Candente Resources: a good base metals junior

There's a big mining and energy pow-wow going on in Chile this week known as the CRU. One person interviewed at the shindig earlier this week was Joanne Freeze, the Prez and CEO of Candente Resources (DNT.to, DNT in Lima, CDOUF.pk on US pinksheets). In the note Ms Freeze mentions that DNT will be updating the resource estimate in May at its Cañariaco flagship project in Peru.

Have a read of the Reuters article linked above for a good idea of what's going on, including important details about the starter-pit project that will make the project profitable in the early stages of operation. Also check out the company website, with all the fun facts & figures you can handle. That's because this post is less on the bones of the company (you can look at all that yourself as part of your own DD*) and more on why DNT stacks up as a great takeover play right now.

Cañariaco is a copper project, 10,000 feet up in the Peruvian Andes, which is a darned good place for miners to be right now all political things considered. The management is a top class team, so no worries there. The project already has a very big copper resource. Up to now the company has defined 820MT of measured indicated and inferred orebody at 0.45% copper content. A quick calculation shows that we're looking at around 8.1Bn lbs of copper under those numbers. It's no secret that DNT want to sell the project on to a bigger producing miner. And the good news is that recently, Peru has been a hot place for greenfield mine purchases. In 2007 the following happened, all in Peru, and all multi-billion LB copper projects:

• April 2007: Anglo bought the Michiquillay project from the Peru gov't

• June 2007: Chinalco bought Peru Copper (CUP), then-owners of the Toromocho project concession

• December 2007: China Minmetals/Jiangxi bought Northern Peru Copper (NOC.to), then-owners of the Galeno project (as well as a couple of other good looking greenfield sites)

But wait, there's more. There are other projects going on up and down the country, and here's just a few.

• PCU are ramping up a new bigbigbig mine called Tia Maria, and are also beginning to drill at another promising spot held by another company.

• Cerro Verde (we mentioned them this week) has just finished a $1Bn upgrade that has doubled production.

• In 2004 Xstrata bought the very big-looking Las Bambas project from the Peru gov't and will be working on its feasibility study next year,and look to produce in 2011 or so.

• Milpo opened its new U$110m Cerro Lindo mine June 2007 and has earmarked U$67m for exploration expenses in 2008. Not bad for a medium sized producer. In fact, Milpo has got so good that Brazil's Votorantim want to take a controlling share of the company, and has just upped its bid yesterday.

Just a few examples of many. There is serious money being invested in large copper plays in Peru, and big projects are being snapped up by companies looking to secure supply for homelands (China) or increase production going forward (usual suspects).

Now this is where it gets interesting

Fully diluted**, DNT has 81.5 million shares. Right now the share price is C$1.54. If we assume that the company's test runs on recoveries can be matched on the production scale (between 81% and 89% recovery from flotation method), this means that each Lb of copper it has under the ground is being priced at 1.8c by the market. Doing an in-situ calculation is a good ballpark way of understanding what a project is worth, and the recent done deals suggest DNT is cheap at the moment. Those deals (Michiquillay, Toromocho, Galeno) have been done with a pounds-in-the-ground valuations of between 2.3c and 4.6c (ex byproducts). If we take 3c as our roundabout target figure for Candente, that would price the takeover target price at C$2.55 a share...a nice upside.

But now this is where it gets really interesting.
Remember back at the top of the page, where Ms Freeze said there would be a new resource estimate in May? Well, the current 8.1Bn lbs resource is calculated on the first 82 drill cores from the site done by April 2007. Since then Candente has drilled a further 121 holes (they've been busy people) and the resource estimate in May is expected by most analysts to blow the present estimates away.

Here's a little chart (click to enlarge) that puts it into focus. What we can see here is what the company would be worth per share at 2.5c, 3c or 3.5c/lb copper, depending on how much copper they declare as resource at the project (also assuming the fully diluted share count stays at 81.5m).

My best guess right now is that DNT is going to come in with around 10Bn Lbs copper resource under the revised calculation, but that just a guess. It could be less, but really I'm tipping my hat at 10Bn lbs Cu because I'd rather stay on the conservative side right now. It's no market secret that DNT has not explored the whole of Cañariaco, and the poundage could go to 14Bn or more once the whole thing has been surveyed. That's big copper, dude.

But based on 10Bn lbs copper in situ, if we say that 85% is recoverable that puts our pounds in the ground at 1.47c. If Candente sells out at 3c (my happy medium forecast), that's a C$3.13 target, and that's where I'm setting my bar. I know it's conservative to base the in-situ price on recoverable copper and not contained copper, and I know that NOC.to was the last deal struck and it was a sexy 4.6c/lb Cu ex-credits, but keeping things low-key also means nicer surprises later.

Bottom line: DNT is a big copper greenfield in Peru, with a management team that have a sale to the highest bidder as its principal objective. This is just the kind of mix that worked in 2007 (even December 2007, when there was no hiding from the subprime slime) and as Votorantim shows, there's plenty of interest in Peru mining 2008 vintage as well. There are plenty of worse places than DNT to put some speculative money.

Disclosure: I don't own personally, but I recommend to clients.

* ALWAYS do your own DD before investing in anything. Remember you got to read this note for free. Think about that.
* *With junior miners, better to run with the FD#