As a distraction from biting our nails to the elbow, DML holders...

As a distraction from biting our nails to the elbow, DML holders and others might consider the question arising from the following analysis. Before the lender’s rebuff, I was trying to see if I could discern what would be the effect of improvements in grade and throughput on the C1 cost of copper using the published production and C1 cost data from the last six quarters. In trying to unpack the trend, the problem is that the C1 cost per lb of Cu jumps around depending on the average grade and recovery that was achieved in the respective quarter. We know that efforts have been made to improve the efficiency of the mill and thereby improve the Cu recovery. So it seems reasonable to separate out the grade and recovery aspects and see what trend could be found in the back figured “C1 cost per tonne milled”. The effect of improved grades and recovery could then be applied to the discovered cost curve for getting ore to and through the mill in order to estimate what the C1 costs would be for various prospective grades and recovery.

I assumed that the cost per tonne milled could be modeled to consist of a fixed cost component and a rate per tonne milled. However, when I regressed the data for the last six quarters on that basis, it seems to be saying that it is all fixed cost and the rate per tonne milled is improbably small. See the first graph in the attached PDF, which shows the resulting cost trend plotted against t/q milled. (The constants for the linear trend of the cost per tonne milled is obtained by regressing the total C1 cost in $/q vs tonnes milled/q and getting the trend. Alternatively they can be obtained by fitting a linear trend line to the cost per tonne milled plotted against the inverse of tonnes milled. The result is the same either way.)

The blue line is fitted to the data for the last two quarters and also fits fairly well to the other data points. It points to a rate cost of only $2.94/tonne and a fixed cost of $35.7m/q. With the pink trend line, I arbitrarily increased the rate component to a still modest $13.15/tonne and forced the line to go through the most recent data point. As can be seen, it does not fit the data as well as the blue line. It appears they spend a fixed $36m per quarter almost irrespective of how many tonnes is mined and processed through the concentrator. It is as if they run the plant and drive the dump trucks round and round just use up the fuel allocation!  Now I don’t think that is what is happening but this result is not explained by saying that recent cost reductions have produced a false trend - the lowest cost per tonne milled was actually achieved back in the Dec-13 quarter.

I would be interested in any explanation of how this comes about. Why are the total costs so invariant with changes in throughput? I could ask the management, but at the moment it would be needless distraction at a critical time.

For anyone interested in what these possibly dubious cost curves would mean when translated back into C1 cost per lb of copper, that can be seen in the second graph. The graph has curves for the most recent quarterly effective recovered grade, which was 0.89% (dotted blue and pink speckled curves) and curves for the Zeta target grade of 1.2% and 92% recovery (yields 1.104%) (solid blue and dashed pink curves). At 750,000t/q throughput, the difference between the dashed pink line and last years’s received price equates to about US$8.5m surplus per quarter on C1 costs ($10m/q for the solid blue line). Back figuring using these cost curves and holding the Cu production constant at the recent August Cu production rate (2283t), suggests that, almost regardless of the grade achieved in August, the C1 cost should be close to the average received price for copper for FY2014, which I make to be about $2.63/lb. But that prediction depends on a number of “ifs”. Also, extending the curves out to the supposed name plate capacity of the plant (750,000 t/q) involves an extrapolation into terra incognita.

Self evidently, to get the August Cu production, they must have substantially improved the recovered grade or the tonnes processed or both. If it was achieved at the same recovered grade (0.89%) as in the Jun-14 quarter, they must have been running the plant at about name plate capacity. If it was done solely by improving the recovered grade then the ore and the recovery must have been a tad richer than the Zeta target of 1.2% and 92% recovery (yields 1.1045%). It was probably a bit of both. Presumably we will get the Sep‑14q production data sometime in Oct so I will be able to plot at least one more data point. I hope that it is not the last!

The usual caveats apply. This is not advice. You would have to be crazy to trust my figures and calculations or to take my advice on anything, especially share investments. The graphs should not be read to the exclusion of the text. Do your own research.