bullabulling finds a silver lining or two

RetailRonnie
22 Nov'12 - 06:53 - 4100 of 4101 1 0


http://minesite.com/news/bullabulling-fnds-a-silver-lining-or-two-on-its-australian-gold-project

Bullabulling Finds A Silver Lining Or Two On Its Australian Gold Project

By Our Man in Oz

Even when gold is the target a silver lining can help. That is the case for Bullabulling Gold as it moves through the feasibility study process at its namesake project in Western Australia.

It turns out that cost pressures are easing now that Australia’s iron ore and coal boom is running out of puff.
And one effect of that slowing market is that the time lag on big ticket items like ball mills is much reduced.
Earlier this year, the waiting time for a mill big enough to handle Bullabulling’s planned annual throughput of 7.5 million tonnes was 24 months. Today, it is virtually half that at just 54 weeks.
Bullabulling chief executive Brett Lambert is not getting overly excited about the sharp improvement in equipment availability, and is uncertain what effect it will have on the economics of the project.
But he does see the trend as an unexpected helping hand in his development of his company’s proposed mine, an open-pit operation that will rely heavily on the economies of scale and close attention to capital and operating costs.
“We’re watching the changing cost environment closely, but at this stage we’re sticking to our plan of developing a mine with a minimum 10 year life, producing at least 200,000 ounces of gold a year”, Brett told Minesite from his Perth office.
“Bullabulling is a world-class gold deposit, one of relatively few with a resource base of more than a million ounces, and with potential to contain a lot more. It’s not a project that can be rushed, which is why we’re moving carefully through the pre-feasibility phase of our studies, heading into the definitive phase next year, with a final investment decision in the last quarter of 2013.”
But the easing off of pressure on capital equipment might prove to be just one part of a multi-layered silver lining. A second potential bonus is a widely-expected fall in the value of the Australian dollar which has been sitting, uncomfortably for local industry, above parity with its U.S. cousin for the past two years.
It is now forecast to fall by at least 10 per cent over the next 12-months. “If we’re lucky we’ll get the benefit of buying capital equipment while the Australian dollar is high, and move into production as it falls”, Brett said.
The net effect of the boom fading and the dollar following could mean a significant improvement in the underlying financial fundamentals at Bullabulling which, at current costs and prices, look to be delicately poised.
Some followers of the stock have been dismayed by an average operating cost estimate of A$1,100 an ounce over the first 10-years, a number strikingly higher than a previous forecast of A$970 per ounce used by investment banks, such as Canaccord, in their spreadsheets.
Back in mid-June, when Canaccord was tipping Bullabulling as a buy at 22p (A33 cents) it used that A$970 per ounce in an analysis which followed the merger of GGG and Auzex which created Bullabulling.
At the time, Bullabulling was trading at A20 cents on the ASX. Today, it is down to A7.7 cents, a victim of the widespread sell-off in small mining stocks compounded by concern at the A$1,100 per ounce production cost estimate.
“We are working to get that cost down,” Brett said. “But what investors should realise is that it is the total cost of producing an ounce of gold, not a cash cost. “If anything, we can be accused of being too honest, which is actually something investors have told me.
Cutting the capital requirement on Bullabulling, which is a superbly located gold deposit straddling the highway leading to Australia’s gold capital Kalgoorlie just 70 kilometres to east, would be the first signal to investors that they should dust off their file on the company.
As the estimates currently stand, the project will cost between A$297 million and A$333 million. But easing pressures on equipment and skilled workers could help the company hit that lower number.
Then comes the potential benefit of higher revenue in Australian dollars should the currency effect kick in. The best way of looking at currency is to see the current gold price of US$1,728 an ounce being reduced to A$1,677 per ounce at a conversion rate of US$1.03.
But a totally different picture emerges if the Aussie dollar heads back to US90 cents. In that scenario the Australian gold price pops up to A$1,920.
To help investors without calculators understand what the currency effect means it’s worth looking at Bullabulling’s current gross profit margin of A$577 per ounce, which uses the latest US dollar gold price and Aussie exchange rate. The gross profit margin explodes by 42 per cent to A$820 per ounce on currency alone at an exchange rate of US90 cents, a factor which cannot be incorporated into an investment decision, yet, but also a factor which cannot be totally ignored.
Bullabulling’s key steps for the next few months include finalising the pre-feasibility study which is based on a JORC compliant resource of 3.5 million ounces. Focus of the work is around the existing open pits last worked by Resolute Mining in the mid-1990s when ore was produced at an average grade of 1.45 grams of gold a tonne, and the gold price was US$350 per ounce.
The current resource estimate, using a cut-off grade of half-a-gram per tonne, is one gram per tonne for ore in four deposits which range from 0.89 grams per tonne up to 1.15 grams per tonne.
Drilling by the owners before consolidation into Bullabulling, added significantly to the resource base, while exploration potential remains open along strike and at depth. There’s also, tantalisingly, potential for look-alike structures to the east if a second limb of what appears to be a structural anticline can be confirmed.
Professional investors with longer than amateur time horizons recognise both the size of the challenge confronting Bullabulling today, and the potential for greater a globally significant gold mine in the future.
In size alone, the pits at the project site could eventually rival the giant Superpit in Kalgoorlie, a prize which has obviously lured in big name investors such as Baker Steel (12.8 per cent of the stock) and TD Waterhouse (5.5 per cent).