Woodlark project image courtesy of Kula Gold. TOPICS (select for more information):
GoldKula GoldPapua New Guinea
Shares issued back then priced at $1.80 began 2016 at a little over 1c.
At the time of its IPO, a definitive feasibility study was underway at Kula’s potential 100,000 ounce per annum Woodlark project in Papua New Guinea, with the plan at that time being for first production in late 2013 “subject to the granting of regulatory approvals and financing”.
Kula’s board at the time consisted chairman David Frecker, managing director Lee Spencer, executive director John Watkins and non-exec directors Louis Rozman, Peter Bradford and Mark Stowell.
Frecker, Spencer, Rozman and Stowell are all still there, albeit Spencer is now a non-exec director.
Stuart Pether has effectively been running the Kula show as CEO for the past few years.
All the stock standard excuses have been trotted out over the journey to date, and while they may all have some legitimacy, it has unquestionably not been the resource sector’s finest hour from an equity market perspective.
The primary excuses appear to have been delayed feasibility work because of the booming market for consultants in the early years of Kula’s public life; delays to approvals process; the uncertainty around how much equity the PNG government wanted in the project, and; the US dollar gold price and its impact on making the project financeable.
With $101 million spent since 2008, all of those except the US dollar gold price have apparently now been resolved, with the PNG state to have a 5% stake in the project.
So far as the gold price goes, it hit a high of $1800 per ounce in 2010 – no surprise Kula was an IPO that year! – and is currently at $1128/oz.
In 2014 the Kula chairman indicated to shareholders that at prices of about $US1300/oz, Woodlark was economically viable with acceptable returns.
On a headline basis then, Woodlark doesn’t look much good at the moment.
But, while capital costs have been previously put at $135 million, the company believes reductions of $20-25 million can be made.
On the operating cost front too, savings can be seen. A recent presentation suggested C1 cost savings of $70/oz were possible, which presumably brings all-in sustaining costs of $868/oz down by a similar amount.
Factoring those sorts of numbers into an equation involving a project producing an average of 100,000oz per annum for seven years, and an IRR in the low teens may be reached.
Which is not good enough to make the development attractive just at the moment.
But perhaps not too far off!
Aside from a higher gold price and definitive proof that the capex and opex reductions are based on reality, increasing the project’s lifespan would provide the boost to returns required.
Kula has been working on this latter aspect, flying magnetics and carrying out early stage, low cost exploration on the ground.
In simple language, magnetic lows correlate with alteration, and alteration correlates with gold. Not always, but the correlation is said to be good.
All in all the results have apparently been positive, though drilling and delineation of resources and reserves is always the proof.
The exploration aspect at Woodlark is doubly important given how much more attractive the project looks with a staged-doubling of production to 200,000ozpa. A previous scoping study on this scenario has come up with an AISC of $700/oz.
For now though, Kula’s focus is getting Woodlark into position for financing when market conditions improve.
While banks are risk adverse, whether corporates sense an opportunity with such an advanced project remains to be seen.
The fact that there are a handful of Australian gold companies making money hand over fist at the moment does pique the interest.
Kula is capitalised at the grand total of $A10 million.
But, while that’s a pittance versus any half-bullish assessment of Woodlark, the company is effectively in the clutches of Sydney-based private equity firm Pacific Road Capital, which holds 41%.
So opportunistic bids for the company would likely have to be very adroitly pitched indeed to have a hope in hell!
The other problem in speculating third party interest in the Australian market context is just how ordinary forays into PNG and elsewhere in the Pacific have been in recent times.
St Barbara’s rather disastrous takeover of Allied Gold being a classic case in point.
Still, the lack of success on this front further ensures the lack of apparent interest in the Kula story right now as evidenced by its lowly $10 million market capitalisation – and hence the opportunity at hand!
Another possible dissuasion could possibly be the sub-sea tailings planned at Woodlark, albeit the method is technically sound and said to strongly-supported by the local population.
All in all though, Woodlark does just look a matter of time.
Maybe Credit Suisse, which late last month pegged the stock as the most likely to enjoy the biggest return in 2016 of the stocks it covers, may finally have something to hang its hat on with Kula Gold.
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