It is the AVB Share Value that is of importance not the momentary share price in making your decision about whether to accept the opportunistic offer from OZL. Given their stated tactic of having watched AVB for 3 years the question may well be asked why now? Below is an illustration of the value locked up in AVB that has the potential to be released.
Centrogold:
The key point that most miss with Centrogold is that there is no risk to licenses being approved. The question is will the INCRA injunction be lifted in the near term or will there be a 12 to 24 month delay while a new set of licenses is obtained? The responsibility for this confusion rests with the company. It could be argued that the conservatism of the CEO and board is to blame. The Global Mining Research report of 18th September 2017 argues along similar lines in general.
- The company, in GMR’s opinion, is spending too little on near-mine and regional exploration reflecting an overly-cautious stance, despite substantial cash flow – the correct conservative view some years ago, but no longer appropriate.
The next most important point is that Gurupi/Centrogold was purchased from Jaguar after an exhaustive process and when Jaguar had very low cash reserves and looming loan repayments due. Jaguar had been making interest payments to Sprott by issuing capital to Sprott. It would be difficult to argue a convincing case that Jaguar were in the stronger bargaining position when striking either the initial contract with Avanco or more importantly the second revised deal that saw Avanco take ownership. That second deal has already saved Avanco share holders US$18 million approximately on JORC’d up royalty payments compared to the first deal. Those numbers will continue to grow as further resources are detailed. In addition, Avanco have a strong asset in Wayne Philips who has an extensive history with the project. The project was previously owned by Kinross, of which Wayne Philips was the technical director, and In conversation direct, he has told me he argued against the initial sale by Kinross as he believed the project would be a valuable asset to that company.
The next important point at Centrogold is that the INCRA action was taken out against MCT Mineracao (Avanco owned subsidiary) and the State of Maranhao as joint defendants. That is the State wants a positive resolution as well as Avanco. The flow on effects to the local and state economy have been calculated at hundreds of millions of dollars. If you read the available information in court documents you see that the DNPM (Brazilian Dept of Mining), the State of Maranhao and Avanco are all arguing for the lifting of the injunction. INCRA and the judge are effectively saying that while they understand this view, they firstly must address the procedural hiccup that was created by Jaguar initially. This procedural oversight was simply Jaguar not working with INCRA, (the Federal Government body in control of the land) to secure access and ownership of the mining area. Avanco have stated in the 2017 Annual Report that these procedures have now been fulfilled in conjunction with INCRA.
Licensing update
All the mineral rights and exploration licences for CentroGold are confirmed to be in good standing with the Departamento Nacional de Produção Mineral (DNPM).
The Company continues to work towards the lifting of the licensing injunction and anticipates a decision as early as June 2018. Good progress was made towards this during 2017 with two key surveys completed:
- a survey examining the impact of artisanal mining activities; and
- Instituto Nacional de Colonização e Reforma Agrária (INCRA), being the regulatory authority responsible for certain surface rights at CentroGold, undertook their own survey.
Both surveys will contribute to an independent report by INCRA which the Company believes will support the lifting of the licencing injunction. (my bold)
The resource at Centrogold is a very attractive asset. The Avanco ASX release of 21st of March 2018 stated,
The Indicated and Inferred Mineral Resource Estimate (MRE) for Contact has increased to: 8.2 million tonnes at 3.1 g/t gold, containing 811,000 ounces of gold
Infill drilling has resulted in a 34% increase in gold grade and a 2% increase in tonnes, for a 37% increase in contained ounces of gold (read 2% increase in costs, 37% increase in revenue and possibly a 100% increase in profits)
The Indicated and Inferred Mineral Resource Estimate (MRE) for Contact has increased to:
8.2 million tonnes at 3.1 g/t gold, containing 811,000 ounces of gold
- Infill drilling has resulted in a 34% increase in gold grade and a 2% increase in tonnes, for a 37% increase in contained ounces of gold
- The Inferred and Indicated MRE for the global CentroGold project now increases to:
32.8 million tonnes at 2.1 g/t gold, hosting 2.217 million ounces of gold
- Within the Contact MRE, Indicated Mineral Resources have increased by 203% to 509,000 ounces at a grade of 3.6 g/t gold
A drilling campaign of a few months has increased JORC from the initial 694,000 ounces to 2.217 million ounces and increased global grades from 1.8 g/t to 2.1 g/t. This is not totally surprising as there was a Nth American style JORC in excess of 3 million ounces already on the project. This new program has discovered gold not uncovered in early campaigns which means there is certainty that the gold resource is already well beyond 3,000,000 ounces and will continue to grow. The non JORC 3 million ounces that Jaguar was sitting on has grown considerably and it is reasonable to expect that with continued drilling over the next 12 months Avanco’s JORC’d resource could easily pass 4 million ounces.
September 2017 I did a sight visit along with a group of analysts to Avanco’s projects in Brazil. During that trip I was told that the targeted production at Centro would be 150,000 ounces per annum. In any calculation of value I do I am using that production number despite the fact it could be argued it may have risen given the stellar results obtained over the past few months. The most recent release on Centrogold, the scoping study, has detailed 170,000 ounces per year for the first 3 years at US$587 AISC. Based on today’s gold price that is A$500,000,000 EBITDA in the first 3 years.
The project economics will be very robust. If you look at the AMEC study of 2010 or the Technomine Feasibility Study of 2011 (available on SEDAR under Jaguar Mining’s entries) there is a wealth of information.
Using the above Technomine study as an indication but considering that the Brazilian currency has moved by 50% in favour of Avanco (costs down), the grade has improved considerably, and the global resource will have grown even if not fully quantified yet, it is plain that the profitability is likely far greater than originally conceived and greater than noted in the scoping study. Then add consideration that the current price of Gold is above US$1300 per ounce when the above study was based on a Gold price of US$1066. That's an additional US$513,962,540 assuming that advancing the Contact zone to additional ounces and 3.6g/t was of zero consequence. These numbers substantiate the AVB scoping study results as extremely conservative.
None of these numbers take into account the ten nearby advanced exploration targets with significant grades already apparent in all ten. Mandiocal for example was being touted as a likely 300,000 ounce resource. If these ten targets were to only average that each it would take the global gold resource at Centrogold beyond 6,000,000 ounces.
IMO Centro as a standalone company could easily be worth $750 Million US within 24 to 36 months. That requires only continued drilling and resource conversion at current rates. Centro will likely hit 3,000,000 ounces JORCed within 12 months but it will not stop there. There are multiple prospects that have already been drilled.
The two links below highlight Andrew Coles excitement at the prospects of landing Avanco for a pittance.
https://www.skynews.com.au/details/_5759335412001
https://www.ozminerals.com/media/oz-minerals-takeover-offer-for-avanco-resources-view-webcast/
Copper:
Pantera:
Pedra Branca started out life with AVB at 192,000 tonnes @ 1.3%. Currently it has a total resource of 427,000 tonnes of contained copper @ 2.44% grade. To date we are unaware of any changes in resource that can be attributed to 2018 drilling campaigns. The data released earlier this week was for 2017 drilling only.
When you have a series of holes but at quite wide spacing, the values used to "infer" what lies between the holes is chopped back significantly. As you put in additional holes and confirm grades the numbers start to approach the actual grade of the holes, ie more certainty that your data is correct and less allowance for error hence a higher resource is able to be recorded (providing the ore body maintains consistency, it can also go down).
That is to a large degree the process we saw unfold at Pedra Branca although they did also extend strike which increases overall resource.
Given Pantera starts out today at 350,000 tonnes @ 1.7%, proportionally we might expect a JORC for Pantera down the track of 778,000 tonnes @ 3.2% grade. Three drills already turning. I know this is a methodology with a wide scope for error (in both directions) but worth thinking about as a guide. At Pantera they are just starting out and as noted they will be doing infill to increase certainty on the existing known strike (which will grow the resources) as well as exploring to increase strike length. This little monster can grow...a lot. While forward looking, I fully expect Pantera to go beyond 1 million tonnes in its own right. Perhaps a long way beyond. I suspect OZL are privy to the current drill results but we as share holders asked to make a decision about whether to hold or sell are not.
I would hope that drill results from Pantera are released as available throughout the period of the offer so that all sides have the benefit of a level playing field.
Antas North:
The current resource is 149,000 tonnes of copper and 100,000 ounces of Gold. The pit was designed for the current targeted rate. The best opportunity for growth through the Antas plant is the Azevedo prospect and near mine opportunities. I do expect to see a considerably longer life of mine when the report is finally published. At current rates they must be approaching 10 years mine life.
I am aware that the new electricity supply contract has been executed so costs in that area will start to drop. The BRL$ is also back up to 3.4 which will also ease costs. Once the waste removal is complete (perhaps already occurred?) and Avanco are back in the high-grade ore the cash flow and profitability should be back at very good levels. Don’t forget that they were mining at much more economic rates prior to the last quarter hiccup.
Pedra Branca:
Pedra Branca has a pre-feasibility study published which was going to be revised. I would like to see that revision before we have to make our decision about this OZL offer or any other offer.
In addition to finding substantially better copper grades and tonnage at Pedra Branca West, Canaa West is yet to have significant work done on it and may add substantially to the resource over the next few years. Avanco was very excited to pick it up at the time and it’s reasonable to expect that it will add to the global resource. They were initially touting it as a Pedra Branca lookalike magnetic anomalie and there are drill holes completed on it.
Copper collectively is currently greater than 1,000,000 tonnes and all at very good grades. By years end it could easily be at 1.5 million tonnes. This copper will all be ready to be processed during the forecast window of shortage and is a very valuable resource. This is not a poorly drilled copper prospect. This is a producing modest sized mine with brownfield expansion opportunities in Antas North, a second project that will likely aim for 42,000 tonnes per year coming up to full feasibility and Environmental license approval and Pantera that by years end could be well drilled out and showing 1,000,000 tonnes in its own right.
OZL Valuation:
What’s OZL really worth? It’s worth noting that Andrew Cole in talking on the earlier linked media pieces stated that acquiring Avanco was going to solve the OZL pipeline issues. That implies that there is a pipeline issue without Avanco’s assets and that the Avanco assetts are very much worthy of pursuit. Of course, if they succeed in getting Avanco at this bargain basement price their value will probably rise significantly. A wider public is now privy to the quality of assets that Avanco have built for them Avanco shareholders.
No matter what value you might decide upon for the two major commodities that Avanco mines over the next few years, one thing is certain, the current bid by Oz Minerals is opportunistic and substantially undervalues Avanco.
Remember Avancos's byline,
debt free and advancing to mid-tier status what happened in the space of a few weeks to change that?
