Cerrado Hits Production and Cost Targets in Strong Q2 Results

Cerrado Gold (TSXV:CERT) (OTCQX:CRDOF) reported another quarter of solid production growth and falling production costs in Q2. Cerrado has possibly the clearest value creation story in gold mining, and here at Capital10x we continue to follow the company with interest.

Below is a short video, with what we believe are the operational and financial highlights of the quarter.

The value creation path for Cerrado investors is simple:

Step 1: Reinvest free cashflow from Minera Don Nicholas (Argentina) back into the country, growing gold equivalent production from 50,000oz to 90,000oz.

Step 2: Raise US$126 million through project financing and equity to add 150,000 oz of production; a doubling of output from the Monte Do Carmo mine (Brazil) by 2025. Brazil is estimated to generate US$150 million of free cashflow in its first year at full production.

Step 3: Take free cashflow from Monte Do Carmo (expected to be North of US$150 million per year), and fund the stock component of the Mount Sorcier Iron & vanadium project in Quebec, which will then generate an estimated US$235 million/yr of free cash flow starting in 2028.

In five years, investors will own a company generating potentially US$380 million a year in free cashflow on a current market cap of only US$46 million. If the company traded up to only 1x free cashflow -equivalent to saying the free cashflow will end in only 1 year- investors would be looking at an 8x return on their investment. This is the math that keeps us watching the success of Cerrado Gold.

Production Ramping Nicely in Argentina & Brazil on Track

Cerrado generated good production growth from Minera Don Nicholas in the quarter, growing production 7% over the same quarter in 2022. All-in sustaining costs continued to fall, down another 6% year-over-year.

The heap leach pad began production in July, according to the press release and Cerrado is on track to nearly double production over the next 18 months.

In addition to strong results in Argentina, Cerrado’s receipt on May 30th of a preliminary license for their Monte Do Carmo mine in Brazil is an important milestone. This means the company is on track to publish a bankable feasibility study by October, and receive a construction license from the Brazilian government before year end.

Brazil is still on track for production startup in late 2024, early 2025.

Monte Do Carmo (MDC) is expected to have some of the lowest operating costs in the world, below $500/oz. The ramp up of this mine is going to double production and cut sustaining costs by 30%, upgrading Cerrado from a junior miner to a low-cost intermediate producer in a few short years.

Monte Do Carmo Estimated Production and Sustaining Capital Costs per Ounce

With Cerrado trading at a large discount to the net asset value of both junior developers and producers, the company has significant rerating potential as it moves closer to first production at Monte Do Carmo in Brazil.

Monte Do Carmo in Brazil represents 80% of consensus Net Asset Value for Cerrado. With the stock trading at a 20% discount to today’s NAV; let alone a future NAV that should be valued 3x higher by the market, we strongly believe the valuation gap will naturally close within the next 24 months offering investors significant upside potential.

Source: Bloomberg Estimates, Cerrado

Q2 2023 Operational Highlights

  • Production increased 7% year-over-year to 12,453 gold equivalent ounces “GEO”
  • Operating cash flow of $10 million increased $12.4 million year over year.
  • New production from the Las Calandrias heap leach begin in July and will add ~20K annual ounces of gold production, a 30% increase from 2022 full year production.
  • Bankable Feasibility Study for Monte Do Carmo in Brazil is expected in October and the construction permit by the end of the year, a major milestone for the company’s transformational project outside Argentina.

Q2 2023 Financial Highlights

Cerrado generated revenue of $21.1 million for the three months ended June 30, 2023, from the sale of 12,453 GEO at an average realized price per gold ounce sold of $1,919, a 7% year over year and 16% quarter over quarter increase in prices.

See our recent report on why we believe Gold prices can be sustained at $2,000/oz or higher over time

Adjusted EBITDA was $4.8 million in the second quarter of 2023 as compared to $3 million in the second quarter of 2022. Current year adjusted EBITDA was higher due to both higher production and lower operating costs.

Second Quarter 2023 Operational and Financial Performance

Source: Cerrado 2Q Earnings
Source: Cerrado Q223 Earnings

Cash Cost Trends

Cash costs per ounce sold were $1,306 in the three months ended June 30, 2023, as compared to cash costs per ounce sold of $1,379 per ounce a year ago, a 6% reduction. Cerrado is delivering on their promise of continuing cost declines as production in Argentina keeps growing.

Cash costs are forecast to fall dramatically over the next three years. A 16% decrease is expected next year as production continues to ramp before it falls dramatically in 2025 as the low cost Monte Do Carmo project in Brazil starts up. Overall Cerrado is expecting cash costs to decline 35% from where they are today.  

Cash provided by operating activities during the second quarter ended June 30, 2023, was $10 million compared to negative cashflow of $600,000 in the year ago quarter. A significant improvement driven by rising production and falling costs. 

Cerrado ended the quarter with $5.8 million of cash and debt/EBITDA of only 1.3x, giving the company continued funding flexibility.

Net loss for the three months ended June 30, 2023 was $428,000, as compared to a $1.5 million loss a year ago.

The improvement in the net loss should continue, as margins expand in Argentina with higher production. 

Cerrado Remains Our Preferred Way to Invest in Gold

While the gold macroeconomic backdrop looks very favorable on its own, we like Cerrado due to its best in class combination of low production costs and rapid production growth.

We don’t need higher gold prices to make money.

Cerrado is the second fastest growing junior producer, yet trades at a 50% discount to peer Minera Alamos with the same growth profile.

Source: Cerrado

Cerrado is also the lowest cost producer in Argentina and will be one of the lowest cost operators in the world, once the Monte Do Carmo Mine in Brazil starts producing gold at only $580/oz of cash costs.

Cerrado Argentina Cash Costs vs Peers in Q1

Source: Cerrado, Company Reports

Owning the fastest growing, lowest cost gold producer, trading at a 60% discount to peers certainly seems like a attractive opportunity to us.

Cerrado Gold is a market awareness client of Capital 10X.


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