Medusa Mining* (LSE:MML) Management decision to expand Co-O to 200,000ozpa
- The board of Medusa Mining has approved the construction of a new plant to take output to 200,000ozpa based on the current grade of Medusa's mining operations (long term circa 12g/t).
- The new plant would have milling capacity of 750ktpa, would cost around US$80m and would take 18-24 months to complete after necessary approvals. The expansion would be funded from internal cashflows which we anticipate will easily meet this expense since we currently forecast June 2011 year end cash balance at US$92m including bullion held on account.
- Management is in preliminary discussions with engineering groups and will provide further details.
- We are updating our numbers in response to this news which we expect to add substantial value to the company for shareholders. Medusa has already demonstrated ability at delivering on promises as they ramped up the Co-O mine to 100,000ozpa of production as planned if not slightly ahead.
- We would expect that the Co-O vein system will be able to support such an operation for at least 10 years and likely considerably longer as demonstrated by a conceptual 3-7moz model and from drilling around the deposit which continues to identify new veins most recently to the north.
- The news to expand Co-O is not necessarily a surprise as it forms part of management's strategy to evolve into a 300,000-400,000ozpa producer, although we were not expecting the green light for the expansion quite so soon. The cashflows from an expanded Co-O will then be used to fund the development of Bananghilig which has a 650,000oz resource and exploration is aimed at expanding this to support a 200,000ozpa gold mine. We also see scope for incremental ounces from other projects such as Anoling and Saugon that could be processed through the old or new Co-O plant. Further value could also come from other targets e.g. Usa or Lingig copper porphyry targets.
Conclusion: Today's news is a demonstration of management's confidence in Co-O and its ability to support twice the current production level whilst maintaining the extremely low cost base, this mine is a spectacular asset for a developing mid tier gold producer. There could also be further benefits from the development of the new plant as it would be built closer to the mine reducing the, albeit, relatively minor haulage costs, furthermore there could be some tax incentives for the investment of new capital. We look forward to exploration updates delineating further resources at and around Co-O, exploration results across the numerous targets including copper porphyries, as well as updates on progress to expand Co-O providing a steady stream of news to investors as well as dividends and low risk gold exposure. * Fairfax acts as Financial Adviser and broker
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