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Xtract Resources PLC Finds Gold, But Should You Buy Into Its Rally?

Xtract Resources (LSE: XTR) up as it finds gold deposit it can mine straight away,” was the catchy headline from Alliance News on Wednesday.

With a tiny market cap of almost £17m, its stock has risen 128% so far this year on the back of higher volumes, but the rally may not be over yet.

However, I’d argue you must be a risk taker to bet on it (and even then, my advice would be to include this stock in a diversified portfolio). 

Gold

Xtract has defined a “significant concentration of gold on the intersection of two major geological structures at the Salvadori prospect at the Chepica Gold and Copper Mine in Chile,” the explorer said on Tuesday, adding that the discovery is the result of the exploration work targeting prospects outside the current mining area at Chepica. 

Jan Nelson, its chief executive, added: “We are delighted with the results of our exploration work in an area where we are able to commence mining within two weeks.

As a result, the stock rose to almost 0.4p from 0.32p, and trades at 0.35p for a daily performance of +9% at the time of writing.

Main Features 

  • The ore zone has been exposed by underground development (on level 2, i.e. 25m below the surface) and has an average grade of 17g/t of gold along 17m of drive intersection.
  • About 1,000oz of gold is expected to be available for production, within two weeks of mining being commenced, in the upper 25m, according to internal estimates. 
  • The area carries a value of $1m at an assumed price of $1,200/oz.

Xtract added that in order to define the ore zone to depth, a drill rig has been purchased and will be shipped to the mine, where it will also be used to define additional ore zones and increase the resource on the mine.

In Other News

Today’s news has contributed to a rise in the share price, but Xtract has been on a roll even before it announced it would raise £3m of new equity to finance its expansion plans. 

On 8 May, Xtract announced the completion of a placing of 1.2 billion shares at 0.25p per share, or about 20% of its total shares outstanding following the new cash injection, which would help it finance “two significant acquisition opportunities” that management believes they could transform Xtract into a “mid-tier producer“.

On 30 March, Xtract announced that it had raised £1.75m that would be used to fund further underground development at the Chepica gold and copper mine in Chile as well as to carry out drilling and metallurgical test work on two copper tailings dumps in South Africa.

The stock has risen 82% since late March as investors have been willing to bet on its aggressive expansion plans. Once caveat is that aggressive production policies are being implemented by large commodity houses, however, while the commodity cycle is unlikely to help smaller players for some time. 

On that basis, right now I'd personally rather consider a bigger small cap with a market value of £300m if I were to embrace risk.

One of the Motley Fool's top small-cap picks is a defensive business that is growing incredibly fast and has 'breathtaking' potential: its name is included in new research recently published by our analysts, which is free for a limited amount of time

We believe there's less risk involved than in Xtract, and its forward financial metrics suggest capital gains in the region of 20% to 30% could be achieved by the end of this year.

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.