minesite article

Scotgold Confirms The Economic Potential At Cononish, But Shelves Its Immediate Funding Plans In Response To Tough Market Conditions
By Alastair Ford
Scotgold’s recent update on the economics of its proposed gold mine at Cononish in the Scottish Grampians had something of a bitter sweet feel about it.

Portal at Cononish
On the sweet side, there was confirmation that at US$1,428 per ounce - the spot gold price when the press release was being compiled - Cononish will throw off plenty of cash.

Nearly £40 million all told, over the minimum six year mine life, which isn’t a sum to be sniffed at.

Even using the base case gold price assumption of US$1,300 gold, the project still throws off over £26 million in pre-tax cashflow on average operating cash costs of less than US$700 per ounce.

“The project is robust in terms of opex and capex”, says Scotgold’s chairman John Bentley, when Minesite catches up with him on the telephone a couple of days later.

But then comes the bitter part of the bitter-sweet equation. “It’s just”, continues John, “that it’s very, very leveraged to the gold price”.

With that in mind, the recent gold price volatility has been distinctly unhelpful, to the point where Scotgold’s immediate financing plans for Cononish have been shelved.

There are two separate aspects to this decision, though they are both inseparably intertwined. The first is debt; the second is equity.

On the debt side, Scotgold has got what John describes as a “very good relationship” with RMB. “They understand the project”, he says. “They’ve been up to site several times.”

And RMB has in principle agreed to provide debt. However, when Scotgold received the initial RMB quote, gold was up at around US$1,800, and based on the forward curve RMB was willing to put up a fair amount.

That’s not quite the case now. “Down at US$1,300 or US$1,400 the debt capacity slides away”, says John.

Which puts the onus firmly onto the equity markets, but here the picture is hardly any rosier. For one thing, Scotgold’s shares haven’t exactly outperformed lately, sliding from over 5p this time last year to the current 1.42p.

At that price the company is valued at around £4 million, and bringing in the £22 million that will be needed to get Cononish built at these levels would represent an enlargement in the share capital by several orders of magnitude, whatever mixture of debt and equity could be attained.

Perhaps not surprisingly, given that the net present value (NPV) is less than £11 million under the base case scenario, appetite amongst potential investors is somewhat muted.

On gold at US$1,428 the NPV nearly doubles to just over £21 million, and given that the price has crept up even further in the days since the announcement was made, the numbers in the short term seem to be getting better all the time.

But it’s not just the way the numbers add up that’s the issue. It’s the volatility. “The advice we have is that the institutions are spooked by the volatility in the gold price”, says John.

And you can’t legislate against that. So while the project looks robust at the current price, it’s being undermined by uncertainty, and somewhat reluctantly Scotgold has for the time being at least put its fundraising efforts on hold.

“What I think we need is some stability and then investors can feel more comfortable”, says John.

As stated in the press release, Scotgold has deferred a raise “pending an improvement in market sentiment”. Precisely what will constitute such an improvement isn’t spelled out, but John is pretty clear that it means a re-opening of the equity markets, and renewed stability in the gold price.

Both could come fairly quickly, and John emphasises that should a funding window open, Scotgold is fully primed to go through it. In reality though, it’s unlikely to be before the summer’s out, which is why the company has also made a point of stating that it has over A$1 million in the bank.

“That’s good for a few months”, says John.

So for the time being, Scotgold has breathing space while it waits for markets to improve, or for the second alternative that was spelled out in the development study update: for a partner to come in and help with the heavy lifting.

“It’s a small mine, but it’s a profitable mine which can be in production fairly quickly”, says John. “For some companies, 20,000 ounces for six or seven years is significant.”

There are also some attractions on the upside. Extensions to the east at Cononish are highly likely, and could add significantly to the amount of mineable ounces in due course.

And there’s also the prospect that regional exploration could deliver further interesting prospects.

“There’s no way that Cononish is the only high grade quartz vein in the Grampians”, says John. So there’s clearly value on offer.

The question is: who will step in and claim it? Will better markets provide better economics and returns, and bring investors and lenders back in in a big way? Or will a partner step up to the plate instead, minimise dilution, but also reduce the overall returns?

It’s an interesting dynamic, and a tricky balancing act. But no one ever said life as a junior miner was easy.