I think many on this forum who have posted following the March Quarterly are misinterpreting the true nature and features of the oversize (OS) issue.
It seems that some are assuming that this could be the revelation of a fatal flaw in the project as implied in some of 2ic posts (although he seems to have wanted to step back his position in his last post).
Before going on to state the OS issue as I see it (based on the descriptions that Bruce Griffin gave in the March Quarterly Webinar), I’d like to point at the market activity of the last 3 days to add weight to what I’m suggesting about the OS issue.
The buying and selling profile of SFX is quite particular, it is not a stock that attracts large uninformed buying volumes (ie, it’s not a ‘hot’ stock where buying just flows in because of overoptimistic sentiment). On face value, I think it’s fair to say the quarterly didn’t have any hyped up promotional aspects to it that would inspire ‘accidental buying’, and yet we’ve seen 1.9mil shares trade in three days, some would say that that’s 1.9mil shares of selling, but I’m more focussed on the buying. Where is the selling coming from? that’s the easy part, as I said there have been views put forward here that would have spooked a few retail investors. Where is the buying coming from? not ‘accidental mum’s and dad’s buying I say, I suspect the buying is coming from those who are seeing deeper into the quarterly and instead of being sidetracked by the OS issue are seeing that the project is now progressing to a point where one can see proof of concept in action. For an institution who wants to get a foothold then accumulation is the only way, and they’ll do that when sufficient indicators say its a good time to do so, and I’m hoping this is what’s happening, and they are taking advantage of the spooked retail guys.
Onto the OS issue. Let me start off by stating that according to Bruce the OS issue has engineering solutions. The most drastic of those solutions in the introduction of a second DMU, and that solution would have a $20mil capex cost, with minimal additional operating costs.
For those interested in re-listening, the topic is covered between 5mins30sec and 11mins30sec on the webinar youtube.com/watch?v=Y7fWkAZ6p0g
In summary: the issues faced during the March quarter were two fold 1) Throughput related 2) Oversize. Actually they are both throughput issues but good to have the distinction.
Throughput - this related to issues between Jan - March where the designed throughput of 2.5-2.9mt per quarter was not being handled by the DMU for several reasons (co-disposal pump, water line, and problems with the screens etc. This meant that nameplate ore throughput at the DMU couldn’t be achieved and that means less undersize ore being presented to the production plant (WCP and CUP), which would then mean less final product. This issue was addressed by changing the liner and seal specifications in the co-disposal pump, and by making modifications to the screens and other features of the DMU. As a result the DMU is more robust, and now appears to be able to process the mine plan throughput rates.
Oversize - there is a larger percentage of oversize in the ore being pushed into the DMU, and as a result more oversize ore is being discarded by the DMU than was assumed in the BFS and hence only 75% of the mine-plan undersize (US) is getting presented to the WCP. In other words, with the mine-plan amount of ore being pushed into the DMU, there is only 75% of the mine-plan undersize being sent from the DMU to WCP. This clearly means that the WCP has less ore to work with and will produce less HMC than if it was full. So the fix is to ensure more ore is able to be processed by the DMU to ensure the WCP receives 100% of the feed specified in the mine plan.
Additionally, the 75% of feed presented to the WCP is resulting in 85% of the mine-plan final product estimates (rather than 75% of mine-plan final product as would be expected). This increased recovery to final product is simply a result of the undersize that is being delivered having a higher grade than was forecast in the BFS. So why did the BFs underestimate oversize and underestimate the grade in the undersize? because the drilling process ground up some of the oversize and turned it into undersize in the samples. The OS most likely has a much lower HM component and therefore the additional volume of ground up OS made the samples look like there was less OS, and that the sample undersize fraction had a lower grade than the real undersize fraction in the ground. I think this is actually very positive news that only some are recognising.
So what’s the solution? If 100% of ore to the DMU produces 75% of undersize and 75% undersize fraction produces 85% of final product, then to get 100% of final product you need to put 117% of mine-plan ore through the DMU.
How do you get 17% more ore through the DMU? At worst you add a second DMU. However given a second DMU will increase capacity by 100% it’s probably an overkill solution (unless some of the surplus DMU capacity can be utilised by the production plant, which would be a big win, this would see the project produce significantly more final product than expected. The extra DMU solution is a $20mil capex fix and won’t materially change operating unit costs, it will fix the problem KMS are dealing with, however there are probably more nuanced cost effective solutions.
The more likely fix is to modify the DMU so that it can handle the extra throughput. In order to determine the best modification solution (or whether a second DMU serves best) there is some data which needs to be gathered. They need to understand to what extent the oversize issue exists throughout the rest of the orebody (ie, were they just unlucky to hit a section of high % oversize in the first sections) and also determine what grade of HM the oversize fraction contains (ie, is it low grade as assumed or does the OS contain higher HM%). The answers to these question will determine the appropriate DMU modifications.
TB is a massive resource and if more ore needs to be pushed to the DMU I don’t envisage that effecting the long term economics of the project, I don’t think anyone believes that the current defined reserves are exhausting the available sands.
What is undeniable, is that many shareholders are disappointed that the March Quarterly wasn’t the quarter that we get confirmation that we are producing at nameplate. It was never meant to be that quarter, but it would have been nice.
Bruce stated that he expects that the June quarter will be the quarter that shows that we are at nameplate throughput on the DMU (as appears to be the case post the modifications in late March and early April). And that subsequent quarters will see a ramp up to nameplate final product as the modifications to address the oversize are implemented.
There is much more that could be said here, but I’ll leave it here for now.
(20min delay)
