This is a quick stock analysis of CERT – Cerrado Gold – which is a mid-tier gold producer based in Toronto. Cerrado owns a newly producing high-grade gold mine with exploration and development potential, in Argentina. In Brazil, the company is focused on expanding the resource base at its Monte do Carmo gold project in Tocantins State.
Cerrado Gold Stock Overview
- Gold producer in Argentina (Don Nicholas).
- Developing their flagship project (Monte Do Carmo) in Brazil.
- Highly undervalued, with 10-bagger potential at $2,500 gold.
- Both projects are economic even at low gold prices.
- They need $125M CAPEX to finance the Monte Do Carmo.
Cerrado Gold Stock Price
Cerrado Gold Company Basics
|Stock Name||Symbol (CAD)||Type||Category||Share Price (US)||FD Shares||FD Mkt Cap (7/3/2022)|
|Cerrado Gold||CERT||Gold||Emerging Mid-Tier Producer||$1.17||88M||$104 Million|
Cash: $4 million
Debt: $23 Million
Current Gold Resources: 2.5 million oz.
Current Gold Production: 60,000 oz.
Current All-in Costs (breakeven): $1450 per oz.
Estimated Future Gold Resources: 2.5 million oz.
Estimated Future Gold Production: 150,000 oz.
Estimated Future All-in Costs (breakeven): $1300 per oz.
Cerrado Gold Projects
Cerrado Gold has two projects.
One is a producing mine in Argentina, and the other one is a development project in Brazil.
Cerrado acquired their producing mine in Argentina (Don Nicholas). It produces 60,000 oz a year at around 4 g/t, and they think they can increase it to around 90,000 oz annually (70,000 oz in 2023 and 90,000 oz in 2024). It is a large property (750,000 acres) with a lot of targets. All-in costs are around $1450 per oz (breakeven) and should drop.
Their flagship project is Monte Do Carmo in Brazil (125,000 acres).
This is an open pit project with a capex of $125 million to produce 150,000 oz a year (first 5 years). They claim that resources will grow from 1.5 million oz (1.8 gpt) to 2 million oz very soon.
Cash costs are projected to be only $500 per oz.
A feasibility study is due in 2022, with construction in 2023 and production in Q4 2024.
This company has an aggressive management team. They actually give guidance to reach 250,000 oz of production by 2025. That seems too aggressive. I am only valuing them at 150,000 oz of production, which gives them 5+ bagger potential. Monte Do Carmo is not supposed to begin full production before 2025. That’s a long wait.
However, I am confident that management will not give away the company for pennies, considering the fact that they own 40% of it.
Is Cerrado Gold a Good Stock to Buy?
Below, I will provide my scorecard for Cerrado Gold. The closer the overall grade is to 10, the better investment CERT is.
- Properties/Projects: 7
- Costs/Grade/Economics: 7
- People/Management: 7
- Cash/Debt: 6.5
- Location Risk: 6.5
- Risk-Reward: 7
- Upside Potential: 7.5
- Production Growth Potential/Exploration: 7
Overall Rating: 7/10
Is Cerrado Gold a Good Company?
Below, I have provided a few positive things about CERT.
- Production growth forecasted
- Significant upside potential
- Strong economics (low AISC)
Is Cerrado Gold a Bad Company?
Below, I have provided a few not-so-positive things about CERT.
- Capex financing and permitting not completed Monte Do Carmo
- Don Nicholas is in Argentina, which adds location risk
- Production at Monte Do Carmo not until 2025
Is Cerrado Gold Stock Overvalued?
Briefly said, no, Cerrado Gold is not an overvalued stock and, as per my calculations, it has over 7X potential in the medium to long term. I do think most real gold companies are currently undervalued as I think the gold price should be much higher.
Below, I have provided my value estimate for CERT stock, at $2,500/oz Au. Yes, it’s a high gold price but I am only looking at gold stocks because I think the price of the metal will go up to at least $2,500/oz over the medium to long term.
- Production estimate for the long term: 150,000 oz.
- All-In Costs (breakeven): $1300 per oz. *Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).
150,000 oz. x ($2500 – $1300) = $180 million annual FCF (free cash flow).
- $180 million x 5 (multiplier) = $900 million *Note: I used a future FCF multiplier of 5 to be conservative (and because we don’t know how they will finance the capex). It’s likely that the quality gold miners will have higher multiples at $2500 gold.
- Current FD market cap: $104 million
($900M – $104M) / $104M = 7.653
- Upside potential: 750%
Is Cerrado Gold Stock a Risky Investment?
Yes. Every mining stock is a risky investment and should only be approached by people who are not afraid to lose all of their money. Nonetheless, I have provided a risk-reward estimation below to give you a better idea of the specific risks with this stock.
The main risk is the gold price. Unless it rises, it is never easy making money with gold miners. In fact, a volatile gold price will likely put you underwater at some point, and perhaps significantly down.
Another risk factor is Argentina, which is an area of the world that is not considered mining friendly.
Taxes and royalties can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.
How they finance the $125 million CAPEX for Monte Do Carmo will greatly impact their upside potential. Remember, at current, this is a $100M company. Raising $125M through the sale of shares will result in significant share dilution. Often these financings require hedging or gold streams, which can decrease potential FCF. Plus, the CAPEX can increase due to inflation. In addition, pre-production companies often have costs higher than expected or grades lower than forecast. There are always potential unknowns that can impact returns.
To take on this high risk, the reward has to also be high. A 100% return, in my opinion, is simply not enough for accepting high risk. We want outsized returns.
For Cerrado, the upside potential is very high and enticing, although it is a speculative bet for the long term. We are expecting the gold price to rise and for then to build the mine in 2024.
Will I Buy Cerrado Gold Stock?
Here is my thesis on CERT in a nutshell.
I’m a big fan of owning mid-tier gold producers. If they have a long-life mine that is economic, it gives them excellent leverage to grow production. This can occur at a lower dilution risk to shareholders, as they utilize their FCF. They can use it for exploration or developing another mine. Cerrado is already building their second mine, so a third is probably part of their plans.
All else assumed true, the key to making money is a good entry price. For this reason, I prefer to buy mid-tier producers when they have an FD market cap between $100M and $150M. Below $100M, the risk increases. Above $150M, the upside decreases. I call this the sweet spot.
A mid-tier producer, using my definition, is going to produce at least 80,000 oz annually. Cerrado is actually an emerging mid-tier producer using my definitions. But they will become one soon, with Don Nicholas expanding production. An 80,000 oz producer should be worth at least $500 million at $2,500 gold. So, if you can buy them in the sweet spot, the upside is significant.
Knowing the above, there is upside potential with only Don Nicholas, which is expanding production from 60,000 oz to 90,000 oz in increments over the next two years.
Then, once Monte Do Carmo begins production, Cerrado could become a significant mid-tier producer, with production of around 250,000 oz per annum. I’m being very conservative, and as mentioned, I’m valuing them at 150,000 oz.
Another thing I like is that they are unlikely to get acquired, not with 40% of insiders recognizing their huge upside potential. Once gold gets above $2,000, Cerrado is going to look pretty enticing with its current low valuation.
This stock has 10-bagger potential at $2,500 gold.
More Analyses From Don Durret
Thank you for reading, and don’t hesitate to correct me in the comments if you think I’m wrong.
– Don Durrett.
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