tropicana: bountiful or borderline

MiningNews - The Metal Detective
Tropicana: bountiful or borderline?
Tuesday, December 18, 2007

FOUR million ounces sounds like a lot of gold. But analysts are divided over the worth of AngloGold Ashanti's Tropicana discovery in the Western Australian desert. The Metal Detective, by Stephen Bell

When the South African gold major unveiled its initial resource estimate early this month, it was cause for celebration.

The 62.8 million tonnes grading 2.01 grams per tonne equates to 4.05Moz of the yellow metal, a hefty treasure trove for AngloGold and its 30% local partner, Perth-based Independence Group.

But it was not the life-changing event that Independence punters had hoped for, despite Tropicana matching expectations of a 3-5 million ounce deposit.

After shooting to a high of $8.54 in the second half of November, presumably on speculation of the impending Tropicana number, shares in Independence have struggled ever since.

The stock regrouped on December 3, the day of the announcement, to hit $8.35, but last week slumped as low as $7.30.

The shares closed Monday at $7.49, down 4% in line with the overall market slump.

Admittedly share prices generally have been shaky of late due to renewed U.S. recession fears, but MD expected Independence to show a bit more golden gloss.

The problem, as MD sees it, is partly one of timing. AngloGold discovered Tropicana five years ago. In the meantime, Independence (as the junior partner) dished out results, assay-by-assay, as the operator churned through 140km of drilling.

As more results came in, and with gold prices rising appreciably, the buzz grew to deafening proportions.

Independence managing director Chris Bonwick had to tread a fine line – keep the market informed but avoid too much hype.
You can't fault a junior for talking up the prospects of a major new gold find.

But Tropicana was in gestation for so long that expectations rose to stratospheric levels.

So high, that the market now appears a bit confused about the ultimate implications for Independence, which mines nickel at Kambalda.

Will a previously rumoured gold IPO eventuate, or does the gold stay in-house? Or will AngloGold – now run by former WMC and Sons of Gwalia executive Mark Cutifani – eventually move to take out the junior party?

Here again, the problem is one of timing.

Bonwick expects AngloGold to start submitting the relevant government approvals documents early next year, leading to a bankable feasibility study starting mid-2008.

All going well, construction would kick off in the second half of 2009.

But Independence concedes that the permitting and approvals process could take at least 18 months.

Given the slow pace of approvals in WA, it would not surprise MD if the timetable slips by a year or so.

And that means it could be well into the next decade before the bullion starts pouring.

The pre-feasibility study is examining mining and processing rates of 4.0–6.5Mtpa, implying an average annual production rate of between 240,000–380,000oz gold.

It is not an earth-shattering rate, not when the Boddingtons, Lihirs and Telfers of the world are looking to push up towards 1Moz pa.

Goldman Sachs JBWere was unimpressed.

"On our analysis the project needs to run at the upper end of the throughput range to generate the economies of scale to make money on our long-term gold price forecast A$730/oz," GSJBW said.

Based on that price forecast, the broker views Tropicana as "little better than break even", with the value of Independence's 30% share worth a modest $20 million.

"However at $A1000/oz we estimate IGO's portion to be worth $350 million," it added.

Macquarie is more generous, betting that Tropicana is likely to deliver an eventual resource base "materially larger" than the initial estimate.

It values IGO's stake at $300 million, or $2.53 per share, underpinned by the continued growth in resources at the project.

As for Bonwick, he remains convinced about a golden future, judged by his comments in a (largely ignored) Open Briefing published a few days after the resource number came out.

"My personal view is that we have only just scratched the surface and, over time, the belt will be shown to have significant gold endowment," he said.

The partners now have aircore results extending 20km along strike from Tropicana with "similar values as those that resulted in the initial discovery", he said.

Reverse circulation drilling of these high priority targets has only just started, and geophysical data indicates that the mineralised corridor "may be much longer, perhaps 50 to 80 kilometres".

"New discoveries in this area would extend or expand any operation based on the Tropicana - Havana Deposits," he said.

An expansion would be good news, given the costs associated with launching a virgin gold mine at the remote site 400km northeast of Kalgoorlie.

Nevertheless, Bonwick expects that a cash cost below A$400/oz is an "achievable target".

As it stands, that forecast is just a wish. It may be achieved if all the stars line up and costs don't blow out too far.

MD hopes that Bonwick and Cutifani keep finding more gold.

Tropicana needs it to make the numbers stack up.