Prominent analyst drops Belo Sun after painful pre-feas

Belo Sun Mining (TSX:BSX) shares fell by as much as 37% on Tuesday after releasing the results of a pre-feasibility study for its Volta Grande project in central Brazil, the country's largest gold project under development.

Not surprisingly a number of banks and brokerages downgraded Belo Sun on Wednesday, but independent analyst Lawrence Roulston's, a 25-year veteran of the resource industry, decision to drop coverage of the  Toronto-based explorer altogether must sting.

Roulston finds many positives from the pre-feasibility study that so bitterly disappointed investors but points to the number of ounces recovered in the PFS mine plan as the biggest letdown of the study:

No doubt, there will be efforts to optimize the project economics as it proceeds through the feasibility study. The most significant factor is that the PFS mine plan mines only 2.8 million ounces out of a total project resource of 4.7 million ounces measured and indicated and a further 2.2 million inferred ounces.

Quoting the news release: “The pit design was based on an optimized pit shell using a gold price of $910 per ounce.” The feasibility study will almost certainly use a higher gold price in the pit design, which would take a lot more ounces into the mine plan. That would extend the mine life and add to the project valuation. Other ways to reduce capital expenditures and operating costs will also be considered.

While the project has considerable upside from the PFS figures, it is an unforgiving market at this time. In the near term, there will most likely be continued selling and downward pressure on the shares before enough investors gain comfort with the potential upsides to the project. The company is well funded to continue work on the project.

We have followed this project from the beginning (when the company was named Verena, and traded at C$0.18). There is a great deal of upside potential in the longer term. However, in view of the current market conditions, we will be dropping coverage of this company.

Click here for Roulston's Resource Opportunities.