With the gold price on the way up again, there is an added incentive to look for undervalued gold plays. Trouble is, the market’s current aversion to anything that smacks of high risk disqualifies a large proportion of the junior miners on AIM. Peninsular Gold is a rarity in this market: a low-risk gold play that is less than fully valued on current reserves of gold and cash flow projections, but with big upside if its exploration work aimed at extending its reserves base pays off.

The company came to the market a year ago. It is controlled by a prominent Malaysian lawyer and businessman, Andrew Kam, who formerly worked for mining giant Anglo American. It is setting out to create a reserves base of 5 million ounces of gold in Malaysia, with between 10 per cent and 20 per cent of that expected to come from its first two targets – the Raub and Tersang projects.

There has been gold mining at Raub for centuries. It is believed to have supplied the gold for the roof of Angkor Watt. The mine operated until 1961 and was then shut down. Peninsular’s first move will be to produce up to 25,000 ounces a year from the tailings pool that is still in place from the 1960s. It is believed to contain around 180,000 ounces of gold. A carbon-in-leach plant is being installed and will start operating by the middle of next year. At the current gold price, that will produce a net operating cash flow of $11 million a year before financing costs.

But that is just the start. Last week, Peninsular announced the results of its latest drillings around the Raub area, lifting inferred resources from 107,000 ounces of gold to 135,000. With about a fifth of the assay results still to come in, that resource is bound to be lifted further in the near future. The target is to achieve an inferred resource for Raub of up to one million ounces – something the company reckons could take three years to achieve, at a cost of around $7 million.

On top of that, the Tersang project has an inferred resource from previous drillings of 528,000 ounces, with the potential to contain one million ounces in total. Drilling here has just started. It is aimed at proving up reserves at lower horizons than previously plumbed. There is a third target area, at Chenua, which is currently unexplored.

If all goes to plan, Peninsular will be producing 25,000 ounces a year by the end of next year. By 2009, that could be lifted to 100,000 ounces, with scope for further increases by 2010/11. For reference, the gross value of 100,000 ounces of gold is currently $65 million (£35 million). With a low cost operating base, Peninsular could be turning half of that into clear profit. By contrast, at the current 50p, the company is only valued in the market at £20 million. Within five years, it could be generating annual profits not far short of that figure.

Clearly, a lot has to happen in between. But what marks Peninsular apart from most of its peers is the fact that known reserves in the tailings can be turned into cash within a very short time to provide funding for further exploration. Those tailings are sufficient to keep production at the planned 25,000 ounces-a-year level for six years. As it stands, Peninsular is currently valued on little more than the basis of those tailings. One to pick up and lock away.

Peninsular Gold	AIM	£7.73m	14.00p	0.00p
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Other company articles:
Peninsular nears production			01/10/2008
Exploration Insights by Robert Tyerman			09/08/2007
Miners go for convertibles			24/07/2007
Peninsular Gold: low risk gold play			14/07/2006
Peninsular ups resource estimate			24/05/2006