This is our first report on Carbine Resources (CRB) rating it as...

This is our first report on Carbine Resources (CRB) rating it as a SPEC BUY at 11.5c with a target of >20c

(Note : our/ERA report contains a large number of figures. When reports are posted on our website :www.eagleres.com.au, then the figures are also attached separately and can be viewed in an enlarged often better / higher resolution format. All the figures and the report can be downloaded separately once they are on the website).

Carbine’s main asset is the old Mount Morgan gold-copper mine in QLD that closed in 1990 (after ~100 years of semi-continuous operation since 1882), when the tailings being treated prematurely broke through the dam wall and failed into the adjacent open-cut they were being dumped (after retreatment) into.

Mount Morgan was renowned for its extremely high grades, the initial discovery assays were reputedly 3,700oz/t (yes oz, not g – in g/t it would have been ~113,120g/t or 113kg/t or ~11.3%Au), and under the gossanous gold cap were ultra rich gold shoots extending to depths of ~950ft below surface (from the top of the ~100m high hill that was completely mined), such as 300oz/t to 471oz/t (9,200g/t to 14,400g/t)extracted from the Grasstree shaft pillar in 1912.

The VMS orebody was always thought to be truncatedby faults at depth – something like a pull-apart slumped graben, but the truncation may not be that simple. One of the drawbacks of geology is that when it can’t be explained, faults are often interpreted, Perilya’s interpretation of the 1990s even had an Invoka and an Infera fault - ie they invoked and inferred two major faults of which Invoka was an “invoked” major regional fault east of the main Mount Morgan orebody, to explain and simplify the geology.

You would have thought that with such a prominent and rich mine the geology would have been executed in extreme detail, but it wasn’t. There has been more than one comment that the miners chased the geos away as it was all ore, it was only when the orebody appeared to peter out that the geos were brought in to try and find the extensions/continuations.

Historically the underground mine closed because of low copper prices in the early 1920s – yes it did close due to the miners rioting over wages in which it caught fire and flooded in 1925, but it had actually been closed since ~1921-1923 due to low copper prices. It re-opened as an open-cut (with treatment of the mine water to recover copper as part of the financing), and that continued until it closed in 1981 again due to low copper prices, but also apparently due to increasing zinc mineralisation, which would have required capex for a different treatment process.

The tailings have been re-treated at varying stages of the mine’s life, as metallurgical processes to treat the orebody evolved and the mine’s orebody, changed becoming increasingly copper-rich with depth (copper grades were ~11% to 12% with 5cm to 8cm thick “seams” of chalcopyrite. Some of the early tailings were based on gold recoveries of ~50% which resulted in tailings reputedly assaying up to ~5oz/tAu and that went into/over the adjacent Dee river.

The mine actually received tailings licences to deposit tailings over and into the river ! (which apparently affects the river for at least ~20km downstream from the mine – as seen by the discolouration) – perhaps that’s why the QLD Govt took over environmental liability in 1993, combined perhaps with the profits that the mine generated.

Mount Morgan at one stage also had blast furnaces and later reverberatory and flash furnaces to produce copper, with the successive plants demolished and built on top of each other, which has resulted in the 4 main ore resources conforming to JORC 2012 standard to be processed – one of which (the Red Oxide) is mostly under the Main Slag dump. There are many other sources that are non-JORC, and some that have to wait until the water level is ~5m lower (possibly in 2.5 years’ time) such as Sandstone Gully.

The mine does have environmental issues especially when it rains and seeps under the dumps, leaching acid into the orangey-brown (in some places black-coloured water) in Mundic Gully and then under other dumps following the old Mundic river course into the Dee River – so clearly the QLD Govt is going to be keen on any improvement as it spends ~ $2m to $3m there every year. And hence CRB may qualify for inclusion in environmental/green/ethical funds, as it is expected to improve the environment.

Most of the buildings have a heritage rating on them – which was done about 20 years ago. All very well, but they have hence not been touched since and have consequently disintegrated to a state where they are mostly sealed off as being dangerous and unsafe.

Having a mine at Mount Morgan should have a major impact on the area, as the nearby town of Rockhampton appears to have ~half of its shops boarded up/closed in the economically stressed Rockhampton-Mount Morgan region.

Obviously other companies have historically looked at treating the tailings, and the last treatment up to the failure in 1990 was achieving gold recoveries of ~50% (with cash costs averaging ~$388/oz), despite the high cyanide consumption due to the copper content.

Tailings retreatment appears to be gaining greater scrutiny at current metal prices as illustrated by the recent articles in John Chadwick’s International Mining (im-mining) publication. For tailings retreatment you basically need to have a simple process that can sell as many resulting products as possible, in order to be economically feasible.

Carbine’s process appears to be simple and producessaleable copper (in the form Copper Sulphate) and Pyrite (at >49.5%S and low nasties [such as mercury, arsenic and lead]), plus of course the Gold – at a relatively high recovery because the copper has been extracted first.

CRB expects to initially produce ~40kozpaAu for the first 4 years at an AISC (all-in-sustaining cost) of (or in English, very roughly profit = 40kozpa x (A$ gold price less A$550/oz). That’s on CRB costing, using ERA costing we achieved ~A$350/oz until we over-hacked or over conservatively increased the cost/t numbers to result in an average AISC over a 9-year base case life of ~$450/oz. It can also be seen why CRB expects to achieve payback of its capex within ~ 2yearsof starting production.

Pyrite is actually big business, used in producing sulphuric acid from ~13 roasters in China and ~6 in Europe, with the higher the sulphur content of the unroasted concentrate the better, plus low deleterious elements (like arsenic, mercury and lead) and ideally some credits like copper and possibly gold or zinc. Tick those boxes and you can have premium pyrite.

And premium pyrite is used in lithium batteries, stainless steel and grinding wheels.

CRB has received expressions of interest to buy its pyrite at US$60/t –and has assumed that for the first 2 years of its DFS increasing to US$80/t after 2 years, as it expects to take time to establish a product track record for its pyrite.

First Quantum’s Pyhäsalmi mine in Northern Finland has been producing ~800ktpa of premium pyrite (its operation also has low grade copper and zinc). Of the 800ktpa, 300ktpa goes to domestic consumption, 100ktpa goes to Germany and 400ktpa is imported by China. China could import pyrite from anywhere if it wanted to, but only imports from 2 mines, namely 400ktpa from Pyhasalmi and 200ktpa from Romania’s Baia Mare stockpile. The Baia Mare mine closed 4 years ago and its stockpile was expected to run out in 2017.

Pyhäsalmi was expected to close in 2019 (according to First Quantum) when it expects to deplete its ore reserves at a depth of ~1440m (ie 1.44km). Pyhäsalmi is examining tailings retreatment and it has been estimated that it may be able to meet its domestic requirements of ~300ktpa, leaving an increasing potential ~500ktpa “gap”, ~ 1 year after Carbine could come into production.

China’s imports of unroasted (premium) pyrite were actually expected to increase to 800ktpa in 2020, although it has yet to be specified where they expect to import from.

Pyhäsalmi has been selling its pyrite for an estimated ~US$110/t to China possibly according to a long-term contract, although spot premium pyrite can (with by-product credits) sell for >US$200/t. If CRB could sell its pyrite for US$100/t, its AISC could theoretically be reduced by >A$130/oz.

The general view is that the only exploration potential at Mount Morgan lies at depth. Perilya found the adjacent Car Park mineralisation under the office car park – but it was disappointing as the grades were not Mount Morgan grades, and the massive pyrite content was ignored. A pity really, but a potential advantage to CRB, as ERA’s estimates are a potential ~30mt (being ~500m long x 100m x 150m) bulk mineable underground resource that may have DSO (direct shipping ore) pyrite at 42%S (being 80% to 90% pyrite) with copper and gold credits. Some of its relatively “poor” intersections were 30m @ 2.8%Cu & 0.8g/tAu (from 357m), and 54m @ 0.35%Cu, 0.35g/tAu & 4%Zn.

The Car Park pyrite is not the same as the original main orebody, yes it still takes ages to oxidise, but the main orebody is simply weird as in its pyrite mostly does not oxidise – it still looks freshly broken even after 20 or 30 years – possibly because of its high silica/quartz content – as illustrated by the greyish lumps that litter its old dumps.

Yes there are deep targets for a future date, but there are a number of near surface exploration targets too, such as :


·Under the old plant (there’s that adit/drive going into the Grasstree workings [of Figure 8b]) but probably limited by potential damage to some of the heritage assets.

·Under/within the main orebody – it is not clear that the orebody was mined to its boundaries (especially based on the sections on which the subsequent open-cut was mined such as Figure 3a), and there are those references to zinc mineralisation being encountered at depth. There are also references to the mine being ~300m deep but that includes from the top of the original ~100m high hill that was removed, so hence the old mine shouldcurrently becloser to ~200m deep.

·Under Sandstone Gully – effectively sterilised by the tailings since 1948, and subsequent shallow surface water – expected to be dewatered within 3 years, with tailings exposed at the western end too.

Added to which there has to be the pyrite possibilitiessuch as that pyrite dump stockpile (Figure 6b) next to the planned plant and whether the “Car Park”mineralisation can be bulk mined in the future, and how the other dump stockpiles (such as B, K and Q) are going to “fit” into the production process and whether they are to be upgraded through ore-sorting.


CRB has 75% of the Project and may negotiate the remaining 25% and there are payments to Norton Goldfields. In ERA’s valuation the holdings have been left as is, and payments made broadly according to the existing agreements. We have also left the QLD royalties as is, though accept that the QLD Govt may provide some initial relief to aid the project due to the long-term community and environmental benefits. If the mine was based in China it would receive non-repayable Govt funding under China’s “green mines” scheme that accesses A$2bn to A$3.5bn of Govt funding.


Hmm so CRB…carries risk..payback in ~2 years after ~1 year construction...extremely low initial AISC of (possibly even <$450/oz), and long-life…easily 9 years, potentially more likely 20 to 30 years’ or so. Plus possible exploration upside…

Conservative NPV of 27c (on the 9 initial years) vs current price of 11.5c, ie double the investment.

CRB just needs to finance its capex of ~A$100m (actually A$94m in the December 2016 DFS) which it was targeting for MQ 2017.

The question is could CRB ultimately become a 10-bagger ? – maybe…..


Hence Carbine Resources (CRB) has been rated as a SPEC BUY at 11.5c with a target of >20c.

Regards

Keith, viz :



Carbine Resources Limited (CRB)–Targeting 20kozAu to 40kozAu per year for >20 years at an AISC of

·Carbine’s (CRB’s) main asset is a 75% holding (with a possibility to negotiate up to 100%) in the Mount Morgan gold-copper mine located ~40km south of Rockhampton, currently under the jurisdiction of Queensland’s Govt who accepted environmental liability in 1993.


·Mount Morgan passed through a series of production phases, over its almost 100-year life from discovery in 1882 to closure in 1990, producing ~8.4moz gold and ~400kt of copper. It had an initial reputation of having extremely high gold grades (eg >300oz/t to 470oz/t in 1912). It has undergone a series of mining phases from underground to open-cut to tailings and dump retreatment, including a whole range of smelting techniques; to result in the current tailings and dumps resources to be retreated for the next phase in its life.


·The Mount Morgan operation appears to possibly have a life of >20 years (ERA view) from treating the tailings and dumps remaining from previous operations through applying a relatively simple process that generates 3 products, namely : copper sulphate, premium grade pyrite, and gold dore at ~20kozpa to 40kozpaAu at possibly an AISC of


·Carbine expects to produce >200ktpa of premium grade pyrite (>49.5% sulphur with relatively low levels of the usual “nasties” of arsenic, mercury and lead), at a time when Finland’s Pyhäsalmi ~800ktpa premium grade pyrite mine may close in ~2019, which could result in materially higher prices than the US$60/t assumed (spot is often >US$200/t), However, CRB’s pyrite con has to establish a track record before it can be priced properly.


·CRB has applied a very conservative approach (ERA view) to its production estimates, which have the potential to materially increase cashflow and profitability, such as the usual 80% design rate (hence throughput may be closer to 1.3mtpa than 1.1mtpa); while grades, resource tonnages and even recoveries all have the potential to be higher. Based on its DFS, Carbine expects to achieve a short term (~2 years) payback of its capex, (after ~12months construction and commissioning, and possibly a ~3 month ramp-up period).