Sienna Gold Inc. (TSXV: SGP, BVL: SGP) – Initiating Coverage – … · 2012. 4. 27. · • Sienna Gold Inc. is a gold exploration company based in Calgary, Canada. • The company

Investment Analysis for Intelligent Investors

Siddharth Rajeev, B.Tech, MBA, CFA Analyst

Chris Porter, B.Sc

Research Associate - Mining

March 1, 2012

2012 Fundamental Research Corp. www.researchfrc.com Siddharth Rajeev, B.Tech, MBA, CFA

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Sienna Gold Inc. (TSXV: SGP, BVL: SGP) – Initiating Coverage – Prospective gold property located in

highly prolific area in northern Peru

Sector/Industry: Junior Exploration/Mining www.siennagold.com

Market Data (as of March 1, 2012)

Current Price C$0.32

Fair Value C$0.50

Rating* BUY

Risk* 5 (Highly Spec)

52 Week Range C$0.11 - C$0.75

Shares O/S 100.36 mm

Market Cap C$32.12 mm

Current Yield N/A

P/E (forward) N/A

P/B 1.7x

YoY Return -44.8%

YoY TSXV -29.7% *see back of report for rating and risk definitions

-

1,000,000

2,000,000

3,000,000

02-Mar-11 01-Jul-11 30-Oct-11 28-Feb-12

$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

Investment Highlights

• Sienna Gold Inc. is a gold exploration company based in Calgary, Canada.

• The company is focusing on exploration and development of the 100% owned Igor project located in northern Peru.

• Igor is in a highly prospective area with several large scale mines in production.

• Three primary deposits have been identified to date - Tesoros, Domo, and Callanquitas.

• The Tesoros and Domo deposits have a combined Indicated resource of 128,900 gold equivalent ounces, and an Inferred resource of 73,300 gold equivalent ounces.

• SGP aims to define a resource for the Callanquitas deposit by the end of 2012, on completion of the ongoing drill program.

• We estimate an initial 785,000 gold equivalent ounces may be defined at Callanquitas in 2012.

• Drilling will begin at the Tesoros and Domo deposits in June 2012, with aims to upgrade the existing NI 43-101 resource.

• The company's current cash position is $3 million. We estimate SGP will have to raise $5 - $6 million this year.

• We initiate coverage with a BUY rating and a fair value of $0.50 per share.

Risks

• Success of drilling, resource expansion, and development are important long-term success factors for the company.

• The value of the company depends on commodity prices.

• Heavy rains during the wet season can cause landslides in the region, which could block access to the property and/or drill sites.

• Political risk and opposition from locals could have an effect on project development and investor interest.

Key Financial Data (FYE - Sept 30)

(C $) 2010 2011

Cash & Cash Equivalents 50,030 6,818,207

Working Capital (150,870) 6,097,562

Mineral Assets & PPE 9,990,133 12,991,416

Total Assets 10,099,646 19,872,804

Net Income (865,708) (1,578,538)

EPS (0.02) (0.02) Sienna Gold Inc is a gold exploration and development company focused on the Igor property in northern Peru. A NI 43-101 resource

estimate was calculated in 2008 for two deposits giving approximately 128,900 gold equivalent ounces in the Indicated category, and

73,300 gold equivalent ounces Inferred. The company is currently drilling a third target and aims to complete an updated resource

estimate by the end of 2012. The project is 100% company owned and is not subject to any royalties.

An FRC

analyst visited

the Igor project

in February

2012.

Sienna Gold Inc. (TSXV: SGP, BVL: SGP) – Initiating Page 2



Company

Overview

Corporate

History &

Structure

Mining in Peru

Sienna Gold Inc. (“SGP” or “the company”) is a TSX Venture listed (SGP) gold exploration and development company focused on development of the Igor property in northern Peru. The company is also listed on the Lima Stock Exchange under the symbol SGP and has offices in Calgary, Canada and Lima, Peru. The flagship property is the 100% owned Igor concession located approximately 175 road km’s east of the regional capital city of Trujillo, operated through a wholly owned subsidiary. Gold and silver mineralisation is hosted within a series of north-south orientated structures comprising veins, breccias and mantos. The company continues to aggressively drill the property to increase the existing resource base. Based on information learned during our site visit, we believe that there is

significant potential to define a deposit in excess of 1 million equivalent gold ounces at

Igor. SGP have owned the property since 2005, and therefore, we believe that progress has been relatively slow, with only a relatively small NI 43-101 resource defined to date. However, we are pleased to see that over the last 12-18 months, the company has been aggressively drilling to define a significant deposit on the Callanquitas target. This, we believe,

represents potential for significant short term upside for investors.

The company was originally incorporated in July 1987 as Vortex Energy & Minerals Ltd. in Alberta. In May 2001, the name changed to Vortex Integrated Industrial Corp., and then to Sienna Gold Inc in April 2005. The Peruvian assets are held through its wholly owned subsidiary Sienna Minerals S.A.C based in Lima Peru. The company’s focus was on oil and gas until July 2004, at which time it changed to base and precious metals exploration. In June 2005, SGP acquired an initial 60% interest in the Igor property, followed by the remaining 40% in June 2007. Since 2005, the company has entered into three other option agreements to acquire interests in different mineral properties. All of the options, except for the Igor property, were dropped within two years of the initial agreements.

Peru has a well established mining industry demonstrated by the presence of many large players, both producing and in development. Some of the projects surrounding the Igor concession are discussed in more detail below. According to the USGS (United States Geological Survey), Peru was the sixth largest producer of gold in both 2010 and 2011, producing 164 and 150 metric tons, respectively. Furthermore, Peru was the second largest producer of silver and copper in both years. In mid-2011, investors were cautious on the outlook for mining in Peru after the election of left wing candidate Ollanta Humala as President in June.




Igor Property

Since the election, Humala has sought to protect the interest of Peruvian locals that have not benefited through investment from domestic/international mining companies. At the same time, Humala has also attempted to protect and increase investment from international companies by implementing a new mining code in October 2011. The new code introduces a new tax known as the Special Mining Tax (“SMT”), which is based on the operating income of the mine. SMT is on a sliding scale from 2% to 8.4%. The old royalty payment scheme, which ranged from 1% to 3% of the metal sales, has also been modified to be 1% to 12% applied to the company’s operating income. This, we believe, is encouraging for mining companies as royalties will now be paid only if they generate positive operating income. Our research shows that increased social conflict with the communities surrounding mining projects has been a recent deterrent for companies investing in Peru. An example of this is Newmont Mining Corp. (NYSE: NEM), who recently announced that they may redeploy up to US$4.8 billion of investment to projects in Africa, originally planned for development of the Minas Conga gold project in northern Peru. Violent protests in the Cajamarca region in December 2011, over environmental concerns, caused NEM to suspend construction of the project. We believe the updated mining code is positive for people looking to invest in Peru. It not only demonstrates stabilisation of the mining code, but also increases government revenue to build services and infrastructure for local communities throughout Peru, which until now have not greatly benefited from mining. Furthermore, we are pleased to note that in December 2010, SGP completed a letter of agreement with the local community of Callanquitas for a period of two years. As part of this agreement, SGP makes strategic donations to local organisations and manages the relationship with locals. Aims of the program are to increase understanding of the project, and highlight the benefits of the future mining operation, such as employment.

We believe this represents significant upside for SGP as it mitigates the risk of local

opposition delaying the project, which is a significant risk for mining companies in

Peru, as demonstrated by recent events in the country.

Property Overview

The property is situated on the west coast of Peru, in the district of Huaranchal, Otuzco province in the Department of La Libertad (Figure 1). The Igor concession comprises around 1,300 hectares, of which, the company has a 100% interest, with no outstanding royalty payments. Three primary deposits have been

identified to date named Tesoros, Domo, and Callanquitas. The Tesoros and Domo targets were the subject of initial exploration by the company, and therefore, are most advanced. An initial NI 43-101 resource estimate was identified in 2008, discussed in more detail below.




The Callanquitas deposit is the current focus of exploration and was first identified as a high priority target in 2008. SGP intends to define an initial resource at Callanquitas by the

end of 2012.

The company is required to pay an annual license fee to maintain the concessions (US$1 per hectare), which allows exploration on the concession. Before bringing the project to production, the company will have to apply for a mining license and acquire the surface rights to the land from the current owners. SGP has recently completed negotiations with the owners of approximately 300 hectares of high priority land in the area of the three deposits.

Figure 1. Location of the Igor property

Source: Company

Nearby Projects

The area surrounding the Igor property in northern Peru hosts several significant deposits, both producing and exploration stage. The location of the projects can be seen in Figure 5. The La Arena property owned by Rio Alto Mining Limited., (TSX.V: RIO) contains around 1.5 million oz of gold (measured and indicated), in the upper oxide mineral resource. Pre-production during construction and development of the mine produced some 51,000 oz of gold in 2011. The property has proven and probable reserves of 6.6 million ounces. Barrick Gold Corporation (TSX: ABX) operates two producing mines in the area: Lagunas Norte and Pierina. The Lagunas Norte mine is an open-pit, crush, valley fill heap leach




operation with an operating cost of just $182/oz in 2010. As of December 2010, the project has proven and probable reserves of 6.6 million oz of gold. The Shahuindo property is an advanced stage development project, 100% owned by Sulliden Gold Corp., (TSX: SUE). The most recent resource estimate gives 1.9 million oz of gold in the indicated category, with a further 1.4 million oz of gold inferred. A positive PEA (preliminary economic assessment) was completed in February 2010, that foresees a 105,000 oz/year heap leach operation, with a relatively low cash operating cost of $430/oz. The above examples provide a small sample of mining projects in the area surrounding the Igor property. This shows that Igor is well located within one of the most prolific and prospective gold belts in the world. Investors should note that low operating costs and multi million ounce deposits are a prevailing theme for these projects, and we believe that there is significant potential for SGP to realize a similar operation at Igor.

Figure 5. Location of Igor and surrounding projects

Source: Company

Property Ownership & History

There is evidence of historical shallow underground gold mining in the area surrounding the Igor concession, which began in Spanish colonial times. Further evidence of gold mining is shown by the presence of an abandoned 50 t/d gold plant located near the concession. The property derives its name from the son of a Russian immigrant who explored the site in the 1880’s. The NI 43-101 technical report for the property prepared by Henkle and Associates Inc.,




states that the initial option for the property was acquired based on sample results taken from the mine workings in the Tesoros fault zone. These samples indicated gold values greater than 6 g/t over 16m. SGP sourced the property from a private Peruvian company, Matrix Gold Mining Investments S.A., (“Matrix”), who originally optioned the property from an individual in 2001. In June 2005, SGP entered into an agreement with Matrix to acquire an initial 60% interest in the Igor property. The consideration was a cash payment of $1.5 million and the option to acquire 100,000 common shares at $0.30 per share until June 2010, subject to a NSR (net smelter royalty). As part of the agreement, SGP had the option to acquire the remaining 40% by June 2007. The company exercised this option in March 2006 and obtained 100% ownership of the concession at that time. Payment for the remaining 40%, and the NSR, was $300,000 cash and the issuance of 2.55 million common shares at a deemed price of $0.85 per share.

In summary, the total consideration for the Igor property was $1.8 million cash,

100,000 options to acquire 100,000 shares at $0.30 per share, and 2.25 million shares at

$0.85 per share ($2.2 million).

In August 2010, the company completed the acquisition of the South Igor concessions which comprises around 300 hectares of land immediately adjacent to the Igor property. The consideration was 355,000 common shares of SGP at a price of $0.155 per share ($55,000), and a cash payment of US$5,000.

Resource Estimate

Domo and Tesoros

Exploration carried out on the property from July 2005, to September 2007, allowed the company to produce an initial NI 43-101 compliant resource estimate for the Domo and Tesoros deposits in early 2008.

The estimate gives an Indicated resource of 97,000 ounces of gold at a grade of 4.3 g/t,

and 3 million ounces of silver at 133 g/t. An additional Inferred resources of 49,100 ounces of gold, at a grade of 4.5 g/t gold, and 2.3 million ounces of silver at 207 g/t are also calculated.




Source: Company

It should be noted that this resource estimate was completed in 2008, using a gold price of $700/oz and a silver price of $15/oz. A cut-off grade of 0.5 g/t was used for gold and 15 g/t for silver. SGP is currently drilling on the nearby Callanquitas deposit and plans to define an initial resource by the end of 2012. We believe this has the potential to add considerable

ounces to the total Igor property resource estimate. The company has long term aims

to define a 1 million gold equivalent ounce deposit on the property.

FRC Resource Estimate- Callanquitas

Based on information provided by management, and verified by us, on the approximate dimensions and the average grade of the deposit, we have calculated a rough estimate of the expected initial resource at Callanquitas. Using grades of 2 g/t gold and 200 g/t silver, we

estimate a total of around 275,000 ounces gold, and 27 million ounces silver. This gives

a total gold equivalent of around 785,000 ounces using our long term gold and silver forecast prices of US$1,200/oz and US$22.5/oz, respectively. It should be noted that this is based on infill drilling completed on Callanquitas to date, over an approximately 500m strike length. Management has indicated that the main structure may extend over 1 km in length, and some widely spaced step out holes have already extended the structure to 900 m. Therefore, we believe there is significant potential for

the resource to be extended beyond this initial estimate.

Location & Climate

The property is located approximately 158 km from the city of Trujillo in north western Peru. The climate is typical for alpine valleys in Peru with a wet season and a dry season. Heavy rainfall can occur in the wet season (January to April) and thick fog is common. Elevations




at the project site range from 2,900 m to 3,700 m above sea level.

The terrain is characterized by steeply incised mountain valleys, some of which currently support subsistence agriculture.

Access & Infrastructure

Road access to the property from Trujillo is on approximately 75 km of paved highway to the city of Otuzco, followed by an additional 100 km of dirt mountain road. In order to gain access for drilling and camp sites, SGP has constructed up to 13 km of access roads (see Figure 7 in the ‘Site Visit’ section) During our site visit, we learned that heavy rains during the wet season can cause landslides that may block access roads. However, we note that the company maintains dozers and excavators at the camp so material can be quickly removed. Power for exploration is currently generated on site. The closest high voltage (220v) power line is located in the town of Huaranchal some 14 km away. The NI 43-101 technical report for the property prepared in 2008, states that water for operations is available on site and mining labour can be sourced from local communities.

Geology & Mineralization

The Igor property is located in the Western Cordillera of the Peruvian Andes as part of the Oligocene - Pliocene Gold-Silver Epithermal Belt, which hosts several world class precious metal deposits. Geology of the project area comprises thick accumulations of sandstone from the Cretaceous age Chimu formation, overlain by siltstones, mudstones and shales of the Santa formation. During mineralization, the organic shales of the overlying Sanata formation acted as a “cap”, confining the hydrothermal fluids and resulting in the development of saddle reef or manto type mineralization. A manto may be described as a mineral deposit whose mineralization is strictly controlled by the structure and stratigraphy of the geology. The structures are often rod shaped and have concentrations of mineralisation where hydrothermal fluids are “trapped” by a confining layer. The region has been subject to an intense period of folding and faulting which is observable in the surface outcrops on the property. The picture below shows the most distinctive feature in the region known as “Bola de Igor”, a folded anticline which forms a pronounced dome shape on the Igor concessions.




Figure 2. Folded anticline known as Bola de Igor hosts the Domo & Tesoros deposits

Source: Company

Note: Spoil heaps from small scale local mining are visible at the top of the anticline. The sequence has also been subject to intense tectonically induced faulting. The most prominent fault, known as the Tesoros fault, strikes north – south, and shows lateral displacement of up to 45 m. Faulting is coincident with intrusions of dacitic dykes and brecciated zones, with one breccia zone up to 50 m wide. Several subordinate longitudinal fault structures, orientated parallel to the Tesoros fault, have also been in-filled forming mineralised veins. Faulting is thought to be associated with a large underlying mineralised dacite porphyry intrusive known as the Huevo de Condor. Mineralization of the breccia and dyke zone, as well as the adjacent saddle reefs / mantos, was facilitated by the fractures created through this faulting.

Three main targets have been identified on the property, which the company describes on the following page.




Source: Company

The Domo and Tesoros targets contain the 2008 resource estimate described above.

Figure 3. Deposit locations at the Igor property

Source: Company

2006 Metallurgical Testing

In 2006/2007, metallurgical testing was completed on drill core and surface samples.

Preliminary results show that for flotation processing of sulphide material, ore will

likely be ground to the -400 mesh size to achieve recovery rates of 46% for gold and

90% for silver.

Domo - A zone of bedding-parallel mantos and perpendicular veins along the

crest of the southeast end of the Igor Anticline. Mineralization is controlled by a

series of northeast-southwest trending faults.

Tesoros - A system of veins, breccias and mantos along a major north-northeast

striking fault that has localized the emplacement of dacitic porphyries and pebble

dykes.

Callanquitas - The most recently discovered and potentially the most important

target at Igor. Mineralization consists of a series of north-south striking,

structures over a zone some 900 meters long and 200 to 300 metres wide.

Mineralization is open to the north, south and at depth.




Tests were also completed for oxide (weathered) ore using a number of different reagents to assist recovery. The technical report concluded that further metallurgical work is needed to establish correct processing techniques and expected recovery. Management has indicated that most of the deposit is oxide material and therefore, we cannot comment on the expected recovery rates at this time. Although there are no plans to complete further metallurgical testing in the near future, the company aims to do this following the initial Callanquitas resource estimate.

Exploration History

2005-2008

The company began exploration work at Igor in June 2005, shortly after acquiring the property. Initial exploration included mapping and the collection of 3,100 rock, and 250 soil samples across the concessions. As can be seen in Table 3 below, results of rock sampling returned an average gold grade of 3.6 g/t and an average silver grade of 103 g/t.

Table 3. Surface rock sample assays results

Source: Company

From 2005 to 2008, the company completed three drill campaigns on the property. The initial focus was the Tesoros breccia and Domo manto zones, which host the NI 43-101 resource. Additional holes were also drilled elsewhere on the property, including hole CA-08-01b on the Callanquitas target. Results from this hole showed a 218 m long intersect of 0.6 g/t gold, and 22.3 g/t silver, this includes a 27 m interval of 2.1 g/t gold and 35.4 g/t silver. The last 2 m contained 1.7 g/t gold, 61.8 g/t silver and 0.44% copper. 2010-2011

In 2010, the company began an initial 2,500 m drilling program on the Callanquitas

zone. Drilling aimed to expand the near surface oxide gold mineralisation, and test for a deep, bulk tonnage, low grade porphyry deposit, first identified in 2008 with hole CA-08-01b. Following positive results from the initial 5 holes, the program was extended with

an additional 3 holes, for a total of 4,236 m. This phase of drilling concluded in June 2011. Prior to the start of drilling, surface samples were collected along the newly constructed access roads and drill pads. Of the 394 assayed samples, 22 had grades equal to or greater than 0.5 g/t gold, and 19 samples were equal to or greater than 31 g/t silver. Drilling successfully identified a number of mineralised intercepts. For example, hole CA-10-08 returned 35.05 m, with an average grade of 1.6 g/t gold, and 243.1 g/t silver including some intervals of up to 30.7 g/t gold, and 5,720 g/t silver. The following table provides a




summary of drilling highlights from the 2010-2011 program.

Table 4. 2010-2011 Callanquitas zone drilling highlights

Hole From (m) To (m)Length

(m)

Weighted

Average Au

Grade (g/t)

Weighted

Average Ag

Grade (g/t)

CA-10-02 12.0 47.0 35.0 0.57 16.43

And 195.2 196.0 0.8 4.96 908.00

CA-10-05 100.5 136.0 135.5 0.25 47.08

Incl. 138.5 140.0 1.5 6.40 1360.00

CA-11-06 159.2 170.5 11.3 3.86 45.50

Incl. 667.7 668.7 1.1 2.63 303.00

Incl. 736.6 737.2 0.6 2.20 1.70

CA-11-07 129.6 155.0 25.4 1.99 17.10

Incl. 141.2 151.5 10.3 4.22 39.30

CA-11-08 206.8 241.8 35.1 1.61 243.10

And 231.0 234.8 3.9 13.14 2112.70

Incl. 232.1 233.5 1.4 30.70 5720.00 Source: Company

The successful 2010-2011 drill program allowed the company to construct a new geological model for the Callanquitas zone. A main high grade structure was identified with several lower grade, sub-parallel structures of similar widths. The main structure extends from

surface to approximately 200-300m depth, with widths of about 20-40m, over a strike

length of 900m. The structure remains open to the north, south and at depth. Drilling has demonstrated that bonanza grade silver intervals are hosted within the deposit. In addition, the deepest sample from hole CA-10-01 at 426 m, was heavily altered and mineralised, which SGP believes indicates the presence of a porphyry copper deposit at depth.

2011 surface sampling

A total of 145 surface samples were collected on Callanquitas in late 2011. 63 of the samples were sourced from the southern extension and previously unsampled northern areas of the zone. 43 of the 63 samples contained more than 0.5 g/t gold and 26 contained more than 31 g/t silver. The samples not only confirmed mineralisation, but

also helped define drill targets for the current 2011-2012 drill campaign.

Current Exploration

In November 2011, SGP began a planned 10,000 m drilling campaign at the Callanquitas zone. Drilling comprises in-fill and step-out drilling aimed at extending the strike of the




deposit. As of the date of our site visit in February 2012, a total of 19 holes had been drilled on Callanquitas. Assay results from eleven drill holes have been released to date, the majority of which were designed to test the top 150 m of the main structure. Positive intercepts include hole CA-11-11, with 30 m of 0.508 g/t gold, and 306.1 g/t silver, including a 5.7 m interval of 0.665 g/t gold and 877.0 g/t silver. The most recent results released in late February 2012 show continued high grade gold and silver mineralization over long intercepts. Results include, hole CA-11-19 which identified a 55.5 m intercept of 2.2 g/t gold and 1,024.6 g/t silver. Included within this are two separate high grade intercepts of 9.4 m of 4.8 g/t gold and 2,933.5 g/t silver, and 6.1 m of 5.9 g/t gold and 1,910.0 g/t silver. In addition, hole CA-12-21 returned 74.5 m at 1.701 g/t gold and 110.1 g/t silver, including an interval of 17.6 m of 4.669 g/t gold and 403.0 g/t silver. The following map is a summary of significant drilling highlights;




Figure 4. Highlights from 2011-2012 drilling at Callanquitas

Source: Company




Future Development

Exploration & Resource Estimate

The company plans to complete the current drilling on Callanquitas by July 2012, with the potential to extend the program pending successful results, financing and rig availability. A semi-detailed environmental impact assessment (SD-EIA) study was started in 2011, that will allow the company to complete this additional drilling.

Drilling at Domo and Tesoros is due to restart in June 2012, and aims to update the

existing NI 43-101 resource estimate completed in 2008. In-fill drilling will increase confidence of gold and silver ounces contained within the deposit by upgrading the Inferred resources to the Measured and Indicated categories. Drilling aims to be completed by September 2012.

At the conclusion of drilling, the company plans to define a global Igor NI 43-101

resource estimate, which will include the Callanquaitas, Domo and Tesoros structures

by the end of 2012.

Acquisition of surface rights

Management has indicated that surface rights negotiations are complete for 300 hectares of high priority land. The purchase agreements will be signed within the next 6 weeks (mid-April 2012) We believe this is positive, and a necessary step in developing the project to production. Development Strategy

In discussions with management during our site visit we learnt that SGP is evaluating several long term development strategies. We have summarized these as follows;

• Commence small scale production (e.g. ~250 tpd) within the next two years with ore from the Domo and Tesoros deposits.

• Larger scale production (e.g. ~2000 tpd) with ore from Domo and Tesoros, as well as the potentially larger Callanquitas deposit. This scenario will likely have a longer development time line.

• Direct ship ore from Igor to be processed at one of several operations in the area surrounding the property. Management believes there are several third party mills in the region with excess capacity.

Given the short term potential for a large deposit to be defined on Callanquitas, we

believe that larger scale production taking ore from all three deposits is the most likely

scenario.

In order to develop the property to production, the ongoing SD-EIA will be expanded and updated to produce a comprehensive environmental study in preparation for a pre-feasibility




Site Visit

study (“PFS”). We caution the reader that production is dependent on acquiring the surface rights, mining license, and environmental studies. As discussed above, this has recently caused development delays for some mining projects in Peru. However, given the company’s ongoing relationship with the local community, we do not anticipate major local opposition at this time. Potential Processing and Mining Methods

A study completed by SGP in 2006, envisioned a 250 tpd (tonnes per day) mill processing ore from the Domo and Tesoros deposits. With the new Callanquitas resource expected in 2012, we believe that this could now be expanded to 1,500-2,000 tpd. Gold and silver would likely be recovered through whole-ore agitated vat leaching followed by a Merrill-Crowe circuit, which is widely used in northern Peru. A relatively low capital cost of $10 million was estimated for the 250 tpd operation based on construction via EPCM (Engineering Procurement and Construction Management). A contractor would be used to mine the ore. The deposits are generally located on very steep topography and therefore, there is no scope for locating a processing facility in the immediate vicinity. Ore would likely be trucked a short distance (2-3km) into the valley where there are several possible processing sites within the SGP concession. Due to the steep topography, ore will likely be extracted using underground stope mining.

Additional Targets on the Property

No other targets have been identified on the properly at this time. The 300 hectare South Igor concessions acquired in 2010, which are contiguous to the main Igor property, have not been explored to date. Management has indicated that there are no plans to drill these targets in the short to medium term as exploration is focused on the three primary deposits. On February 20, 21, and 22, 2012, we had the opportunity to visit the Igor property, the SGP offices in both Lima, and Trujillo, and observe the ongoing drill program at Callanquitas. Photographs taken by us during the site visit are provided below.




Figure 6. Core storage facility at SGP offices in Trujillo

Source: Fundamental Research Corp.

Figure 7. Some of the 13km of access roads constructed by SGP to date





Figure 8. Manager of Exploration Owen Miller (left) and project geologist at the camp


Figure 9. Igor camp





Interest in

Other

Properties

Management

Figure 10. Drilling hole CA-12-26 at approximately 150m depth


The company currently has no interest in other mineral exploration properties. However, management has stated that they are seeking new projects throughout South America, including Peru, Columbia and Chile. Although having only one property may represent a risk, we do not see it as significant. The

company is able to focus on the Igor project which is in a highly prospective area with

several large scale mines already in production. In addition, the property has a resource base which the company plans to expand with the ongoing drill program.

Management and board hold approximately 7.1% of the outstanding shares. Biographies of the company’s management team and board of directors, as provided by the company, are below: John M. Rucci, President - Mr. Rucci graduated from the University of Calgary in 1977 with a Bachelor of Commerce degree. During the past 33 years, Mr. Rucci has been involved with numerous public and private companies. He has been involved in many startup companies, providing deals and consulting services to these ventures. From 1996 to 1997 he was director of Fort Point Resources Ltd, a public oil and gas company trading on the Vancouver Stock Exchange. From 1996 to 2001, he was chairman of the board for United




Tex-Sol Mines Inc, a publicly traded gold exploration company. From 2001 to present, he has been the president of the Corporation. Gordon Forbes CA, CFO - Mr. Forbes obtained his CA in 1968 and spent 30 years with a major accounting firm from which he retired as a tax partner. Since retiring from public practice, Mr. Forbes has consulted to various public companies. He joined Sienna Gold Inc in 2004 in a consulting capacity. Mr. Forbes was appointed Chief Financial Officer in May 2009. Owen D.W. Miller, Manager of Exploration - Owen D. W. Miller is a graduate of Aberdeen University in Scotland with an Honours Degree in Geology and Mineralogy (1st Class). He then did a porphyry-related Ph.D at the same university. He has over 18 years experience in the mineral exploration industry and has worked on a wide range of economically important deposit types. He has travelled extensively and lived for the past 18 years in Latin America, is bilingual in Spanish and also speaks some Portuguese. Dr Miller first worked in Latin America for Newcrest in Argentinean Patagonia. He then worked as a contracting/consulting geologist for various companies in Chile and Argentina. He moved to Peru in 1998 as a senior geologist with Barrick before returning to consulting in 2001, specializing in database management and GIS systems and their practical applications in mineral exploration. He began working for Sienna in 2010 as a consultant and became exploration manager in 2011. Rafael E. Romero, Director - Rafael E. Romero, was born and raised in Peru and was educated in North America, at Northeastern University. He is presently a senior executive and bank officer at Credicorp (NYSE: BAP) with experience in loans and new projects analysis as well as expertise of the import/export business. Mr. Romero currently manages that bank’s personal banking department. He brings over 20 years of experience in Peruvian banking plus other related businesses as part of the Romero Group of companies where he has contributed to the formation of several successful companies. D. Richard Skeith, Director - Mr. Skeith has over 30 years experience as a solicitor advising a variety of private and public corporations. In addition he has been or is currently a director or officer of a number of public and private companies in the oil and gas production and services sectors, in mining, biotechnology, real estate and telecommunications. Mr. Skeith is a director of the Corporation. Andrew S Burgess, Director - Chair, Audit Committee. Mr. Burgess has a B. Comm (Hons) degree from the University of Manitoba and is a Chartered Accountant (Alberta) and Certified Public Accountant (Illinois). He has held directorship and or officership positions of several listed mineral exploration and mining companies including Consolidated Brinco Ltd., Western Canadian Mining Corporation, Sulphurets Gold Corporation, Dominion Explorers Inc., Ecstall Mining Corporation, United Tex-Sol Mines Ltd., Sienna Gold Corporation and Spectrum Mining Corporation. These companies have been involved in the mining of asbestos and coal and the exploration for copper, gold, lead, zinc, silver and rare earths. The projects these companies have initiated include the Quinsam coal mine, the




Management

Rating

Kerr/Sulphurets copper/gold porphyry deposit, the Croinor gold deposit, the Akie sedex hosted lead-zinc deposit, the Clavos gold deposit, and the Wicheeda rare earth deposit. Warren Pratt, Director - Bilingual Consulting Geologist (BSc Geology Hull, 1986; PhD Structural Geology, University of Wales, 1990). Dr Pratt has a strong mapping background and in 1994 won the President’s Award of the Geological Society of London for detailed thematic mapping. His extensive International experience includes: Argentina (Au/Ag), Arizona (Cu, training), Chile (Cu), Cyprus (VHMS, ophiolite), Ecuador (Au/Ag, Cu/Mo), Egypt (Au, training), Malaysia (Au), Norway (VHMS, Cu), Peru (VHMS, Au, Ag, Cu/Mo), Sweden (Au, Zn, Pb) and Finland (Au). He has a proven track record of generating Au/Cu targets in under-explored areas. In recent years he has consulted at working Au mines (Bjorkdal, Sweden: Pahtavaara, Finland), and on several major epithermal Au and porphyry Cu discoveries, including La Bodega (Ventana Gold, Colombia), Regalito (Lumina, Chile) and El Galeno (Lumina, Peru). Charles Littlejohn, Director - Mr. Littlejohn graduated from the University of Western Ontario in 1969 with a Bachelor of Arts degree. He also holds a law degree (J.D. cum laude) from the Southern California Institute of Law. Over the past 40 years he has been a founder and director of numerous companies, including a mutual fund management company. He has also taught classes in International Law at a California law school. He has a keen interest in geology, with considerable experience in PGE metals plus gold and cobalt deposits in Northern Ontario. He also has held numerous positions in the oil and gas industry and was admitted as a full member of the Society of Petroleum Engineers in 1984. For the past 22 years he has managed a small private hedge fund. He currently resides In San Luis Obispo, California. Declan B. Livesey, Director - Independent Engineering Consultant (PhD Mining Wales, 1974). Dr Livesey has over 30 years experience in the mining and oil and gas industries. He has held a number of management positions within major resource companies including VP Operations and Engineering with a major US corporation. We believe that one of the most important aspects of a junior mining company is its management. Therefore, we have developed a management rating system as a quantitative way to rate management based on a number of factors, including technical experience, the ability to raise financing, and the management’s time commitment to the company. Our net

rating for Sienna is 3.95 out of 5.0.




Strength of

Board

Financials

Management Rating

3.95

4.25

4.00

4.00

3.50

4.00

0% 20% 40% 60% 80% 100%

Net Rating

Team's focus on the company

Experience in projects similar to the current project

Track record in raising capital/w orking for public

companies

Experience in putting mines to production/generating

prospects

Technical Experience

It should be noted that SGP’s management team does not currently include anyone who is experienced in putting mines into production. In our discussions, management are aware of this and aim to employ someone with the necessary skills/experience as the project advances to feasibility stage. Although the project is not yet at an advanced stage, we consider the ability for SGP to attract skilled and experienced individuals a minor risk. We believe that the Board of Directors of a company should include independent or unrelated directors who are free of any relationships or business that could materially interfere with the director’s ability to act in the best interest of the company. An unrelated/independent director can be a shareholder.

Poor Average Good

None of the directors have filed for personal bankruptcy X

Five out of seven hold shares in the company X

The Audit committee is composed of three board members,

one of which is independentX

The Compensation committee is composed of six board

members, five of which are independentX

XFive out of seven directors are independent

The company reported a net loss of $1.58 million (EPS: -0.02) in FY2011 (12 month period ended September 2011). We estimate that the company had a burn rate (cash spent on




Valuation &

Rating

operating and mineral properties) of $0.37 million per month during FY 2011. At the end of FY2011, the company had $6.82 million in cash. Working capital was $6.10 million (or $0.06 per share). The table below summarizes the company’s liquidity position.

(in C$) 2010 2011

Working Capital (150,870) 6,097,562

Current Ratio 0.4 8.9

LT Debts/ Assets - - Burn Rate/month (113,072) (367,797)

Cash from financing activities 860,091 10,563,675

The company's current cash position is $3 million. CAPEX budget for 2012 is $8

million - which implies the company will have to raise $5-$6 million this year.

Options and Warrants Outstanding: We estimate the company has 8.89 million stock options (weighted average exercise price of $0.28), and 19,771,860 warrants outstanding (exercise price - $0.60). We evaluated SGP based on a comparables analysis. We could not conduct a Discounted Cash Flow (DCF) valuation as we do not have information on the expected recovery rates of the oxide material, which is the primary ore type at Callanquitas. Comparable companies are typically selected based on target commodity, stage, region, type of deposit and market capitalization. As we are not aware of many direct comparables to Sienna at this time, we compared SGP's Enterprise Value to Resource ratio to the average ratio of a broad array of gold explorers (pre-production), as shown in the chart below. We used 100% of measured and indicated, and 50% of inferred/historical resources of companies included in the analysis. As for Sienna, we used 100% of indicated and 50% of the inferred resource on the Tesoros and Domo deposits. We normally apply a 50% discount to our in-house resource estimates, however, we only applied a 25% discount to our estimate on Callanquitas based on our confidence in the deposit.




Risks

EV /

Resources (Au. Equiv.)

1 Sulliden Gold Corporation Ltd SUE $96.2

2 Midway Gold Corp. MDW $66.8

3 Cadan Resource CXD $66.8

4 Sona Resources Corp. SYS $66.6

5 Klondex Mines KDX $58.6

6 Orezone Gold Corp. ORE $57.8

7 Prodigy Gold Inc. PDG $50.3

8 Trelawney Mining and Exploration Inc. TRR $49.8

9 Inter Citic Minerals Inc. ICI $48.1

10 Inca One Resources IO $44.6

11 Kimber Resources KBR $40.4

12 Magellan Minerals Ltd. MNM $39.6

13 Northern Gold Mining Inc NGM $37.8

14 Sienna Gold SGP $37.7

15 Sutter Gold Mining Inc SGM $35.6

16 Rye Patch Gold RPM $31.1

17 International Tower Hill Mines ITH $28.8

18 Moneta Porcupine Mines Inc. ME $24.6

19 Temex Resources Corp. TME $23.7

20 Gowest Gold GWA $20.9

21 Rio Novo Gold RN $19.4

22 Laurion Mineral Exploration LME $14.2

23 Seafield Resources Ltd. SFF $6.2

Average EV / Resources ($/oz)1

$43.6

* Resources include all measured and indicated, and half of inferred and historical resources

(1) Excluded SFF as it is an outlier

Company SYM

As shown in the table above, the peer average EV to resource is currently at $44/oz. This metric used to be about $85/oz at the same time last year. We believe the current metric of $44/oz significantly undervalues gold exploration projects – especially because the overall market sentiment on juniors is not as optimistic as it used to be in early 2011. Also, gold projects in Peru (especially the ones in the same region as SGP) typically trade at higher multiples compared to projects in other regions largely because of their lower operating costs and the overall attractiveness of the region (including infrastructure and geology). We, therefore, valued SGP's resources based on a $60 per oz multiple - which gave us a fair value of $0.50 per share on SGP.

Therefore, based on our review of the company's assets and valuation, we initiate

coverage on SGP with a BUY rating and a fair value of $0.50 per share.

The following risks, though not exhaustive, may cause our estimates to differ from actual results:

• The value of the company is dependent on commodity prices.

• Access to capital and share dilution – the company might have to raise $5 - $6 million this




year.

• The company currently has no operating mines.

• The company has interests in only one mineral property.

• Limited metallurgical testing has been completed meaning reliable recovery rates have not yet been established.

• Landslides are common in the area after heavy rains during the wet season (January to April). Given that the project is in a mountainous region, this has the potential to delay exploration and development/production in the future.

• Political risk and opposition from locals could have an effect on project development and investor interest.

• SGP’s management team does not currently include anyone who is experienced in putting mines into production. The ability for SGP to attract skilled/experienced employees is a minor risk.

We rate the company’s shares a RISK of 5 (Highly Speculative).




Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. “FRC” does not own any shares of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject company. Fees were paid by SGP to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, SGP has agreed to a minimum coverage term including an initial report and three updates starting with this report. Coverage can not be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The performance of FRC’s research is ranked by Investars. Full rankings and are available at www.investars.com. The distribution of FRC’s ratings are as follows: BUY (68%), HOLD (9%), SELL (4%), SUSPEND (19%). To subscribe for real-time access to research, visit http://www.fundamentalresearchcorp.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction.

Documents

Sienna Gold Inc. (TSXV: SGP, BVL: SGP) – Initiating Coverage – … · 2012. 4. 27. · • Sienna Gold Inc. is a gold exploration company based in Calgary, Canada. • The company