November 29, 2012
Scotgold Will Start Construction At Scotland’s Only Gold Mine In June Next Year
By Alastair Ford
“We’re on the final leg of getting there”, says Chris Sangster of Scotgold, following a recent resource upgrade at Cononish. “The planning passed satisfactorily in October 2011, we sorted out all the legal agreements with the Parks Authority, and three months after that the Crown granted the mining lease.”
Portal at Cononish
In amongst all that official box-ticking the company also put out what it called a “project development study” in April, which showed attractive economics for an operation that would produce 21,000 ounces of gold and 74,700 ounces of silver per year at an average operating cash cost of US$575 per ounce of gold equivalent.
Using a base case of US$1,100 gold, the study put the net present value (NPV) of Cononish at £10.4 million, applying a 10 per cent discount. But on US$1,655 gold the NPV jumps to over £40 million, and life of mine cashflow rings in at a tidy enough £69.5 million pre-tax.
So, a nice little project if not an earthshaker, and Scotgold also has some promising-looking gold and platinum for any investors with a taste for speculative upside.
The next big step will be to raise money to get the project built. Using the assumptions of the April study, it’ll take just under £23 million to restart mining at Cononish, with a further £2.4 million required over the life of the mine as sustaining and deferred capital.
Discussions with banks have been ongoing for some time now, and Chris remains upbeat that some form of financing will now come together.
The recent resource upgrade certainly helps. “The blocks that we converted from inferred to indicated added around 16 per cent in tonnage and content”, says Chris. “We moved 27,000 ounces from inferred into indicated, taking our total measured and indicated resource to 82,500 ounces. That will provide for just under four years of production at the development study rate.”
Given that RMB have already signed an indicative term sheet based on the previous 55,000 ounce resource, the increase in ounces bodes well. “Their indicative sheet said they might be able to lend £9.2 million. We hope to get that up to £12 million or £13 million”, says Chris.
A final study is now being put together by consultants at AMC, and this is due out by the end of the year. The banks will then be able to review the debt capacity of the project. “Once we’ve got it”, says Chris, “we’ll be looking at how much we need to raise”.
The capital markets are not easy at the moment, but Chris is fairly upbeat about the prospects for Cononish. “At the moment there seems to be an appetite for a project such as ours. It’s significantly cash generative”, he says. “The current spot price is still very high.”
At US$1,740 gold is trading at well above where it was when the project development study was first put out in April, and overall it’s 11 per cent ahead of where it was this time last year.
So in that sense, although the equity markets aren’t exactly buzzing the timing for a re-start at Cononish remains propitious. But how Scotgold raises the equity portion of the money required remains to be seen.
The shares have performed relatively well relative to the market. At the current 4.12p they are down from a 12 month high of 6p hit in March, but they’ve been rangebound for the past six months or so, which is more than can be said for some juniors.
But if the appetite isn’t there at the current price, Chris is quite prepared to contemplate alternative forms of financing, such as a royalty or some form of equipment loan. “A royalty deal is certainly an option”, he says.
Much depends on how the market looks in the first few months of next year, and at the moment that’s anybody’s guess. In the meantime there’s A$1 million in the bank, so the company is “adequately funded”, as Chris puts it, while discussions continue.
And in the background Scotgold’s exploration programme continues to tick along. Last year the company reported a very interesting platinum result from drilling on a target not too far from Cononish. “We’re hoping to follow up on that in the near future”, says Chris.
A second strong hit would certainly give the shares a lift, as the market is desperate for even a sniff of platinum from anywhere that isn’t South Africa at the moment.
As far as other targets on Scotgold’s Grampian ground are concerned, the next step, says Chris, is to do some geophysics on the veins. But the company’s infill drilling programme at Cononish is nearly over, which means it will soon be able to switch its rig back to exploration work.
And that could work out quite well in terms of newsflow. There’ll be a flurry in the first half of next year as the company puts out news on financing and the commencement of construction in June.
But it’s then likely to go quiet until first production in 2014. Some choice exploration results in the intervening period would certainly help to keep the interest levels high.
November 29, 2012Scotgold Will Start Construction At Scotland’s...
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