Why are shares in this small-cap ASX gold company charging higher?

This company's gold project is stacking up nicely.

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Shares in Challenger Gold Ltd (ASX: CEL) are trading higher after the company announced a major capital raising and a positive prefeasibility study for its Hualilan gold project.

Young successful engineer, with blueprints, notepad, and digital tablet, observing the project implementation on construction site and in mine.

Image source: Getty Images

Capital a vote of confidence

Despite Challenger announcing it had raised $85 million at 12 cents per share, the company's shares traded higher on Monday morning, hitting a high-water mark of 15.25 cents before settling to be 3.7% higher at 14 cents.

Challenger also announced that experienced gold company Executive Peter Marrone would join the board as Chairman Elect, and he would also take up $8 million worth of the new placement shares.

Current Challenger Chairman Eduarto Elsztain, who is also taking up shares in the placement, said Mr Marrone's involvement in the company was noteworthy.

He said:

The placement has been supported by Challenger's four largest existing institutional investors and two new institutional investors which have a successful history investing alongside Peter Marrone. The funds raised will enable the company to accelerate exploration at Hualilan with Challenger committing to its first material extension drilling campaign in several years.

Mining project looking solid

The prefeasibility study, meanwhile, said Hualilan, in Argentina, would have a payback period of 2.25 years and generate post-tax, free cash flow of US$1,982 million.

This was calculated using a gold price of US$3500 per ounce, compared with the current gold price of US$4518.07.

The capital cost to build the mine came in at US$232 million, with a further US$35 million calculated for contingencies.

The mine is expected to produce 105,000 ounces of gold in its first two years of production, followed by 12 years producing 135,000 ounces per year.

The operation would involve an open-pit mine with a 1.5 million tonne per year flotation plant and an eight million tonne capacity heap leach circuit.

The mine is expected to have an all-in sustaining cost of US$1422 to operate.

Challenger said several opportunities to improve the mine's performance had also been identified as part of the prefeasibility study process.

These included third-party funding of all electrical infrastructure, which could save US$48 million, metallurgical upside from changes to the heap leaching process, changes to the pit design, and "multiple capital and operatorship scenarios''.

Challenger said the mineral resource also remained open at depth and in both directions along strike.

The company said it now plans to "undertake a re-optimisation phase of the prefeasibility study to determine the final design case to take to definitive feasibility study''.

It will also carry out a 31,500m drill campaign designed to convert inferred resources to the indicated category, which has the potential to extend the life of mine.

Challenger Gold is valued at $329 million.

Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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