Quiet on the hot copper front.
Crap news day ,gardening done, foie de veau thawing in readiness for a feast, too early for a tipple so thought I'd engage in a bit of navel gazing and dreaming of how my next toy might be funded.
HGO has finally stopped burning cash. Could the dilution days be over?
The key takeaway from the above discussions is the fact that after 4 years on a journey to find a life after the giant pit, HGO has finally stopped burning cash and will now be funded internally to increase resources to fill the plant and extend the mine life. It seems the dilution days are over.
Whats in store for the shareholders.
Economic assessments,Scoping studies and Feasibility studies are all about calculating a discounted cash flow valuation of what lies ahead as a reward for investors who fund the project.
We have all the guidance necessary to do an NPV if we are prepared to guess what the exploration targets will deliver.
Resources:
(a) MRE of 7mt at 1.08% copper at cut off of 0.6%cu
(b) An exploration target in modest depth extensions to known lodes of 10mt to 20mt at similar grades.
(c) Drill intersections that tell us those lodes go considerably deeper.
( d) The more uncertain deeps put us in with a chance for a bonanza lode.
( e) dropping the cut off grade to 0.4% increases resources by 55%.
The current mine plan is based on Kavanagh and Nugent which represent less than 60 % of exploration target in (b) so It seems adding Emily Star , Paringa , North Kavanagh and Coopers could increase the available high grade lodes and annual throughput of high grades from 1.4mt to 2.3mt. Dropping the cut off grade could add 55% to lift that to 3.55 mtpa which would fill the plant.
Seems that that might be what the plan is.
Mine life.
It's probably reasonable to say that it will take a couple of years to fill the plant at it will run at 1,4mt of high grade for 3 years and then run full, off into the never never, given all the resources and known lodes that aren't in the exploration target.
A conservative resource estimate once the targets are drilled might well be the MRE of 7mt plus the top end of exploration target (c) for a total of 27mt.
That is 1.4mt for 3 years and 2.3mt for 10 years.
The deeps and the rest could easily extend the cash flows out to 40 years plus.
Free cash flow from operations.:
Spread sheet that I have previously posted tell us that at current prices once the ramp up is sorted, we could expect Net Cash flows of circa $110m for the 3 years it takes to fill the plant rising to circa $170m pa going forward.
NPV:
The discount rate of 8 % that is regularly used in Mining company green field NPVs seems like nonsense to me. Maybe ok for Woolworths type cash flows but a start up mine's cash flow are about as uncertain as you can get. Whilst there is more certainty for HGO at this stage, the resource uncertainty and mining risk profile would reasonably need a much higher discount rate to entice investors .
The following spread sheet shows what a higher discount rate does to the cash flows especially the distant ones.
Observation.
The UG wouldn't have been a goer if the replacement cost of the Hidden Gem Assets had to be funded.
Success was only possible because the market cap was sitting at a fraction of those assets replacement cost when the exploration and UG mine development funding CRs were done at a discount to what was already an absolute bargain.
The good news:
Its pretty obvious a cu price of $4.50 won't be high enough to get green field developments funded which means there is a bright future for those who have bought assets for a song that can be put to work quickly with minimal pre-production cap ex..
Add to My Watchlist
What is My Watchlist?
