Medusa is engaged in a process to increase mine production to the new mill capacity of 2,500 tpd. For the medium term a new L8 service shaft is being built, but in the short term, the main drivers for this will be:
Upgraded L8 shaft haulage improved capacity
Tramming bottlenecks at the base of L8 shaft resolved
New stopes developed
New payment system for miners to reduce overdraw from stopes and lift average grade
Relevent statements from the Q3 report:
"The upgraded L8 Shaft has operated satisfactorily since it was completed on schedule on 13 January 2015. Ramp up of production to meet the increased capacity of 1,400 tpd is progressing to schedule with the L8 shaft production achieved in March totalling 30,792 tonnes, averaging 1,184 tpd (up from an average of 700tpd). This will continue to increase as new stopes are developed and tramming bottlenecks are resolved."
"Development of a tramming loop at the base of the L8 shaft has commenced to allow the locomotives to unload and proceed, easing congestion to cope with the doubling of production. This will be completed during the next quarter. Additional locomotives and battery packs have been ordered to meet increased production."
"Following the commissioning, increased development of 40 new headings and subsequently 20 new stopes were commenced to meet the increased capacity of 1,400 dtpd."
"The contract remuneration system has been modified to ‘payment for volume blasted’ from previous ‘payment for tonnes drawn and trammed’. This removes the tendency for overdrawing of stopes which increased unplanned dilution, as well as providing a more reconcilable measuring system for payment and control. This system is being introduced on all new stopes developed, and benefits will be fully integrated by end of September quarter once all “old design” stopes are completed."
How will improvements in these areas improve Medusa's gold production in Q4 and in the year to follow?
The likely minimum Q4 production rate is as follows, assuming no improvement over March, based on the latest published figures
ie March, Q3: L8 haulage 1,184 tpd, Levels 1-5 1,000 tpd, Q3 grade 5.84, Q3 recovery 94%
56,784 ton/mth x 3 mths/qtr x 5.84 gm/ton / 31.1 gm/oz x 94% recovery = 30.0k oz (company record, FY: 101.8k oz another record)
Allowing for some almost certain progress in both tons hauled and grade gives a more likely Q4 outcome of:
58,000 ton/mth x 3 mths/qtr x 6.0 gm/ton / 31.1 gm/oz x 94% recovery = 31.5k oz
For year 2015/16:
60,000 ton/mth x 3 mths/qtr x 6.5 gm/ton / 31.1 gm/oz x 94% recovery = 35.36k oz/qtr = 141.4k oz/yr
Profitability will be a function of gold output and the gold price. The gold price atm is $1223.50 breaking above its 200 day MA last week along with silver which is now well clear of its 200 dma. We will have to see next week whether these break outs are maintained and gold continues higher as expected.
Even at $1200 average gold price, Q4 AISC should be c.$950/oz and cash generation is expected to be strong with year end cash above $20 million, debt below $8 million and a P/E ratio of less than 4.
Medusa's sp is in a shallow uptrend, currently not willing to go much above $1. All this should change as we get closer to Q4 results in July as institutions must be able to see the writing on the wall and that if they don't establish a position beforehand it will be a lot more expensive from August onward .....
If Medusa can produce 30-31.5k oz in Q4 with decent free cash flow together with demonstrable prospective further rises in profitability in the coming quarters and years then the investment case should be obvious.
MML Price at posting:
$1.00 Sentiment: Buy Disclosure: Held
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