A Tale of Two Cities

A Tale of Two Cities was a book set in London and Paris. The FML story is set in Coolgardie and Laverton. Charles Dickens began that book with the well-known words: "It was the best of times, it was the worst of times ..." Hopefully, with FML we have seen the worst of times and we can now look forward to the best of times.

The question on everyone's mind now is how long it will take FML to resume production. I had originally thought that the sequence would be:

(1) drilling, followed by
(2) an interpretation of those results, then
(3) an updated resource and reserve estimate, leading to
(4) a feasibility study, that results in
(5) restoring the mill to working order, so as to enable
(6) a resumption of production.

If that sequence is correct, the second half of next year(2020) would seem feasible for a resumption of production.Since the mill at Laverton has a capacity of 1.4 million tonnes per annum (mtpa) then, assuming it either processes 1.2 mtpa and recovers an average grade of 2.6 grams per tonne (g/t) or processes 1 mtpa and recovers an average grade of 3.2 g/t, the resulting production would be 100,000 ozs pa. Support for that figure may be found on FML's website which contains the words: "In CY 2012, Focus produced 100,000 oz of gold from its Laverton operations and 85,000 oz from Coolgardie." For a mine life of at least 5 years, there would need to be at least 500,000 oz of gold available.

However, in the last few days it occurred to me that it does not make sense to resume operations at Laverton then stop, expand the capacity of the mill, then resume operations. So my prediction is that there will not only be a restoration of the mill but also an expansion of its capacity. What size would the expansion be? I do not profess to have any expertise in these matters, but if it were my decision, I would not be doing anything less than doubling the capacity of the mill. That would mean more money is required to resume operations at Laverton than a mere restoration of the mill and that may explain why Coolgardie is being sold, noting that the news of the proposed sale of Coolgardie came at about the same time as the news of good drilling results from Laverton.

It will be recalled that, when the feasibility study for Coolgardie was prepared, it only envisaged production of 40,000 oz pa initially but selling Coolgardie should mean that operations can be resumed by doubling (my estimate) the capacity of the mill and thereby producing 200,000 oz pa at Laverton. Obviously, a mine life of at least five years would require at least 1 million oz of gold to be available.

The bad news is that it would take additional time and money to resume production if the mill capacity is to be expanded. My guess, which is all it can be at the moment, is that it may take as long as mid 2021 (the year after next) but the good news is that the profits will be double the estimate set out in my Great Expectations post.

So, to redo those calculations (in AUD) with double the production: 200,000 oz, PoG 2,100 (up from 2,000 used last time), AISC 1,200, margin 900, profit of 200,000 x 900 = 180 million (m). Assume 20m for exploration leaves 160m less 30% for tax (ignoring that there are tax losses so as to not overestimate the amount available). That leaves 112m and assuming a payout ratio of 50% gives 56m for dividends. With 182,748,565 shares (according to the most recent Annual Report), that would enable a dividend of 30 cents per share.

If I am correct in thinking that the Laverton mill will be expanded and not just restored, those who bought shares in FML at or above the price Shandong paid (equivalent fo $2.50 after the 1 for 50 consolidation) need only be patient.

In short, upgrading the capacity of the mill will take more time but it will make more money. Of course, we all hope that by the time FML resumes production the price of gold (PoG) will be even higher than it is now.

As always DYOR and DYOC (Do Your Own Calculations).

Happily, we have recently seen a mention of resuming production in an announcement of drilling results and an investor presentation in addition to the usual Quarterly Activities Report. It seems we can now look forward to being told more about the path ahead for FML: not only what has been done but also what is going to be done and, ideally, by when we can expect it to be done.

Charles Dickens began the last paragraph of A Tale of Two Cities with the famous words: "It is a far, far better thing that I do, that I have ever done ..." Hopefully, with FML, what Shandong's expertise will achieve is a far, far better thing than has ever ben done with FML: sustainable, long-term operations supported by an exploration program that combine to produce dividends for those who hold their shares and capital gains for those who sell them.