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March 18, 2009

Early Stage Gold Production From Citadel’s Jabal Sayid Copper-Gold Mine Could Substantially Contribute To Development Costs


By Our Man in Oz



Low copper prices have reduced interest in most of the copper stocks, especially those still in the planning stages. But, as more seasoned observers of the mining sector know, there is often a by-product with copper orebodies which makes a dramatic financial difference: gold. That’s why over the past few weeks investors in Australia have started to re-discover one of the world’s more interesting companies, an emerging copper miner, with a “gold cap”, run, in the home of Islam, Saudi Arabia, by a woman. Citadel Resources is the object of this new found interest. Last week it graduated to the ranks of the top 300 companies listed on the Australian Securities Exchange (ASX300) thanks to its steady share price rise, and aided by other stocks dropping out.
“We’re very pleased with the positive result of the feasibility study into the Jabal Sayid project,” said Citadel chief executive, Ines Scotland, when Minesite’s Man in Oz caught up with her last week. “The gold will be a useful cash generator, especially in the early years, but it’s the copper which will be the major profit earner”, Scotland said. She is correct. Copper is the “long game” at Jabal Sayid, but it’s the gold on top which is causing a ripple of excitement among investors.

Until a few weeks ago Citadel was seen as a stock with a first class copper prospect that would make solid profits even with the copper price at US$1.50 a pound, but one that might yet face an uphill battle securing development capital until metal prices improved. That view has changed for two reasons. First, because Jabal Sayid is half-owned by Saudi interests and the government of the oil-rich kingdom is keen to see the development of alternative industries. Second is the gold, the production and sale of which, according to a back of envelope “calculation” by Minesite’s Man could end up contributing up to half the estimated US$249.5 million capital cost of the copper phase.

So far, a relatively small gold resource has been outlined, measured at 237,000 ounces. The trick is to see where the gold “sits”, and then to note, with a raised eyebrow or two, the capital cost of getting at it - an astonishing US$13 million. That’s a cost which probably amounts to less than the value of the gold taps in some of the private jets which whiz around the Middle East, and is certainly less than the annual wage and bonus of many a New York banker, even in a recession.

Mining the oxide-gold orebody will be simplicity itself. It will be scraped off the top of the copper-rich geological structures and transferred to a heap leach pad where it will be sprinkled with acid to release the gold. Scotland said access to existing infrastructure, and low power costs, was the main reason why the gold-phase capital cost was so low. Whatever the reason, it seems likely that the gold resource at Jabal Sayid, an operation which could be expanded by trucking ore in from other discoveries, will yield gold at just US$330 per ounce, a number which indicates a profit margin per ounce of around US$600/oz using the latest gold price as a guide.

Given that the target is to produce up to 60,000 ounces of gold a year for the first two years, and perhaps for at least double that time as production gets underway and ore is hauled in from other locations, then the gold financials become rather interesting. At the target production rate Citadel could rake in a gross profit of US$36 million a year, or US$72 million over the first two confirmed years, and US$144 million over the four possible years.

There are, obviously a lot of assumptions in that sort of “best guess”, but it is a pointer to what a gold cap can do to the early-stage economics of a copper project, something which Citadel’s “external adviser”, Owen Hegarty, knows very well. Back in the mid-1990s Hegarty used early-stage gold production to help fund the development of the Sepon copper project in Laos, and launch the very successful Oxiana mining business. Well, successful that is until it merged last year with Zinifex to create the troubled OZ Minerals which is being eyed off as a Chinese takeaway in the great Aussie-asset sale.

Media interest in the gold booster at Jabal Sayid has been muted as reports have focused on the copper phase of the mine, which has just passed the first stage of the feasibility analysis process. Potentially, the three main orebodies which make up the project could produce 60,000 tonnes of copper in a concentrate at a life-of-mine operating cost of US94c per pound of copper, with costs in the first two years cut to US75c/lb thanks to precious metal credits, a very profitable business even with copper at US$1.50/lb. The economics of the overall project is aided by the relatively high average head grade of ore which assays 2.26% copper.

At another time Citadel’s share price would have reacted much more positively than it has to these sorts of developments. At A13 cents the company is capitalized at an untaxing A$95 million. What seems to worry the market is the copper-phase capital cost and the need to find a crack in the world’s frozen capital and debt markets. That’s when the magic of the gold cap kicks in. And investors thus prompted to take a fresh look at this emerging copper miner will then note other hidden benefits, such as the Saudi banking system showing a desire to fund new mining projects, and the low fuel and power costs in Saudi which means that ore from other gold deposits could be cheaply trucked to the processing centre. Diesel, for example, has a wholesale price in the kingdom of US10 cents a litre – enough to make farmers in the Home Counties around London weep with jealousy.