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Ocean Securities believes Cluff Gold is underrated by the market

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Ocean Securities published a note on Cluff Gold (LON:CLF, TSX:CFG) saying it believes the market is underrating the Africa-focused group.

A quick valuation of Cluff shows that, even based solely on the in-situ resource at the Baomahun exploration asset, Cluff looks fairly valued compared to its peers, indicating that the market is adding little extra value for Cluff’s two producing gold mines - "which we find hard to believe as they are both profitable operations", the broker said.

Since Cluff's two operating mines at Angovia in the Cote d'Ivoire and Kalsaka in Burkina Faso emerged from their commissioning phases and began producing gold in earnest, Baomahun - located in Sierra Leone and 100% owned by Cluff - has become the company's flagship development project.

"We think that the market is valuing Cluff on only the prospects of Baomahun and adding very little value for the two operating mines. We would suggest this is due to remedial work at both mines having gone unnoticed. This work has increased the profitability of both operations, and in the case of Angovia, led to the rapid development of the nearby Blangan deposit, proving the growth potential of the mine," it said.

Baomahun is currently estimated to contain 510,000 ounces of gold in measured resources, 910,000 ounces of gold in indicated resources, and a further 1.030 million ounces of gold in inferred resources, all at a 1 g/t cutoff, a total of 2.45 million ounces.

Cluff is looking at fast tracking this project to get it into production by 2014. The first step will be the feasibility study, after which Cluff will begin to arrange financing the US$250m construction project.

Mining operations have been carried out on Baomahun before by Winston Mines, the previous owner, so some rudimentary infrastructure is already in place. The mineralogy is well understood, so should not pose any problems, according to Ocean.

As it stands, a mining operation at Baomahun has the potential to become a 150kozpa producer for 8 years, with average costs of US$500/oz and a relatively small capex of US$250m.

Ocean believes the development of Baomahun would lift Cluff gold into the next league of mid-sized gold producers, and make it one of the largest gold producers listed on AIM.

"But we also expect these numbers to improve as there is huge potential to expand the existing resource of 2.5moz as only a quarter of the 12km mineralised trend has been explored so far. The project is in the right place within the largest Greenstone belt running through the country, and Cluff has been able to combine the two licences that were held by Winston Mines, the previous owner.
 
"We feel that the first 8 years of production at Baomahun will be just the initial mining stage, with great potential to either scale up the mine, or prolong the mine life, or both. There is little doubt that the potential of Boamahun will draw a lot more acquisition attention in the near-term given the outlook for the gold price, and the growth of the West African gold mining industry," Ocean added.

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