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China's Golden Age revisited

Bob Moriarty
May 4, 2007

I made my first trip to China in September of 2004 and I've been back several times since. China amazed me three and a half years ago and continues to amaze me. They are "Communist" run and yet are the most capitalistic country on earth. I first wrote about the country and a company called Goldrea (GOR) in a piece titled China's Golden Age in October of 2004. It's time for an update as lots of good things are going on.

My trip in 2004 was made with the president of Goldrea, Larry Reaugh. He was tied up this year when I would be over in Asia on behalf of some other mining ventures so I made a lightening quick trip to the Shandong Daye Mine by myself.

In simple terms, three years ago Goldrea entered into a joint venture with the Daye Mine. In China most of the mine/mills are state owned. Not necessarily equivalent to what we would recognize as the Federal level but projects are often the legal property of state and even city authorities. Since the local governments are far more interested in getting their hands on the cash flow rather than rationalizing the assets, often projects will suffer from lack of investment in upgrades or resource development.

Goldrea entered into the joint venture with China Rushan, owner of the Shandong Rushan Mine on a 65,000 hectare property along strike and down dip of the existing 1750 TPD Daye mine. There was an existing 700,000 ounce gold resource which is not yet 43-101 compliant. After 20,000 meters of drilling in the last 2 _ years, Goldrea has added a 43-101 indicated gold resource of 331,175 ounces and 275, 968 (approximately) ounces of gold in the inferred category.

As I detailed in 2004, the real value is in the mill. At that time the Chinese who own and operate the mill had 4 years of resources left. Both Larry and I realized that as the remaining gold resource was milled, the value of the mill to China Rushan would decrease. And it has. So Larry has negotiated a deal to buy 80% of the mill for $16.6 million Canadian. That's what we call in Miami "El Goodo Dealo."

The ore has no value without the mill and the mill has little value without the ore. Combine them and you have a good deal. The deal is complicated, being Chinese.

First of all, let's look at what they were doing and see if we can come up with some numbers. To build a 1750 TPD plant from scratch with used equipment in China would cost somewhere around $50 million.

The Shandong Daye Mine was producing 65,000 ounces per year. I'd value 65,000 ounces of year production at maybe $400 million in market cap. (Desert Sun sold 18 months ago for about $700 million with 102,000 ounces of production and unlimited resources)

So at the worst case, Goldrea is buying 80% of a $50 million dollar facility for about one third of the real value but getting something worth 20-40 times more when they are getting the value of 80% of 65,000 ounces of production a year.

That's not all they are getting, the Chinese are an enterprising group.

The ore being mined contains 25% sericite worth $45 a ton. Sericite is a form of mica used in construction materials and even cosmetics. The Daye Gold Mine owns 25% of the sericite recovery company processing the tailings from the mill. That company has 48 workers and now GOR will get 80% of the value of the company.

click on images to enlarge

The Daye Gold Mine now owns 30% of a company using the tailings of the tailings to make construction building blocks. This company employs 120 workers. GOR gets 80% of the value of that company.

There is some intangible value in the senior water and power rights owned by the Daye Mine. In essence it provides the owner of the Daye Mine with a tremendous competitive edge in mining or milling within 50km of the Daye Mine.

In 2004 Goldrea was selling for $.20 a share and the company had a market cap of $4 million. The stock is up 3-fold but the number of shares has doubled. In any rational term, the stock is far cheaper now than back then. As an exploration company GOR is getting about $20 an ounce. I fully expect both the ounces to continue to go up and the grade milled. I think the mill has the potential in a year or two for 100,000 ounces per year production.

Goldrea has two drills turning right now and another two drills scheduled soon. The deposit is open in three directions and the real key to success in the future is going to be in increasing the resource. When I was there three years ago, you could literally kick rocks at the surface and see the sulfides. The deposit has multi-million ounce potential but Goldrea will need to spend the money drilling that the Chinese were reluctant to spend.

Goldrea's story is compelling. They are buying dollar bills for nickels. Some of the terms of the deal are as only the Chinese can create. Larry wanted to spread the payment over five years and Chinese law does not permit that with a government owned entity. But they will allow Larry to buy 70% of the company with shares of Goldrea which he has then has to buy back at cost, over a three year period. I don't see much difference but the Chinese do.

This is a good deal for Goldrea shareholders. Larry is doing a Private Placement to raise $12 million and will borrow the remainder of what he needs to complete the transaction. This will double the number of shares outstanding but when this deal is complete, Goldrea shareholders will be smiling.

We have participated in private placements of Goldrea in the past, I own shares and I am biased. While this deal isn't a home run out of the park like some of the projects I have written about lately, it is a solid double and the stock will become a great trading stock. Do your own due diligence.

Goldrea Resources Corp
GOR-V $.57 Canadian (May 3, 2007)
40.1 million shares
Goldrea Resources website

Bob Moriarty
President: 321gold

321gold Ltd