120000 Oz. Gold Produzent Saracen Minerals

24 June 2010

The hunt for Red October

Argonaut recently visited Saracen Minerals (SAR) Carosue Dam Operations, located

~120km NE of Kalgoorlie within the South Laverton gold field.

Carosue Dam was originally commissioned by Pacmin (later acquired by Sons of Gwalia) in

2000. SAR purchased the 2.4Mtpa plant and the bulk of the land package from St Barbara

(SBM) in 2005 for ~$17m when the operation was under care and maintenance. Today,

SAR has 875koz in Reserves, more than 3Moz in Resouces and a substantial tenement

position encompassing the Laverton and Keith-Kilkenny Tectonic Zones.

To date, the management team has done a commendable job through the commissioning

phase, consistently coming in on time and below budget (led by Executive Chairman Guido

Staltari, who previously ran Burmine). Re-commissioning of the plant began in November

2009, with first gold pour achieved in January 2010. The total capital outlay for the

commissioning phase was $20.9m, ($3.5m below budget). The operation produced ~15koz

in the March Q and has produced over 19koz in April and May.

The goal is to become a >150koz pa producer by 2015.

SAR has devised a staged development plan, with production over the first 3-5 years

coming predominantly from the previously mined Porphyry and virgin Whirling Dervish

open pits. Stage 2 envisages a further 3-5 years of production sourced from cutbacks of

existing open pits as well as potential underground opportunities such as Red October.

Pre-strip of the Whirling Dervish pit has been completed and will underpin the bulk of the

mill feed for at least the next two quarters. Given its proximity to the plant (~1km) and

anticipated above average grades at the top of the footwall lodes, production in the Sep

and Dec Q’s could surprise.

Risks to monitor include the challenging production schedule, sustaining the grade profile

(Reserves – 1.6 g/t), sensitivity to fuel prices and keeping up with a ‘hungry’ plant (which

has operated at ~2.6Mt on an instantaneous basis).

Exploration looms as the key to de-risking the production profile moving forward. The

tenement package remains substantially under-explored at depth with potential for

identifying mineralised structures within a setting that has defined ~25Moz of gold in the

last 15 years.

SAR has recently completed a two-tranche $35m placement, leaving the Company debtfree

and with adequate working capital to progress development opportuntities. The bulk

of the proceeds will be spent on de-risking the potential >8g/t Red October underground

project (at the northern extent of the tenement package), which could be the ‘gamechanger’

for SAR, sitting 15km south of AngloGold’s ~15Moz, ~400koz pa Sunrise Dam

operation.

Argonaut’s valuation of $0.56 assumes a ~A$1,300/oz gold price over the next three years

with production grades reverting to the current 1.6g/t average reserve over a 6-year mine

life. The stock is cheap across a range of metrics and provides strong leverage to gold

prices (spot gold and fx valuation is $0.62). The key to re-rating will be demonstrating

upside to current grade expectations.

BUY

http://www.saracen.com.au/userfiles/news/272/...t-for-Red-October.pdf