CLEVELAND MINING COMPANY LTD 
By Cleveland Mining Company
Suite 5, Level 8, 99 York Street, Sydney NSW 2000
P: +61 2 9299 5001 | F: +61 2 9299 8001
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Dec 12th 2012
Cleveland Mining Company producing gold; under the radar
Cleveland Mining Company Ltd (ASX: CDG) is a gold producer in Brazil and has iron ore assets it is progressing.
The company retains a highly successful Board and management team with a strong record of major project delivery, and maintains a focused commercial strategy of project acquisition and development.
Debt free gold production has commenced at the Premier Gold Mine and the Company has outlined multi-million ounce potential for development in surrounding project areas within the Crixás Hub.
Iron Ore assets are held at Ferradura where the Company plans to define a
200MT resource with a production target of 5MTPA.
A $10.8 million capital raising was completed during the last quarter, with BC Iron becoming a 5% corner-stone shareholder in Cleveland Mining.
Peter Fisher has been appointed as CEO reporting to the Managing Director, David Mendelawitz and will focus on operations in South America.
Share Price: $0.37
Issued Shares: 175.8M shares
Market Cap: $65.05M
Cash: $4M and $15M Receivables at Sept Qtr end
ANALYSIS
Cleveland Mining has a well qualified board that includes Donald Bailey who was the founding CEO of LionOre, David Mendelawitz, Russell Scrimshaw and Jim Williams who all held senior positions at Fortescue Metals Group and helped to develop multi-billion dollar iron ore mining and export operations.
Cleveland Mining is driven by project economics that have potential to generate economic returns at the bottom of an economic cycle, in areas backed by
Cleveland Mining (ASX:CDG) is a South American-focused miner with gold and iron ore projects in Brazil, including the Premier Gold Mine, where commercial production recently began. Cleveland has an all-star Board of Directors, which includes Don Bailey (former Deputy Mining Director for Rio Tinto and the founding CEO and Chairman of LionOre), Russell Scrimshaw (former Dept. CEO of Fortescue Metal Group Ltd. , FMG), Jim Williams (former Head of Mining at FMG), David Mendelawitz (former Head of Business Improvement at FMG) and Aaron Finlay (former CFO Mayne Pharma Group Ltd. ).
Author:legislation and government that can provide stable and transparent operating environments.
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This operational philosophy is responsible for the establishment of debt free mining operations at the Premier Gold Mine, which is held in a 50:50 JV with Edifica ParticipaÒ«ões. Production will produce between 10,000 to 20,000ozs in the first year of full operations and will be expanded to 40,000oz by 2014.
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OPEX is targeted at around $450 per ounce and will place Premier within the lowest quartile of global gold producers, and throw off very significant free cash flow for the ongoing development of the Crixás Gold Hub which has a multi-million ounce potential.
The gold assets at Crixás also include prospects at O Capitão and Premier that surround and are along strike from the Serra Grande Gold Mine that has produced 3.4Moz and currently produces 134,000oz pa from three underground mines and one open pit. Major gold trends from the Serra Grande Mine run directly across concessions that are under development by the Company. The Serra Grande Mine is about 800m from Cleveland's Premier Mine and its tenements
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abut Cleveland's.
Cleveland's 100% owned Mara Rosa Project abuts Amarillo Gold Corp's 1.2 million oz Posse project.
The wealth of senior management talent that was retained from the Fortescue Metals Group is also responsible for the rapid growth of the Amapá Hub and the iron ore project at Ferradura where the Company is fast tracking the development of a potential 200MT resource AIMed at producing 5.5MTPA of iron ore.
All iron ore projects are held in a subsidiary known as Cleveland Mining HK which will be developed as a separate entity.
The wealth of iron ore contacts within the senior management team has already attracted Chinese steelmaker Xingi Aosen Steel as a cornerstone investor with an uncompleted commitment of $10.26M to acquire 6.25% of Cleveland Mining HK, and will be utilised for the development of resources at Ferradura.
These relationships have also created a strategic alliance with BC Iron Ltd that will lead the acquisition and development of Brazilian iron ore projects on a 50:50 joint venture basis. BC Iron Ltd has become a cornerstone investor in Cleveland Mining with an equity stake of 5% that was acquired at a cost of $5.7M.
The Company has strong backing from key strategic funding and alliance partners that will lead to a significant pipeline of activity over the next 12 months.
The current share price of $0.38 for Cleveland Mining affords an opportunity for investors to acquire a newly minted gold producer before many investors discover the mis-pricing between the current and likely share price in 12-18 months time.
MANAGEMENT TEAM FOR CLEVELAND MINING
Donald Bailey serves as Chairman, and is the Ex-Deputy MD of mining operations in South America, Africa and Europe for Rio Tinto PLC, and is a mining engineer with over 50 years of experience. He was the founder of LionOre Mining Ltd, which was acquired by Norilsk Nickel for more than US$6.0B
David Mendelawitz serves as Managing Director, and is a geologist with over 18 years of experience in exploration, mining and commerce, with success in the discovery of gold and iron ore in an international setting. He is the Ex-Head of Business Development at Fortescue Metals Group.
Aaron Finlay serves as Finance Director and Company Secretary, and is a Chartered Accountant with 20 years of experience in accounting and finance. He has held CFO, Company Secretary and senior management positions with a number of public companies that include Mayne Pharma Group, pSivida Ltd, Tawana Resources NL and was also CFO of INVESCO Australia and Head of Group Tax & Treasury at INVESCO in the U.K.
Russell Scrimshaw is a Non-Executive Director, and until recently the Deputy CEO of Fortescue Metals Group, where he was part of the key management team that completed the multi-billion dollar development of iron ore mining facilities, port and rail start-up, and negotiated billion dollar off-take agreements with China's largest steel mills. He is the Chairman of AIM-listed Sirius Resources and has held senior management positions with a number of major Australian corporations and is Adjunct Professor of Mining Economics at China Central South University in Changsha, China.
Jim Williams is a Non-Executive Director and mining engineer with over 50 years of experience. He was a founding member of Fortescue Metals Group where he served as Head of Mining. He previously held senior posts at Laverton Gold, Consolidated Goldfields in South Africa, Chief Mining Engineer for Bechtel Australia, Chief Mining Consultant for Minproc Engineers, and founder and CEO of J Williams Mining Associates. and has consulted on more than 20 DFS, with no project he approved having ever failed.
The Company has also appointed Peter Fisher to Chief Executive Officer of South American projects, and reports directly to the Managing Director. He has more than 30 years of experience in executive management, project development, finance, business development and mining engineering in Australia, USA, China and Europe that include
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BHP Billiton, Rio Tinto, Hancock Prospecting and HWE Mining. Mr Fisher was responsible for strategy and development of all Hancock Prospecting's Pilbara iron ore projects in the mid 2000's. Whilst at BHP Iron Ore, he was responsible for all contract mining projects, which had a total value of over a billion dollars.
SHAREHOLDING AND FUNDING
Cleveland Mining has issued 175.8M shares, with Sarah L. Mendelawitz being the largest shareholder holding 21.30%, and followed by Wang Zhe 6.82%, BC Iron (SA) Pty Ltd 5.00%, Finook Pty Ltd 3.88% and Penwerris Pty Ltd 1.78%.
34.78M unlisted options are issued at exercise prices of $0.20 - $0.84 from December of 2014 March of 2016. 31.25M
of these options are performance based and can only be exercised on completion of significant milestones.
In August 2012, the Company garnered $10.78M by issuing 8.28M shares at $0.62 and 8.79M shares at $0.642, and held cash of $4.37M at the end of the same quarter.
Cash outflows were reported for exploration and evaluation of $0.25M, development $1.77M, administration $1.34M, purchase of prospects $1.93M, loans to associated entities $1.85M; with a total outflow of $7.50M reported for both operating and investing cash flows.
The December quarter cash outflows are projected for exploration at $0.35M, development $0.50M, production $0.50M
and administration of $1.0M for a total of $2.35M.
Key Project Locations
CRIXÁS HUB COMMENCEMENT OF GOLDMINING AT PREMIER GOLD MINE JV
The Company's most advanced project is the Premier Gold Mine JV which is held as a 50:50 Joint Venture with Edifica Participacões. Premier is located in an area that is very close to the town of Crixás with a population of 20,000 people, and includes gold mining infrastructure that supports operations at the Serra Grande Gold Mine.
Premier is a high potential brownfields gold project that is part of the Crixás Hub of 15 concessions that cover ~150km², and contains an Inferred resource of 1.95MT at 1.42g/t au for 89,000 ounces of gold. This resource was defined from historical data and a limited drilling programme that evaluated a very small portion of the total project area.
The company decided to build a small mine as quickly as possible rather than continue drilling in order to generate early cashflow, gain Brazilian construction and mining experience, implement systems and procedures, and develop an understanding of the permitting processes. The mine is designed to be quickly expanded, which the company started planning for even before mining and processing of the first stage had begun.
Cleveland has completed and commissioned a Stage One process plant that was built for A$5.0M and comprises crushing, grinding and gravity separation circuit that is rated at 40TPH and should produce ~10,000 to 20,000 ozpa with a recovery of 25 65% of gold content. The company plans to install a CIL cyanide circuit early in 2013 to boost recovery to 97% and will reprocess the tailings material from production coming before its installation.
A Stage Two process plant will soon be under construction, boosting throughput to 80TPH. This will involve the installation of a second ball mill and will allow for production of up to ~40,000oz pa at an OPEX of ~A$450 per ounce.
MULTI-MILLION OUNCE GOLD POTENTIAL AT CRIXÁS HUB
The Crixás Hub includes a number of project areas that are located within a gold camp that includes the Serra Grande Mine operated by AngloGold Ashanti that has already produced 3.4M ounces over the last 17 years. Serra Grande commenced operations at a cash cost of less than $200 per ounce, and currently averages US$767 per ounce from underground and open pit operations.
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The Premier Gold Project is located less than 1km from the resources at Serra Grande, and lies along the same prolific trend-line.
An additional source of feedstock for the process plant at Premier has been defined at O Capitão, which is located
10km to the north, and was the site of historical artisanal mining in the 1980's that produced ~180 350,000 ounces of gold by 6,000 12,000 garimpeiros who extracted grades of 5-10g/t au by hand.
O Capitão will supply feedstock to the Premier process plant in 2013 at a CAPEX ~A$2.0M, and boost output to
40,000ozpa at an OPEX of A$450 per ounce for a mine life that is expected to exceed 5 years.
Two mineralised areas have been identified that include a high grade zone with highlights of 1.30m at 14.29g/t au from
44.7m, and 2.00m at 17.21g/t au from 39.0m; and the Dona Maria Garimpo with 11.00m at 1.01g/t au from 51.00m,
16.50m at 1.16g/t au from 46.40m, 4.40m at 3.55g/t au from 91.00m, and 7.57m at 1.99g/t au from 79.80m.
Drilling at O Capitão has delineated an open strike line that exceeds 250m and contains multiple stacked mineralised zones with widths that range 1.0 -17.9m per zone. An extensional and infill drilling programme will get underway at Dona Maria shortly, and is AIMed at defining a JORC compliant resource in early 2013.
Exploration at Premier has defined a large gold in soil anomaly at the Premier South Zone that is measured at 2km in length and covers mineralised outcrop that has been partially drilled. This mineralised zone lies immediately along strike from producing gold resources at Serra Grande and will be aggressively developed by further drilling programmes in the near term.
Cleveland Mining controls one of the largest landholdings in the prolific Crixás gold camp, and believes that this strategic holding has potential to contain multi-million ounces of economic gold resources.
AMAPÁ HUB FERRADURA IRON PRODUCTION POTENTIAL AT 5MTPA
The Amapá Hub is located in a coastal region of northern Brazil and contains the Ferradura iron ore project. The state of Amapá has attracted a number of developers that include Severstal, AngloGold Ashanti, Vale, Cliffs Natural Resources and Beadell Resources, and currently hosts the Anglo American owned Amapá iron ore mine, which commenced operations in 2007, and has a planned output of 5.5MTPA.
The area has not historically attracted a lot of mining activity because Brazilian companies were focused on the famous Iron Quadrangle in the country's south. Amapá is emerging as the world's newest address for high quality iron ore that is politically stable with pro-mining legislation, good infrastructure and access to low cost and skilled labour. Several Russian and Indian companies, including steel manufacturing giant Severstal, have stated serious AIMs for the state.
Cleveland Mining recently completed the purchase of Ferradura and AIMs to define a resource in the vicinity of 200MT at 39.9%Fe to support an initial production target of 5MTPA of iron ore, with production commencing in 2014. Recoveries are anticipated at 40-50% Fe to deliver 80MT for a mine life of more than 15 years. Cash production costs are currently estimated at ~$55 per tonne and CAPEX at ~$250M.
Ferradura is expected to have a very low CAPEX due to shallow overburden, and low infrastructure costs that include proximity to local hydro-electric power, roads, and open access to the port of Macapá which is approximately 80km to the south.
SRK completed an independent review at Ferradura that included an analysis of core samples from 40 drill holes that were recently completed, and concluded that the project area contains a large area of shallow, hematite and magnetite mineralisation with an exploration target of 150-350MT at a grade of 10%-40%Fe contained within multiple targets.
A drill programme will get underway shortly, and is expected to produce a maiden JORC estimate during 2013. Metallurgical testwork and engineering studies are already underway as part of a scoping study that is planned as a prelude to a DFS that will commence during 2013, and cost $30M to complete.
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Cleveland Mining has established a Hong Kong subsidiary called Cleveland Mining HK that will maintain a separate management and funding structure for its iron ore projects. "Cleveland Iron" has been established to avoid dilution of existing shareholders who have invested in the parent company for development of its current gold assets.
In June of 2012 Cleveland Mining HK commenced a $10.26M placement to Chinese steel group Xinji Aosen for a
6.25% interest in "Cleveland Iron". These funds will be earmarked for the development of Ferradura when received.
In August of 2012 BC Iron Limited entered into an Iron Ore Strategic Alliance with Cleveland Mining, and took a 5%
equity stake in the Company that consisted of 8.8M shares at a purchase price of $0.642 per share, for a total of
$5.64M. The two entities have formed a 50:50 joint venture AIMed at acquiring and developing new iron ore projects in
Brazil.
TIMELINE FOR 2013
- Stage Two completion of CIL plant at Premier and increased production.
- Drilling at Premier for exploration and resource extension.
- Infill and extensional drilling at O Capitão.
- Double plant capacity with feedstock from O Capitão.
- Exploration at Mara Rosa.
- Seeking +1Moz gold project acquisitions.
- Bulk sampling and metallurgical testwork at Ferradura.
- Rotary Core drilling and logistics at Ferradura.
- Environmental studies and licensing for Ferradura.
- Seeking project acquisitions for co-development with BC Iron Ltd. ANALYSIS & OPINION
Cleveland Mining has employed a counter-cyclical approach to project acquisition, reducing cost of acquisition and dilution to shareholders.
The Premier Gold Project has advanced from a brownfields acquisition to gold production in less than 3 years with construction taking less than 12 months. Management made the original acquisition only after rigorous scrutiny of geological prospects, local costs and infrastructure. Management do not seek to maximize returns as is typical in many gold projects but sought to deploy a small CAPEX of $12M to produce maximum returns.
This business strategy will produce 20,000 ounces of gold per year, at a cash cost of around $450 per ounce, doubling production with a year. At the current gold price of A$1,629.13oz this equates to approximately $23.58M of cash-flow basis, and before the 50:50 joint venture partners account for repayment of capital, taxes and other outgoings.
Cleveland Mining will then generate a very significant and ongoing cash flow stream for exploration, development and production upgrades within the Crixás Hub.
In May of this year AngloGold Ashanti which held a 50% interest in the adjoining Serra Grande Mine completed the purchase of the remaining 50% interest from Kinross Gold Corporation for US$220M. The purchaser acquired 1.6Moz of reserves and resources along with 70,000oz of annualised production at an EV of US$137.50oz au.
The Serra Grande Mine has already produced 3.4Moz au with another 1.6Moz defined, and is along strike and located
1km from the Premier Gold Project. Cleveland management believe that the concessions that make up Premier Gold project and the other resource assets within the Crixás Hub have similar multi-million ounce gold potential, and may potentially generate an EV that has potential to approach the recent purchase price paid by AngloGold Ashanti on the adjoining property. At that stage Premier may become a strategic asset with takeover potential.
The recent purchase of a 5% interest in Cleveland Mining by BC Iron Ltd for $5.7M values Cleveland Mining at $114M or $0.64 per share, and the previously announced sale of a 6.25% interest in "Cleveland Iron" to Chinese interests that remains unconsummated places a potential valuation of $164M on the iron interests alone.
This equates to $0.93 per share, and underlines the tremendous discount that the market currently applies to Cleveland
Mining.
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Based on this metric alone, and applying a discount for conservatism, we value Cleveland Mining at between $0.54 -
$0.73 against a current share price of $0.38.
This affords an opportunity for investors to acquire a newly minted gold producer Cleveland Mining - before many investors discover the mis-pricing and uplift expected in the 12-18 months time.
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