buy c$1.35 initiating coverage - beacon securities...jan 16, 2018 · eps nmf nmf nmf cfps nmf nmf...

Beacon Securities Ltd.| 66 Wellington Street West Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830 |www.beaconsecurities.ca

Cardinal Resources

(CDV-TSX)

West Africa’s Largest, New

Gold Discovery

January 16, 2018

Michael Bandrowski (416) 643-3870

[email protected]

We are initiating coverage of Cardinal Resources

(CDV-TSX) with a BUY rating and a 12-month target

price of $1.35/sh. Our valuation is based on the

following:

Large Scale Resource with Plenty of Upside

Cardinal Resources has delineated a 7.4MM oz.

resource grading 1.1 g/t Au in the Indicated and

Inferred categories, at its flagship Namdini gold project.

While Namdini remains open, we see significant upside

at Kungongo where a 4.2km x 300m gold-in-soil

anomaly has been identified and Ndongo where an

RC scout drilling program has commenced on gold-in-

soil anomalous targets.

PEA to be Released Q1 2018

The company plans to release a Preliminary Economic

Assessment (PEA) for its Namdini project in Q1 2018.

Recent starter pit drilling results have been extremely

positive and suggest a higher grade, low strip scenario

could dramatically reduce the payback period for this

large scale development project.

Mining Friendly Jurisdiction

Ghana has a long mining history, established mining

laws, royalty and tax regimes in place. In addition,

Ghana has a skilled workforce and good infrastructure.

Several large and medium sized companies are

currently operating in country including Newmont,

Kinross, Gold Fields, Golden Star and Anglogold

Ashanti.

Initiating Coverage

BUY C$1.35Previous Close 0.50

12-month Target Price 1.35

Potential Return 170%

52 Week Price Range $0.43 - $1.05

All prices in CDN unless indicated

Estimates

YE:June 30 FY17E FY18E FY19E

Au Price (US$/oz.) $1,300 $1,300 $1,300

Production

Au (000 oz.) - - -

Revenue ($MM) $0.0 $0.0 $0.0

EPS nmf nmf nmf

CFPS nmf nmf nmf

Valuation

P/E nmf nmf nmf

P/CF nmf nmf nmf

Stock Data (MM)

Shares Outstanding

Basic 350

FD 350

Market Cap

Basic 175

FD 175

Cash $20.0

Enterprise Value 155

Major Shareholders

Gold Fields 11%

Dynamic 11%

About the Company

Cardinal Resources is an Australian based gold

developer currently advacning the Namdini Gold

Project located in northern Ghana. The company

will be releasing a revised reosurce estimate and

Preliminary Economic Assessment in H1 2018.

Stock Performance

mailto:[email protected]

January 16, 2018 Page | 2 Michael Bandrowski| 416.643.3870 | [email protected]

Cardinal Resources Ltd.

Investment Thesis…..Large Scale Gold

Resource with Plenty of Room to Run

Near-term Catalysts: Cardinal will continue to release results from its

ongoing infill drill program that should lead to an updated Mineral

Resource estimate in Q1 2018. We anticipate an upgrade in Mineral

Resources and a well-defined starter pit when the update is released. In

addition, the company continues to advance the Preliminary Economic

Assessment (PEA) which is expected to be completed in Q1 2018.

Strong Management Team: Archie Koimtsidis, CEO, is an experienced

mine developer and former Deputy Country Manager of Ghana for PMI

Gold – Ghana (now Asanko Gold , AKG-TSX, Not Rated). Kevin Tomlinson,

Executive Director, is a geologist and investment banker and former

director of Centamin and Orbis Gold. Rounding out the team is Project

Manager, Bruce Lilford who is a former Senior Study Manager at Amec

Foster Wheeler.

Significant Exploration Potential: Cardinal has a NI 43-101 compliant

Indicated & Inferred mineral resource of 204Mt grading 1.14 g/t Au

containing 7.4MM oz. Au. We believe there is potential to further expand

this Mineral Resource along strike and to depth. In addition to Namdini,

Cardinal has two large scale targets that could significantly add to the

current resource base. Kungongo is roughly 45km west of Namdini, soil

sampling has identified 4.2km x 300m gold-in soil anomaly and 20km north

of Namdini lays a large granite intrusion at Ndongo that will be a high

priority exploration target in 2018.

Solid Mining District: Ghana has a long mining history and is home to

several junior, intermediate and senior mining companies. Ghana has an

established mining and tax regime in place that provides a clear

framework for advancing projects.



Valuation Our valuation method for Cardinal Resources is based on a price-to-net-

asset-value (P/NAV) multiple based on a discounted cash flow (DCF)

model using a long-term gold price assumption of US$1,300/oz. starting in

2018.

Exhibit 1: Cardinal Resources NAV Summary Cardinal Resources NAV Summary

US$ millions C$ millions Per Share

OPERATING ASSETS

Namdini (8% DCR) 683.1 888.0 1.61$

Exploration Assets 20.0 26.0 0.05$

Total 703.1 914.0 1.66$

OTHER ASSETS

Working Capital (of which cash = $9.5MM) 1.9 2.4 0.00$

Cash from Exercise of Warrants/Options - - -$

Total 1.9 2.4 0.00$

TOTAL ASSETS 704.9 916.4 1.67$

LIABILITIES

Debt - - -$

Env ironmental 4.2 5.4 0.01$

Total 4.2 5.4 0.01$

TOTAL LIABILITIES 4.2 5.4 0.01$

NET ASSET VALUE 700.7 911.0 1.66$

Long Term Exchange Rate Shares Outstanding

US$1.00 =C$ 1.30 Basic 550.0

Options -

Warrants -

Fully Diluted 550.0

Source: Beacon Securities Ltd.

For junior gold producers, we use a target range of 0.5x-1.0x P/NAV. Using

a target P/NAV multiple of 1.0x on our 2017 NAV estimate suggests a fair

value of $1.66/sh. for Cardinal Resources.

On a forward-looking P/CF multiple basis, we forecast Cardinal Resources

could achieve $0.22/sh. of CFPS as a 145koz/yr. gold producer in 2022.

Discounting our forward-looking cash flow estimates back to 2018 (at 10%

per annum) suggests $0.14/sh. Applying our target multiple of 7.0x P/CF to

this estimate, which is at the mid-range of our 5x-10x target range for

junior gold producers, suggests a fair value of $0.98/sh.

On an AMC/oz. (EV/oz.) basis, we employ a US$60/oz. target multiple for

the ounces at Cardinal Resources. Assuming resource growth to

10.0MMoz implies a fair value of $1.42 per CDV share.

Using the valuation methods described above, and an equal blend of fair

values generated by NAV, CF, and AMC/oz. analysis, generates our 12-

month target price of $1.35 per NCA share.



Exhibit 15: EV/oz. Au Comps

Source: Thomson Eikon, Company Reports, Beacon Securities Ltd.

Cardinal Gold is currently trading at a significant discount to the peer group. Given the current resource base and

highly prospective exploration ground we expect a positive Preliminary Economic Assessment and exploration news

from one or more of its other properties will significantly increase the share price and narrow the gap with its peers.



Namdini Gold Project The Namdini Gold Project is located in the northeastern region of Ghana

approximately 50 kilometers southeast of the regional center of

Bolgatanga, and close to the southern border of Burkina Faso. The nearest

airport is located in Tamale, a 160 kilometer drive south of Bolgatanga via

National Highway N10. The project area is located approximately six

kilometers southeast of the operating Shaanxi underground gold mine

that is supplied by grid power. The Ghana National high voltage power

grid is located approximately 30 kilometers west of the project. The

property is readily accessible from Bolgatanga along paved highway

followed by 15 km of well-travelled gravel roads. Access during the rainy

season is slower due to poor road conditions, however, the main access

roads are passable year-round.

Exhibit 2: Project Location Map

Source: Company Reports



History Gold was discovered in the region in the late 1930’s when a British

businessman was shown gold-bearing quartz veins at Nangodi by a local

farmer. Small scale underground mining operations commenced in 1934

attracting the attention of Gold Coast Selection Trust (GCST) who

optioned the property in 1936 and acquired a large prospective licence

that covered the belt. GCST ramped production to roughly 5,000 oz. per

annum in 1936-1937, but production quickly decreased as grades fell, the

option was subsequently dropped in 1938.

During the early 1960s, the Ghana Geological Survey Department carried

out limited shallow drilling around prospects, which had been identified by

earlier work in the 1930s. In the 1970’s, some soil geochemistry and

trenching were carried out over a 7 km stretch in the Nangodi area where

most of the known prospects occur. The Namdini Gold Project was first

discovered in September 2013 by prospecting. A small scale mining

license was approved in 2014 and RC drilling began shortly after. Prior to

Cardinal, no systemic exploration has been undertaken on the Namdini

property.



Geology The Namdini project area is located in the Nangodi Greenstone Belt

(NGB). The main lithology in the belts are volcanic-sediment sequences of

Birimian age (interbedded basic to intermediate flows, felsic tuffs and fine

grained sediments) overlying earlier sedimentary basins (greywackes and

phyllites) of Tarkwaian formation. Locally, the NGB trend north-northeast to

south-southwest over 30 kilometers and diverts to an east-northeast to

south-southwest trend in the south of the area around Namdini.

The project covers the southern extension of the NGB. Rock types

comprising the Namdini project include a steeply dipping Birimian

sequence of inter-bedded foliated meta-sedimentary and meta-volcanic

units, which have been intruded by a medium-grained granitoid and

diorite. The meta-sedimentary and volcanoclastic rocks have been

intensely altered with a pyrite-carbonate-muscovite-chlorite-quartz.

Alteration is prevalent in the volcanoclastic rocks, the tonalite is

extensively altered and overprinted by silica-sercite-carbonate

assemblages.

Exhibit 3: Namdini Regional Geology




Mineralization Mineralization at Namdini is hosted within a sequence of meta-

volcanoclastics, granitoids and diorites. In all rock types, mineralization is

associated with disseminated sulphides of pyrite and arsenopyrite in both

the veins and wall rocks. The mineralized zones are visually distinctive due

to the presence of millimeter to centimeter wide quartz-carbonate veins

that are commonly folded and contain yellow-brown sericite-carbonate

selvedges. Visible gold occurs in strongly altered granite and is associated

with silica-sericite shears that have sub-millimeter widths, as well as in the

diorite.

Exhibit 4: Namdini Alteration – Hole NMDD007 (227.3M – 231.95M)


Exhibit 5: Gold Associated with Pyrite




Mineral Resource Estimate The Mineral Resource estimate for the Namdini Gold Project deposit is

based on RC and diamond drilling information available to September 11,

2017. Core recovery measurements, which are available for

approximately 58% of diamond drilling average 99.6% and 85% for RC

drilling. Both Indicated and Inferred Mineral Resource estimates are

reported using a 0.5 g/t Au cutoff grade. Mineral Resources are reported

in accordance with the NI 43-101 guideline for disclosure of a Mineral

Resource and Mineral Reserve statement. Drilling has outlined

mineralization with three-dimensional continuity, with a size of

approximately 1,300 m long, 300 m wide, and 700 m in depth.

Exhibit 6: Namdini Resource Estimate (cut-off 0.50 g/t Au)

Category Cut-off Tonnes Grade Gold

(Au g/t) (Mt) (Au g/t) (M oz.)

Indicated 0.5 120 1.10 4.27

Inferred 0.5 84 1.20 3.10

Total 0.5 204 1.14 7.37


Exhibit 7: Namdini Gold Project Long-Section




Namdini Drilling Cardinal Resource continues to aggressively drill at Namdini, total

meterage as of the September 2017 Mineral Resource is 81,689 meters,

Exhibit 8.

Exhibit 8: Namdini RC and Diamond Drilling Drilling Year Number of holes Drill metres

RC Diamond Total RC Diamond Total

Resource 2014 44 1 45 4,749 66 4,815

2015 42 9 51 4,939 2,129 7,068

2016 19 71 90 3,991 16,400 20,391

2017 36 53 89 8,209 26,639 34,848

Subtotal 141 134 275 21,888 45,234 67,122

Grade Control 2017 172 0 172 7,224 0 7,224

Metallurgical 2017 0 1 1 0 236 236

Sterilization 2017 71 0 71 7,107 0 7,107

Subtotal 243 1 244 14,331 236 14,567

Total 384 135 519 36,219 45,470 81,689 Source: Company Reports

Trial grade control drilling of the potential starter-pit has been completed

on a 10 meter x 15 meter grid. Results to date have been positive,

comparisons of grades, ounces and tonnes between the Mineral

Resource model estimate (September 2017) and trial grade control model

estimates shows a strong correlation.

Exhibit 9: Resource vs. Grade Control Drilling

Resource Model (September 2017) Grade Control Model Delta

Cut-off Tonnes Grade Metal Tonnes Grade Metal Metal

(g/t Au) (Mt) (g/t Au) (oz. Au) (Mt) (g/t Au) (oz. Au) (oz. Au)

0.3 4.05 1.4 183,000 4.04 1.4 183,000 0

0.5 3.44 1.6 176,000 3.43 1.6 175,000 1,000

0.7 3.00 1.7 168,000 2.89 1.8 165,000 3,000


Exhibit 10: Recent Starter Pit Drill Highlights

Hole ID From To Length Au

(m) (m) (m) (g/t)

NMRC193 0 42 42 4.50

NMRC314 0 42 42 3.90

NMRC320 0 42 42 3.00

NMRC335 0 42 42 4.85

NMRC361 0 42 42 3.40

NMRC383 0 42 42 3.71

NMRC433 0 42 42 4.81

NMRC486 0 42 42 5.57




Exhibit 11: Long Section – Potential Starter Pit


Exhibit 12: Plan View – Namdini Drill Location Map




Exploration Potential Cardinal Resources has also completed geophysical, structural, and large

scale soil sampling programs on its greenfields properties. Preliminary work

at Kungongo has identified a large scale gold-in-soil anomaly measuring

roughly 4.5 kilometers long by 300 meters wide. Kungongo is located

roughly 45km east of the Namdini project site. We believe there is

potential to delineate a second large scale resource and significantly

increase Cardinals valuation in 2018.

Exhibit 13: Identified Soil Anomalies at Kungongo




Cardinal Resources has two additional exploration properties, Ndongo

and Bongo that take the total land package to over 900 km2. The Ndongo

property lies along the same structural shear as the Namdini gold deposit

and has an ongoing soil sampling and geophysics program running at this

time. Given the defined Mineral Resource at Namdini and the company’s

highly prospective exploration ground, cardinal is our top pick to

dramatically increase its Mineral Resource base in 2018.

Exhibit 14: Identified Regional Exploration Zones




Namdini Metallurgy Several phases of metallurgical test-work have been completed on

samples of Namdini mineralization since 2015. In July 2016, a 332 kg

sample was submitted to Suntech Geomet Laboratories (Suntech) in

Johannesburg South Africa. The sample was produced from quarter core

from drill hole NMDD005 in the center of the deposit, and containing gold

mineralization from all three key rock units that make up Namdini gold

mineralization (granite, metavolcanics and diorite). The master composite

graded 1.42 g/t gold and 1.1% sulphur.

The test-work returned flotation sulphide and gold recoveries averaging

95% at a primary grind size of 80% passing 75 microns into a concentrate

of less than 5% of the original rock mass grading up to 50 g/t Au, 48%

sulphur with no potentially deleterious elements. Regrinding the

concentrate and 24 hour leaching produced gold recoveries from the

concentrate in excess of 80% for an overall gold recovery of 76%.

Further test-work of the original sample completed in 2017 focusing on

concentrate regrind, extended leach times and pre-leach aeration and

showed overall gold recoveries of 84%. Subsequently, the test-work

program was significantly expanded with the production of large scale

samples of diamond core for the starter pit (785 kg), life-of-mine (1,226 kg),

a dedicated comminution sample, a flotation optimization sample (360

kg) and a specialized oxide metallurgical sample (114 kg). The Life-of-

Mine sample showed overall gold recoveries of around 86%. Further

optimization work is underway.



Investment Risks Commodity Prices For mining operations, profitability and cash flow are materially

dependent on the realized prices for the commodities produced. In the

case of non-producers, the most important factor to economic viability is

the assumption of future commodity prices.

Geological/Technical Even with an operating asset, geological risk will remain, relating to how

the actual mining results (grade, tonnage, recovery, etc.…) compare to

forecasted rates. Cardinal Resources is advancing through the Preliminary

Economic Assessment (PEA) stage at Namdini and presents a higher level

of risk at this point in time.

Political Cardinal Resources Namdini Project is located in Ghana, a jurisdiction with

a long history of mining, our concerns regarding political risk are

moderate. In addition, we do not foresee any major changes to the

States political status in the short-term.

Financial We anticipate the company will require additional funding to complete

advanced engineering, feasibility work and eventually put the project into

production.

Initiating Coverage with a Buy Rating Cardinal Resources provides investors with exposure to a potential world

class developing gold asset located in northern Ghana. The Namdini gold

project is a large scale gold project being de-risked by a highly

experienced management team with in-country experience. We expect

the company to continue generating positive news flow from its ongoing

drill campaign, metallurgical optimization work, greenfield assets and

near-term Preliminary Economic Assessment.

Given the current drill program, growing Mineral Resources and near-term

PEA, we expect Cardinal Resources to outperform its peer group over the

next year. As a result, we are initiating coverage of Cardinal Resources

with a 12-month target price of $1.35/sh. and a BUY rating.



Cardinal Resources Ltd. (CDV-TSX)

Previous Close C$ $0.50 12-Month Return 170%

Target Price C$ $1.35 Rating BUY

All figures in C$, unless otherwise stated

CAPITAL STRUCTURE FINANCIAL SUMMARY

Fiscal Year (June 30) 2017E 2018E 2019E 2020E

Shares Outstanding 550 Production

Options - Gold (000 oz.) - - - -

Warrants -

Fully Diluted Shares 550

BEACON PRICE DECK Income Statement C$MM

Calendar Year 2017 2018 2019 2020 LT Rev enue - - - -

Gold (US$/oz.) 1,300 1,300 1,300 1,300 1,300 Operating Expenses - - - -

Foreign Exchange (C$/US$) 1.30 1.27 1.25 1.25 1.25 EBITDA - - - -

Net Income - - - -

NET ASSET VALUE Discount rate C$M C$/share

Namdini 8% 888 $1.61 Basic Shares Outstanding (M) 550.0 550.0 550.0 550.0

Other Assets 10% 26 $0.05

EPS $0.00 $0.00 -$0.12 -$0.07

Total Assets 916 $1.67 P/EPS nmf nmf nmf nmf

Target/EPS nmf nmf nmf nmf

Debt - $0.00

Reclamation 5.4 $0.01 CFPS $0.00 $0.00 $0.00 $0.00

Total Liabilities 5.4 $0.01 P/CFPS nmf nmf nmf nmf

Target/CFPS nmf nmf nmf nmf

Net Asset Value 911 1.66$

Management & Directors

Archie Koimtsidis, CEO/MD Michele Muscillo, Director

Kev in Tomlinson, Non-Executiv e Chairman Robert Schafer, Director

Malik Easah, Executiv e Director Bruce Lilford, Project Manager

Jacques McMullen, Director

Beacon Securities Ltd.| 66 Wellington Street West Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830 |www.beaconsecurities.ca

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Does Beacon Securities beneficially own more than 1% of equity securities of the issuer? Yes No

Has any director, partner, or officer of Beacon Securities, or the analyst involved in the preparation of the research report, received remuneration for

any services provided to the securities issuer during the preceding 12 months?

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this issuer in the past 12 months? Yes No

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Department? Yes No

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All information contained herein has been collected and compiled by Beacon Securities Limited, an independently owned and operated member of

the Investment Industry Regulatory Organization of Canada (IIROC). All facts and statistical data have been obtained or ascertained from sources,

which we believe to be reliable, but are not warranted as accurate or complete.

All projections and estimates are the expressed opinion of Beacon Securities Limited, and are subject to change without notice. Beacon Securities

Limited takes no responsibility for any errors or omissions contained herein, and accepts no legal responsibility from any losses resulting from investment

decisions based on the content of this report.

This report is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell securities discussed herein. Based on

their volatility, income structure, or eligibility for sale, the securities mentioned herein may not be suitable or available for all investors in all countries.

As at December 31, 2017 #Stocks Distribution

BUY 69 75.0% Buy Total 12-month return expected to be > 15%

Speculative Buy 13 14.1% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss

Hold 9 9.8% Hold Total 12-month return is expected to be between 0% and 15%

Sell 0 0.0% Sell Total 12-month return is expected to be negative

Under Review 1 1.1%

Tender 0 0.0% Tender Clients are advised to tender their shares to a takeover bid or similar offer

Total 92 100.0%

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buy c$1.35 initiating coverage - beacon securities...jan 16, 2018 · eps nmf nmf nmf cfps nmf nmf...

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