A gold mine bursting with potential

In today's penny share story, I want to show you the pure, explosive profit potential of small cap energy stocks and gold miners.

The action takes place in Ireland, where AIM-listed Providence Resources (PVR) announced in March that it found oil in the Barryroe field, off the south coast.

Providence's CEO, flamboyant Irish businessman Tony O'Reilly, said the find was "a defining moment for the Irish offshore oil and gas industry". He said: It's just like with winning the lottery you've got to buy tickets."

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By that O'Reilly means that Ireland's oil & gas industry needs more wells. His hope is that Providence's discovery will be "a catalyst to get more investment in the Irish offshore."

This is great news for anyone owning shares in Providence. The share price has trebled over six months.

And oil is not the only natural resource causing excitement in Ireland. It also has a thriving metal mining industry and its universities produce a stream of geologists and mining engineers.

This is not widely known by many gold enthusiasts, but Ireland also has gold. And near Omagh in Northern Ireland's County Tyrone, one penny share company, Galantas Gold (GAL) has the country's only operating gold mine.

Why this gold mine is only now coming to light

This is not just a hopeful project. Galantas is actually mining gold today, and making good money out of it. The mine has an interesting history.

It was started in the 1980s by RTZ Corporation for tax purposes, after the closure of its Cornish tin mine left it as a UK company with no UK mine. A change in the tax laws prompted RTZ to sell. Jack Gunter, who was about to retire after fifteen years with RTZ, saw the opportunity and stepped in to buy it.

In the tense political climate of the time it had one particular merit. As an open pit mine it required no rock blasting and that meant no explosives that could fall into the hands of the IRA. Gunter, now in this 70s, is the chairman today, while the mining engineer Roland Phelps has been chief executive since 1997.

Today, this experienced veteran duoare running a profitable, if small, gold mine. But they believe that the Omagh mine could soon be producing a lot more gold. And as Irish investors turn from chasing gold shares overseas to the gold on their own doorstep, the share price has been ticking up. Let me explain why.

400,000 ounces of gold could be exposed

Having last week been granted additional mining licences, Galantas's licences now cover some 600 km2 and estimates made by the independent consultant ACA Howe back in 2008 suggest that this contains some 400,000 oz of gold in nine different zones.

These are set out in the following table:

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As you can see, about three quarters of this gold is in the least certain Inferred' category, while only 16,000 oz is in the measured' category. But the 2008 Howe report also said that these gold-bearing zones could be extended to hold a total of 1.33-2.46 million ounces of gold, while further exploration targets could add another 400,000.

Now ACA Howe is back on the case. Before the end of May it is expected to provide a resource update, adding ounces to its 2008 estimate and moving some from the 'inferred' to the indicated', and the indicated' to measured' categories.

A whole new level to for Galantas to exploit and reap the rewards

This will be important information for the share price, but Howe has a second purpose. It will also comment on Galantas's plans to move from surface to underground mining.

Galantas has already produced its own mining scoping study, and Howe will provide confirmation of its cost estimates, of its operating methods and of its tailings storage. It will also comment on Galantas's plans to expand its processing plant, which uses a froth flotation' method to produce a gold concentrate that is sold, under a life of mine off-take agreement, to Xstrata Corporation.

Assuming that ACA Howe's report raises no obstacles, Galantas will apply to mine underground and, although this is more risky than surface mining and will no doubt require Galantas to raise some capital, it should take production to a new level. And that should be good for the business.

Last year, Galantas produced 6,479 oz of gold, with some silver and lead credits taking the gold equivalent' up to 7,307 oz. Although it is yet to publish full year results, based on figures for the first nine months the mine is likely to have delivered a net income of close to £1m, while cash in the bank should exceed £3m.

Galantas shares are traded on both the Toronto Stock Exchange and AIM, where the current share price of around 5p values the business at £11.5m. That looks pretty reasonable for a cash-rich business making £1m a year.

But chief executive Phelps is eyeing something much more substantial. With underground mining he reckons the mine could produce 50,000oz of gold per year. That should bring it to the attention of a much larger group of investors.

Clearly, much is riding upon ACA Howe's report in May. I will be watching it with great interest.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.