new investors perspective, page-12

I’m not going to bother on short term price predictions while the sector is struggling- hopefully at a low turning point but that’s not normally obvious till after the fact.
I will stick to the fundamental assessment of Old Pirate and what I believe its worth and why.

fmx_rider, you mentioned a concern over the lower grades of the zone that made up the indicated part of the resource at Old Pirate.
I have put in a lot of hours researching further since buying last week including a lengthy question and answer conversation over the phone with the MD.
I had 27 questions written down and he was very happy to answer all at length.
The first paragraph below addresses the reason why the indicated zone has a lower grade and why the rest of the resource is not likely to drop to similar grades as it is converted to indicated.

Old Pirate indicated resource zone is made up of multiple stacked veins and the ore body in this zone will have a much lower strip ratio than the rest of the resource which makes up the inferred resource. The lower grade for the indicated resource will be compensated by the much lower strip ratio.
The reason for the lower grade is that in this zone we have multiple tightly stacked veins.
Many are too close to separate vein material from low grade or barren rock in between so the resource model includes this rock and that is why the indicated resource has a lower grade than the inferred.

The inferred resource is made up of veins which can easily be targeted without as much waste rock being included.
Therefore converting this resource to indicated will not likely have a significant impact on the reported much higher grades.

I did a comparison of old pirate to Dorays resource which has had a scoping study released.
The ore bodies have many similarities.
Both have 85% gravity recovery and over 97% overall recovery (test results are 99.5% on Old Pirate).

Average width of their ore body is 1m.
Average width of our veins is around 1m.
Both are high grade deposits starting at surface.
Overall our grade is lower than theirs; 12.7g/t top cut vs. our 8g/t top cut (or 10.5g/t uncut) but ours is much shallower and the lower grade area that drags our overall average grade down has a much lower strip ratio.
This is important because our lower grade zone (still over 5g/t top cut) having a much lower strip ratio and most of it being only down to 50ms from surface should still have very low cash costs. 5g/t is a very strong grade for a very shallow low strip pit.

Once this lower grade zone is mined, the remainder of our resource is significantly higher grade (AND much shallower overall than Doray’s) with the bulk of our resource defined to only around 70 ms deep while theirs is defined down to 400ms.
Looking at cross section of their deposit, the average depth of their gold is around 200ms.
I don’t have enough info on ours yet (the only cross section I have found is on the indicated zone) but much of our resource is based on surface trenching.
It appears the average depth of our gold may be around 35ms if not less. At least that appears to be the case for the indicated zone for which a cross section has been released. I will try and get more info on this when I talk to management again with some further questions.

While our grades are lower than Doray’s they are still very high. Another comparison of our grades that is useful is comparing to Mt Monger’s successful narrow vein u/g mine with its head grades typically around 8g/t and cash costs tipped to drop to near $500 per ounce before u/g development costs. They do have an advantage of higher throughput rates but our open pit mining is a big advantage over their u/g narrow vein mining.
We have an average grade over the resource of 7.95g/t top cut and there is a good chance head grades will be closer to the 10.5g/t uncut grade estimated over our entire resource.
Most miners would love average grades like that down deep let alone on the surface.

Our resource will be open pit for the majority of the currently defined jorc then moving u/g (mainly for gold not in the current jorc).
Dorays will be a small o/p followed by u/g mining for the bulk.
We are likely to toll treat at a plant which has 350,000tpa capacity and is struggling with profitability.
Last 6 months TAM treated 59,000t or 120,000t annualized.
That leaves 230,000t capacity for us assuming a similar throughput going forward for TAM.
Reality is because they are struggling, it may be better for them to give us more if not 100% capacity.
Whatever they give us, the plant will be able to operate at full capacity.
A 350,000tpa plant will provide for much lower cash costs than a plant with only 150,000tpa capacity all else being equal.

Doray’s cash costs are projected to be $5-600/oz with their very small scale 150,000tpa plant (55mill capex).
I think my $400 estimate (based on a much higher throughput if we built our own larger plant) is looking reasonable even using the Coyote plant given ours is open pit for the majority of our resource, low strip ratio and very shallow depth over lower grade parts of the pit, still open pit for most of the high grade ore as well, and the much larger scale plant (more than double the capacity). I am assuming $400-500 cash cost through Coyote before toll charges.

The main unknown will be how much we pay in toll charges, but this should be more than offset by no capex other than a very small amount for upgrading haul roads.
Doray only has 338,000oz and their scoping study shows this is viable as a stand alone project with a NPV of $106mill (which of course is after capital costs).
If they had an existing plant on site, their NPV would be $160mill.
We have a 26% larger resource of 427,000 oz top cut (and a much larger 565,000 uncut) and no plant to pay for.
I believe we will have lower cash costs thanks to the much shallower deposit so mainly o/p (vs. their mainly narrow vein u/g mining) and much higher throughput rates and we have next to no capital costs.
8g/t top cut in a shallow open pit with much of the resource sitting on surface is a very rare deposit.
Our total cash costs may end up similar to theirs after allowing for toll treating charges.

If the total costs inc. toll charges are similar, our NPV could be around 26% better than $160mill on our current top cut resource, i.e. around $200 mill.
Perhaps less if toll charges push our total cash costs above theirs.
Current market cap is only $155mill with $26mill of that being cash so the maiden resource at Old Pirate already appears to be worth considerably more than our EV of around $130mill based on the comparison to Dorays scoping study results.

Much of our 26mill cash will be spent by the time we produce, but that will very likely result in more ounces and a significantly higher NPV which will likely more than offset the reduced cash position. Once in production we should be very strongly cash flow positive.
I have assumed we should have at least a 9g/t head grade which is on the low end of our range of 8g/t cut and 10.5g/t uncut.
Both costs and grade may prove conservative.

The biggest attraction is, we have multiple untested veins, open along strike and depth.
There appears to be a very good chance of a significant increase in resource.
This should have a strong effect on the NPV.

We are likely to be ready to begin production soon after the wet season finishes around April May next year assuming the MOU for toll treatment comes up with a favourable outcome for both companies. This may be our biggest risk, but we always have the option of our own plant which is already likely viable just on our maiden resource. The viability increases rapidly as the resource grows.

Also as the resource grows putting in our own larger capacity plant will look more attractive from an NPV perspective than toll treating.
A larger capacity plant reduces cash costs through economies of scale and brings cashflow forward to earlier years reducing the discounting effect when calculating NPV.

Next resource upgrade is due around July/Aug but I’m sure that won’t be the last one.
This maiden resource should be just the start.

This is the type of company I look for; it looks undervalued on current resource, no debt, plenty of cash and fully funded to production (assuming toll treating) and plenty of growth options and exploration upside in a low risk country and with low operational risk.

Buccaneer with its 44Mt at 1.1g/t for 1.56mill oz (higher cut-off grade) resource, Hyperion and our large exploration tenements must have a significant value not allowed for in my NPV estimate above.

Catalysts;

If Buccaneers heap leach investigations prove positive, this should re-rate strongly. With heap leach, the entire Buccaneer resource of 2.6mill ounces @ 0.65g/t comes into play. This resource has a very low strip ratio.
We should also re-rate on announcement of a toll treatment agreement for Old Pirate with reasonable terms, or as our resource grows at Old Pirate.
We may also re-rate sooner as the market looks at the numbers on Old Pirate and decides at some point the sp has fallen too far, and/or the sector begins to recover.