By Chris Shaw

Earlier this month Andean Resources ((AND)) released the results of its bankable feasibility study into the Cerro Negro gold project in Argentina, and both UBS and Credit Suisse were encouraged enough by the report to maintain their Buy ratings on the stock.

Deutsche Bank has also looked more deeply in the results but has come to a different conclusion, the broker initiating coverage on Andean with a Hold rating. The quality of the Cerro Negro project is not Deutsche's issue, as it sees it as an attractive operation given high reserve grades and low operating costs in the early years in particular.

The Cerro Negro project is projected to produce at annual levels of 240-290,000 ounces once ramp-up has been completed, but Deutsche suggests there remains upside to this level given the positive exploration potential of the region. Recent reports of excellent grades from drilling at Mariana Central support this view.

Currently three deposits have been delineated at Cerro Negro, while Deutsche has factored in two additional mines becoming operational from the other currently known deposits in the region. At least half a dozen deposits have already been delineated by Andean thanks to its previous exploration work.

The fact there are additional prospects in the region is something of an issue for Deutsche, as in calculating its base case valuation on Andean of $3.20 it is already factoring in an expansion of the project in coming years. Even allowing for current spot gold prices, the broker's valuation for Andean would only increase to $3.35, which is still well below the current share price.

The other issue for Deutsche is the project is now entering the project financing, construction and commissioning stages, which should take about two years. In terms of financing, Deutsche expects Cerro Negro will be 65% equity funded and 35% debt financed, so further exploration success would be a positive for the value of the equity portion of the project.

The current schedule calls for construction to start in the December quarter of this year and with commissioning of the project to be late in the March quarter of 2012. Both phases present some downside risk to valuation if Andean doesn't execute properly, so adding to Deutsche's view it is a struggle to find value in the stock at current levels.

Deutsche's price target of $3.20 reflects this, as it compares to the respective targets of UBS and Credit Suisse of $4.00 and $4.50. Deutsche notes its target price offers a FY12 earnings multiple of 9.5 times, which is above the mid-point of the peer group range of 5-12 times.

This is reasonable in the broker's view given the expected strong margins and resource upside of the project, Deutsche noting the grades and cash costs at Cerro Negro compare favourably with the best of similar projects.

Given production won't start until FY12 and it will be FY13 before the project's metrics and multiples become comparative, the fact the stock is trading well above its valuation sees Deutsche again emphasise how it finds it difficult to turn more positive on the stock at the current share price premium to valuation.

Shares in Andean today are in a trading halt as the company has announced a placement of 70 million shares at C$3.35 per share to raise C$234,500,000 in working capital for the Cerro Negro project. The stock had previously closed at $3.83, which compares to a trading range over the past year of $1.80 to $3.88. This implies just over 2% upside to the average price target according to the FNArena database of $3.90.

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