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Xtract Resources - Initiation of Coverage

Xtract Resources is the old Xtract Energy that Executive Chairman Colin Bird rescued back in 2013 and set on a new course. The early acquisition of a Chilean gold mine failed to meet expectations but the Manica Gold mining licence in Mozambique looks to be coming good. The company has been benefiting from a growing profit share from the alluvial gold on its licence area in a neat deal where other parties fund the necessary capex.

• Growing profit share from Manica alluvials and hard rock gold mining

  Profit share from Manica has been growing steadily for a couple of years now but it is about to step up a gear. The same sort of model is being employed at the Fair Bride hard rock deposit where a 35,000oz pa gold operation is set to begin before the year-end. Here, Omnia is providing the $6-8 million necessary capex and Xtract will get 23% of revenue after costs.

• On course for £12.5m share of annual mining profits within 12 months

  More similar profit-sharing deals are about to come to fruition at Eureka (copper & gold) and Kalenga (copper), dramatically transforming Xtract’s fortunes. The board has worked hard on these deals for a while, but it does seem that all the trains are about to arrive at the station at the same time.

• Blue-sky projects include Bushranger in the hot Lachland Fold Belt

  This area in New South Wales is Australia’s world-class copper-gold province and elephant country. Here, Xtract has just acquired an open ended JORC resource of 350,000t of contained copper in quite a coup. ASX listed explorers with interests here have recently seen big re-ratings.

• Big disconnect in the share price as our valuation shows 480%+ upside

  We believe our valuation is conservative and initiate coverage of Xtract with a target price of 6.56p and a Conviction Buy stance.