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Blackham Resources Ltd: THE INVESTMENT CASE

Blackham Resources generates strong February gold production, continues turnaround

An expanded prefeasibility study has confirmed the potential to generate annual production of 200,000 ounces at Matilda-Wiluna.
Gold bullion
The consensus share price target implies upside of more than 200%

Blackham Resources Ltd (ASX:BLK) has had more than its fair share of twists and turns since being one of the best performing microcap gold stocks in the first half of 2016 with its shares increasing five-fold to a high of 81 cents.

While its shares retraced substantially in 2017, the Matilda-Wiluna Gold Project in Western Australia has now hit another gear, suggesting there could be a return to share price growth.

While the company faced its share of challenges in 2017, it appears to have negotiated a number of issues that weighed on its share price.

Furthermore, recent strong buying suggests that its shares could be oversold as it surged more than 40% last Thursday under record daily traded volumes of about 300 million.

Annualised production of 80,000 ounces

A key catalyst behind this re-rating was the record monthly gold production of 6,713 ounces achieved in February, which comes on the back of nearly 6,500 ounces produced in January.

The first two months of production in 2018 translates into annualised production of 80,000 ounces.

It would be difficult to find another sub-$100 million market capitalisation ASX-listed gold producer with this production profile.

Management confident of achieving strong cash flow

While this annual production is yet to be achieved, the signs are promising.

Milan Jerkovic, executive chairman, said: “Record production and further reduced costs from the operation underpinned another month of strong cashflow, whilst maintaining stockpiles with increased grades.

“We remain confident that 2018 will be a transformational year that will generate significant cash flows and value for Blackham and its shareholders.”

On the score of cashflow, it is worth noting that the company had cash and bullion of $31.4 million and secured debt of $43.8 million as at February 28, which leaves it well-positioned to continue its optimisation procedures.

Continued improvements in production and costs

February’s open pit mining strip ratio was a low 1.5:1 waste to ore as opposed to 3.6:1 in January.

The low stripping ratio and increased gold production resulted in Blackham achieving record low monthly all in sustaining costs (AISC) in February of $912 per ounce compared with $1,158 per ounce in January.

The average realised gold price during February was $1,670 per ounce.

With the Australian dollar gold price hovering in the vicinity of $1,700 one would expect the company to generate strong cashflow again in March.

This implies a margin of nearly $800 per ounce.

Growing high-grade stockpiles set the scene for March

Another feature of the company’s operations in February was the increase in high-grade stockpiles to 144,000 tonnes at 1.7 grams/tonne (g/t) gold.

Milled grade and gold production are expected to continue to improve during the month with the increasing grade of the mill feed stockpiles.

Gold reserves also support a share price re-rating

Blackham has a gold resource of 65 million tonnes at 3.1 g/t gold, equating to a resource of 6.5 million ounces, and reserves of 15 million tonnes at 2.5 g/t for 1.2 million ounces.

An expanded prefeasibility study confirmed the potential to generate annual production of 200,000 ounces.

Given the company has 1,000 square kilometres of landholdings in Australia’s largest gold belt, there is also the potential for exploration upside.

Now that Blackham has optimised the Matilda-Wiluna gold operation there is the prospect of refocusing on exploration.

Cashflow from existing operations would assist the company in self-funding exploration initiatives.

Blackham now broadly in line with analyst’s expectations

It is worth examining the responses of analysts to some of the disappointments that occurred in 2017.

While Canaccord noted the lower production figures and higher production costs in the six months to June 30, 2017, the broker maintained its price target of 80 cents per share.

This was recognition of the value of the company’s underlying assets including its forward production profile.

At that stage, the broker was projecting annual production of about 90,000 ounces in fiscal 2018.

While it would appear that the company won’t ramp up to that level until fiscal 2019, it could be argued that Blackham now has the production profile and operational stability to support Canaccord’s share price target.

Despite negative sentiment towards the stock, the consensus share price target still stands at 25 cents, implying upside of more than 200% to Friday’s closing price of 8.1 cents.

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