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La Mancha Resources

La Mancha Resources enters 2009 full of confidence

Good news flow from La Mancha Resources (TSX:LMA) certainly hasn't gone unnoticed in recent months. After hitting a low of just 4 cents in November 2008, the company has benefited from a rebound in the markets combined with solid updates from its operations in Africa and Australia.  Shares in La Mancha hit 30 cents this week, but still look undervalued compared to other gold producers.

La Mancha has an interesting history. The company completed a transformational deal in 2006 when it merged with the gold interests of Areva.  Areva is best known for its extensive operations in the uranium market, where it does everything from mining uranium to building nuclear reactors, allowing it to bid for new nuclear power developments where it not only builds the power plant, but also guarantees supply of uranium for the life of the operation.  Areva wasn't always about only uranium however, and once had interests in many other commodities too, particularly in Africa. The deal with Areva took La Mancha from a mineral exploration junior on the TSX Venture exchange to a main board stock with 2 producing gold mines and over 30 exploration projects and most important of all, cash and cash flow.  Areva is still the largest shareholder in the group, with around 63% of the issued capital, and La Mancha's CEO and President, Michel Cuilhé, joined the company from Areva, where he was an executive director.  Three other directors on the board of La Mancha work for Areva.

Since the deal was completed in 2006, La Mancha has focused on increasing gold production at its more mature assets while continuing to investigate its large package of exploration projects.  Gold production in 2007 hit 53,900 ounces, rising to 71,000 ounces in 2008.  Production guidance for 2009 has not been disclosed yet, but with the group's operations in Australia still ramping up, a number north of 85,000 ounces is likely.  La Mancha has also been keen to build up its measured and indicated resources to help boost production visibility, a key metric to attract fund managers.  As of December 31st, 2007, La Mancha reported a measured and indicated resource of 1.3 million ounces across its four key projects.  This number increased to just under 1.8 million ounces in early January 2009, and the company is targeting 2 million ounces by February 2009.  La Mancha's exploration and development budgets have been funded through group cash flow, and a cash pile that currently stands at around C$9.8 million.  The company also has an undrawn line of credit to the tune of C$3.1 million, a small equity stake in Dioro valued at around C$1.3 million and C$7.9 million in commercial paper. Production and currencies are 100% unhedged.

La Mancha's production profile in 2008 emanated from three mines.  The Hassaï Mine in Sudan was the largest contributor, generating approximately 32,000 ounces of gold (net) to La Mancha.  La Mancha has a 40% stake in the operation.  The company recently boosted the overall resource at Hassaï when it defined 114,800 of measured and indicated ounces of gold from the tailings. This resource is likely to increase again in the second quarter of 2009 as La Mancha upgrades the inferred resource, which could increase the total measured and indicated resource to more than 180,000 ounces.  Beyond the tailings resource, Hassaï also hosts a Volcanic Massive Sulphide (VMS) deposit.  The VMS potential of Hassaï and the surrounding region, where La Mancha has identified a number of targets, is the future of the project once the gold is exhausted.  To date, La Mancha's drilling has suggested the potential for around 20 million tonnes of ore grading between 1.5-2% copper and 1.3-1.5 grams per tonne gold.  

La Mancha's second largest producer in 2008 was the Ity Gold Mine in Cote d'Ivoire, which is expected to contribute 23,000 ounces.  La Mancha has a 45.9% interest and is operator.  Measured and indicated resources at Ity have increased from 240,000 in 2007 to 361,000 in 2008, thanks to additional drilling at Zia and Ity open pit extensions, plus additional work on the Tontouo Project and Walter Anomaly to the north-east.

The 2009 production boost will largely be derived from Australia however, where La Mancha has two operations kicking it up a gear.  At Frog's Leg, where La Mancha has a 51% stake, the project is already ramping up, and is expected to contribute 14,000 of gold production (net) to the company in 2008.  At full tilt, the mine is anticipated to produce around 36,700 ounces of gold to La Mancha, and will have an initial mine life of 7 years. Cash cost over the life of mine is anticipated to be just shy of US$400 per ounce.  White Foil is the group's second project in Australia, where a scoping study is due for release in "early 2009".  La Mancha has already dewatered the pit and completed resource definition drilling which outlined 531,000 ounces of measured and indicated gold based on a 1.2 g/t cut-off grade.

This puts La Mancha on a pretty solid footing. With a strong balance sheet and three gold mines and a fourth on the horizon, the company has built up a neat production profile since its merger with Areva's gold interests in 2006. The company has oodles of exploration acreage too, and the VMS potential in Sudan certainly has excited the company's directors when we spoke to them recently.

Looking ahead, robust gold prices continue to underpin the investment argument for gold producers who can deliver cash flow. La Mancha is certainly doing that.