Zacks initiates coverage of Colt Resources with an Outperform rating

Steven Ralston, CFA

Zacks has initiated coverage of Colt Resources ( ) : TSX-V) with an Outperform rating and a target of $1.35. Colt Resources is a junior gold exploration company with two advanced stage projects in Portugal: the Boa Fé gold project and the Tabuaço tungsten project. Drilling programs are proceeding at both properties with positive assay results having been announced 14 times thus far in 2012. The company has been very successful in obtaining equity capital to finance the exploration and development of these gold and tungsten projects. Both Boa Fé and Tabuaço have NI 43-101-compliant estimated resource reports.

We believe that the Chaminé and Casas Novas gold deposits at Boa Fé and the São Pedro das Águias scheelite (tungsten) deposit at Tabuaço are readily recoverable. Management’s internal goal is to initiate production at both locations in 2014. The Chaminé deposit at Boa Fé is well-suited for an open pit mining project under the experimental mining license, which allows for an open pit with a maximum surface area of 5 hectares. An initial NI 43-101-compliant resource estimate for the Chaminé and Casas Novas deposits was released on July 3rd, 2012. Management has accelerated drilling in order to evaluate nearby deposits and plans to complete a preliminary economic assessment by the first quarter of 2013. At Tabuaço, drilling continues in order to better delineate and upgrade the tungsten resource estimate, which is expected later this year. An internal preliminary conceptual mine plan has been completed, and management plans to apply for an experimental mining license. Management is in discussions with a number of unnamed parties to act as a potential partner to bring the scheelite mine to production within two to three years.

Colt Resources is also drilling areas adjacent to the deposits slated for production. The Boa Fé shear zone hosts a series of high grade, near-surface gold deposits and occurrences. Within the confines of the Boa Fé experimental mining license, confirmatory and exploratory drilling is also occurring at the Banhos, Braços, Covas and Ligeiro deposits. Historical drilling at these deposits suggests significant potential. At Tabuaço, other promising occurrences of scheelite around the São Pedro das Águias deposit are being investigated, namely, Quinta das Herédias, Quintã, Quinta do Paço and Quinta da Aveleira. These numerous targets at Boa Fé and Tabuaço have the potential to define additional economic deposits that could be brought into production with Chaminé, Casas Novas and San Pedro das Águias.

Nikolas Perrault, CFA, was appointed CEO in December 2008. While at Colt Resources, Mr. Perrault has a track record of opportunistically pursuing acquisitions of concessions in Portugal, most recently the Boa Fé gold project. Prior to Mr. Perrault’s arrival, the Penedono concession had been the company’s primary focus. Mr. Perrault is fast-tracking the development of the Boa Fé and Tabuaço projects.

Our price target is based on an estimated share value of attributable resources. The methodology ascertains a value for each property and accounts for relevant balance sheet items such as working capital, PPE (property, plant and equipment), marketable securities and debt. The value of each individual property is determined by adjusting the value of current resources for the expected recovery rate, mining/processing costs and net smelter royalties. Based on our calculation of share value of attributable resources, the target for Colt Resources’ stock is $1.35 supporting our Outperform rating. The valuation model is quite conservative in that it includes the development costs of two mining operations (gold at Boa Fé and tungsten at Tabuaço). In general, these costs are not usually incorporated into resource-based models. For comparison purposes, removing the development costs would produce a $2.26 per share value of attributable resources.

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