F&B asked how long to get to 250,00oz pa on pure organic growth...

F&B asked how long to get to 250,00oz pa on pure organic growth with no capital raising, along with a couple of side issues.

Using the ten year mine plan as a basis, what existing mines could likely produce, POG and production costs from the June 2012 Quarterly, along with the need to develop (excluding Burtville and Greenfields) at least three of the announced new mines at Laverton and two at Coolgardie (there are more cut back options at Coolgardie to keep it down to two new mines), upgrade at 3MH to 1.8 MPTA, along with the need refurbish Barnicoat to at least 2MTPA to treat appropriate ore bodies, I make it by the end of 2019 with some cash on hand at the end of the period to bring in an additional mine in each area (I have worked on the basis that you want to end up at the end of the time scale with money in the bank to fund further development to keep production at 250,000oz pa going forward).

In coming up with the end of 2019 timeframe I have had to use a number of assumptions, the most worrying one being the duration of the BGS toll treatment contract at Laverton (this was renegotiated when FML took control of CRE with its details remaining commercial in confidence) – based on the premise that no announcements have been forthcoming to date and taking into account lead times, I have assumed that we have at least another 18 months to run on the existing contract and that it will not be renewed (at some stage we need to control our own milling destiny at Laverton).

To get to 250,000oz pa on straight organic growth by the end of 2019 one thing that goes out the window is expenditure on exploration – there would not be the money available for a large programme so you are talking about some limited exploration money available for Lake Cowan and other green field sites, with the bulk of what money that could be made available going into proving up additional resources at existing mines, or those under development (need to maintain an adequate proven reserves to depletion ratio).

If on the other hand, on an organic basis, you throw the 250,000oz pa target out the window and stick to a steady 200,000oz pa target rate for at least the next five years then things are a whole lot brighter in terms of de-risking the business, coming up with a reasonable exploration budget and maybe even paying an annual dividend to your shareholders - if you want to go to 250,000oz pa after 2017 will probably take another five years but you will get there with a comfort factor.

Raising an additional $20m right now is really not going to change the 2019 250,000oz pa achievable time frame by that much as it is insufficient to increase the momentum needed - $40m might just shave a year off the time frame, with $60m you could just about guarantee shaving a year off, and with $80m you would come close to shaving off two years (I will keep out of the how much should be raised and by what methodology argument in this post).

Overall, you could say that for FML going from 200,000oz pa to 250,000oz pa on an organic basis would be a quantum leap and we could well find ourselves in a “one bridge to far” situation and I think this is illustrated by the fact that the Board’s new organic growth production target is 235,000oz pa with no time frame attached (and they have all the planning data that we are missing).

As for how long it would take with Shandong providing $227.5m to reach 500,000oz pa the question is pretty well unanswerable as on my calculations it is insufficient capital to meet the target – reckon it would take a $100m right now to get FML to 250,000oz pa in 5 years time and that is with a reasonable well controlled targeted exploration budget, so the cost of going to 500,000oz pa becomes mind boggling.

Certainly Lake Cowan could change the whole equation, however the answer to where does the money come from for any future development there needs to be answered – I cannot see any need to rush off looking for other acquisitions when we might be sitting on exactly what we want with the answer known within two years (that is on the current very limited exploration budget).

Would like to thank F&B for setting a head bashing exercise, as it certainly brought out a few reality checks in doing it.