Ann: Mount Gunson Copper Prelim Feasibility Study, page-7

re: Ann: Mount Gunson Copper Prelim Feasibili... Hi Zoomyjeff,

Thanks for the feedback. I guess it’s all down to interpretation. I’ve gone back to the news announcement again to see was I missing something material – just in case – and, no, I think my earlier interpretation is still valid even if I expressed it in a rush. Maybe we’re just splitting hairs. You are right to say that the value of the plant would be negligible if the extraction of Windabout does not occur. However, today's announcement illustrates to me that management is very keen to seek to exploit Windabout in light of the results of the PFS on MG14, and as I show below, it could be worth multiple times of today's market cap to do so. I agree with you that the input prices in the study were reasonably conservative and that too can provide additional upside, in time.

1) MG14
The report says the following: “Sedgman Metals have concluded that the MG14 project could generate AUD21.5mm of surplus cash per annum over its two year life.” The assumptions are based on the following prices: Cu USD2.70 per lb; Co USD14.50 per lb and the AUD/USD of 0.86. Elsewhere, in relation to MG14 alone, it states that “The Mines Trust flow chart for the processing plant...Approximately 19,000 tonnes of concentrate per year would be produced, containing 6,250 tonnes of Copper and 215 tonnes of Cobalt.” Working backwards, and using the various price input factors, we can determine the amount of revenues that the project will give rise to, annually:
6,250 x 2,205 x USD2.70 = USD37.21mm = AUD43.27mm
215 x 2,205 x USD14.50 = USD6.87mm = AUD7.99mm.
Total revenues = AUD51.26.
Total surplus = AUD 21.5mm
Total cost = revenues less surplus = AUD51.26 minus AUD21.5mm = AUD29.76mm. Let’s say costs are estimated at AUD30mm, approx 60% of the revenues.
Total capital investment = “From the costs estimated in the Sedgman review, the project will generate surplus cash marginally above the capital cost of the MG14 mine. For the sake of illustration let’s assume that AUD21.5mm x 2 years is marginally above a nice round figure of AUD40.00mm.
Section 7 Marketing: “At present, there is a severe shortage of good quality copper concentrate and preliminary advice is that the MG14 concentrate will be keenly sought after.”

Conclusion: Metallurgical work on MG14 samples suggest that the concentrates have attractive characteristics that would be well sought after in the market. However, as attractive as MG14 may be in its own right and taking the Claudia Schiffer argument that nobody is going to get out of bed to mine an ore body which “marginally” breaks even, I interpreted from today’s announcement that there is something greater, more profitable at stake. The development of MG14 almost provides GUN with a free option (it pays for itself within two years), in that “Sedgman Metals review of a 1995 PFS on Windabout indicated that the MG14 processing plant could be upgraded to treat Windabout ore for a relatively moderate cost at nearly twice the annual throughput.” To me, this is the prize contained in the announcement and I would only assign a small probability that processing Windabout ore won't happen (the all-important probabilities that go into any personal investment decision)

2) Windabout Deposit
Again, according to the announcement, “the Windabout Sulphides are coarser grained than those at MG14 and a review of previous metallurgical work by the Ian Wark Research Institute concluded that recovery of copper into concentrate should be higher than MG14.” If this is the case, then with additional sampling, metallurgical testing and additional potential for resource upgrades etc., this just provides additional comfort to me that the company is going to proceed to exploit Windabout.

Just using very quick back of the envelope calculations, therefore, with 18.7mm indicated tonnes of 1.0% copper, 0.05% Cobalt and 10g/T silver, you get roughly the following in-situ value of the Windabout deposit :

(18,700,000 x 1% x 2,205 x 2.70lb) / 0.86 = AUD1.295bn
(18,700,000 x 0.05% x 2,205 x 14.50lb) / 0.86 = AUD0.347bn
(18,700,000 x 0.00001 x 2,205 x 12(troy oz) x 17.00toz / 0.86 = AUD0.098bn

Total in-ground value of Windabout deposit = AUD1.74bn

In this analysis, I make no assumptions or speculation about the recovery of Windabout, strip ratios, operating costs to mine etc. The announcement today just confirms:
• That it would be attractive to mine MG14;
• That mining MG14 would more or less pay for itself;
• That with additional minor cost modifications the processing plant at MG14 could possibly be used to treat ore from the much larger Windabout deposit.
• That the current market cap of GUN is less than 1% of the in-ground value of the Windabout deposit. If GUN moves to set up a processing plant at MG14, I would hazard a guess that operating margins will be a lot greater than 1% (for the sake of the argument, we have shown above that the operating margin in MG14 will be closer to 40%!)

Many other posters have regularly pointed out how undervalued GUN is, and it has been a very frustrating investment in recent years. Today’s pricing action and volumes look as if some stale investors exited, or maybe it was just that the story didn't seem as good as it first appeared; mere conjecture on my part: I simply don’t know. However, when considered in conjunction with the potential in the Coburn Zircon project, today’s announcement just serves to underline, once again, how undervalued GUN is. I stand by my earlier assertion that GUN is way, way undervalued, and as frustrating as the ride has been, it simply is not the time to get off the train now. I will buy more if the share drifts back from here. Maybe I didn’t express myself too clearly earlier.

All the best to holders.