperanza Resources with a short term price target of $2.40 or 85% higher than today’s 30-day average stock price.
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