Investment bank Stifel GMP has started covering Mongolia-focused miner Steppe Gold Ltd (TSE:STGO) (OTCMKTS:STPGF), saying its flagship mine in the country is set to be a free cash flow machine.
Using the current spot gold price, analysts at Stifel GMP see the newly commercial ATO mine generating US$100 million of free cash flow over the next two years.
READ: Steppe Gold secures initial debt funding of around US$10.5M for its expansion project at ATO mine
"With high grade mineralization starting at surface, the mine benefits from both a low strip ratio and a high concentration of gold. We estimate LOM average by-product total cash costs of $485/oz, putting it in the bottom quintile of the cost curve," they added.
The mine, which only started producing in March, is already seeing strong cash flow and in its second quarter to June 30, Steppe sold 12,458 gold ounces and 3,728 silver ounces, netting it C$19.5 million in sales.
Stifel GMP also noted the mine's potential upside from mining the sulphide ore at depth.
"Underneath the oxides sit large, polymetallic sulphide orebodies. The company has already defined 12.2 million tons of mineralized material, with drilling over the past two years due to significantly expand this number, and at higher grades than the current resource. The four deposits (ATO 1, 2 & 4 and Mungu) are open at depth and the trend remains largely unexplored near the mine along strike to the north," it said.
On Tuesday, Steppe confirmed it had secured an initial tranche of debt funding of around US$10.5 million for an expansion project to exploit fresh rock ores to 150,000 ounces equivalent a year.
Stifel GMP noted that drilling was now aimed at expanding the mineralization to support construction of a sulphide flotation/CIL plant, largely funded by project debt and internally generated cash flow, to ramp up output.
"Steppe Gold’s land holding at ATO extends for 14km, of which only the 1 km around the currently known deposits has been explored. The company is eager to start step out drilling further to the north along trend. In addition, STGO owns the highly prospective but undrilled UK property in the south of the country."
Stifel GMP starts with a 'Buy' rating and targets C$4.70 a share, which is a long way from the current price of C$2.63.
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