After yesterday’s post on the background of Kentor Gold I have decided to post my analysis on one of Kentor projects, the Burnakura Gold Mine. Over the next couple of days/weeks I will post analysis on each of their projects and then bring it all together to provide my total valuation on the company.
The Burnakura Gold Project located 50km south of Meekatharra in Western Australia, it covers an area of $47.5km2 of gold prospective tenements on pre-1994 mining leases. The project has historic open pit production of 216,205 oz (1.8 million tonnes at 3.8 g/t) and open pit mining ceased in 1998 when the price of gold fell below $440 per oz.
In 2005 underground production commenced with a new plant and camp installed in November 2005. The mine continued to operate until October 2009 when the operation was placed in care and maintenance mode pending the development of additional underground deposits. Underground production resulted in 50,637 oz of gold from 264,731 tonnes mined at 5.94 g/t.
As the project was owned by an unlisted mining company, Jinka Minerals, the mine was never bought back into production (even with the huge increase in the price of gold) due to a lack of funds/limited access to funds for further exploration. As a result the project (along with Gabanintha and Jervois) were sold to Kentor Gold in 2011.
Burnakua currently has a 160,000 t/pa CIL Gold Plant which can be easily upgraded to 400 to 500,000 t/pa should a suitable grade be defined. There is also a refurbished ninety person camp, offices and workshop.
Kentor is also considering the use of a heap leach plant to process lower grade ore and on 20 June 2011 announced that they had acquired a heap leach plant, previously owned by Range River Gold (in administration). The plant acquired included:
· A two stage crushing plant
· Heap leaching equipment including an agglomerator, conveyors and stacker
· Carbon adsorption tanks
· Elution column and gold room.
The elution column and gold room will be used in the processing circuit at the Burnakura project and provides Kentor Gold with an effective means of re-commissioning the plant.
Since the acquisition Kentor Gold have also announced a 500,000 oz resource at the Burnakura Project. See announcement for further details.
To arrive at a value for the Burnakura project I have analysed potential project costs provided by an Intersuisse Report and a variety of other industry sources. I have split my valuation into two sections, the high grade operations and the heap leach operations. I then ran a discounted cash flow exercise (using a spread sheet that I developed) on each operation to arrive at a net present value. This involved hours of work and I am happy to share the spread sheet with those interested. For the purpose of this post I will however summarise the key points. Please be aware that this is not intended as advice and you should do your own research. The points below does not represent all my research but more so a snap shot/summary.
My initial projections for the production are conservative and include the following:
1. 250,000 tpa production after year 1
2. Mine life of 11 years until 2023
3. Average grade of 2.9 g/t
4. Average gold price over the life of the mine $1,550 (starting at $1,700 in 2012 and decreasing over time to $1,400 in 2023).
5. AUD/USD exchange rate starting at 1.05 and decreasing to 0.90 in 2023.
6. Cash costs of $850 per ounce including royalties.
7. Production of approximately 21,000 oz per annum after year 1.
8. Initial project capital expenditure of $2,500,000 in 2011 and 2012
9. Sustainable capital expenditure of $2,500,000 from 2013 to 2023.
Now since I ran these figures the price of gold has increased significantly. It is likely that we will be going into production with a gold price of close to, if not higher than $2,000 per ounce which obviously improves the profitability and therefore value of the mine. Initial discussion with other investors in KGL has also indicated that cash costs will be lower than my estimate. Kentor Gold is expected to release the feasibility on this project within 4 weeks. I will then re-evaluate the above figures to be more in line with their forecasts. What the above does however highlight is a base case scenario which is how I like to analysis the future potential of a company. Any improvements in the projects financials is additional reward on top.
The Net Present Value of the High Grade Operations is $45.8 million based on the above. There are currently 1,061,592,950 shares on issue with 59,611,358 options. On a fully diluted basis this equates to a NPV of just over 4 cents per share.
We can then add on the Heap Leach Operations. The assumptions for the gold price, exchange rate remain the same. Those than differ include:
· Plant capacity of 350,000 tpa
· Average grade of 0.91 g/t
· Average gold produced is just under 12,000 oz per annum.
· Cash costs per ounce of $750 including royalties
· Initial cap ex of $5 million in 2011
· Sustainable cap ex of $3 million in 2012 flowed by $1 million each year after.
· Mine life until 2029
This gives a Net Present Value of $33.9 million of 3 cents per share. Therefore the value can be summarised as:
High Grade Operations: 4 cents per share (fully diluted)
Heap Leach Operations: 3 cents per share (fully diluted)
Total Value: 7 cents per share (fully diluted)
On top of that if we say that cash on hand will drop to only $35 million within the next 3 – 6 months then we have another 3 cents per share value. That equates to the current share price of 10 cents which effectively means future upside from Gabanintha, Jervois and Andash is provided for zero, as long as Burnakura proceeds.
We also need to keep in mind that I am basing my analysis on the High Grade Operations on a 250,000 tpa plant and a gold price that is significantly lower than today’s spot price. It is likely that the plant’s capacity will be increased soon after production commenced and gold still appears to be in a long term uptrend that could provide further upside to for the project.
Finally this is the first time I have posted any figures on my blog so I will state again that you are required to do your own research, do not rely on my own figures as I am not a professional and I could have made mistakes. Investing and trading is risky and you should consult a licenced financial advisor.
I look forward to your comments and feedback and sharing my spread sheet with those who may be interested in comparing notes.
No comments:
Post a Comment