I do not understand the pessimism in relation to FML. What Shandong is doing makes sense if you take a long-term view and that may be why short-term speculators are not happy.
A close consideration of the recent sequence of events is that the sale of Coolgardie was not put in place until the early results of the Laverton drilling were available to FML.It appears that selling Coolgardie and concentrating on Laverton will soon mean that FML has identified as much gold at Laverton as it had before selling Laverton plus it will have plenty of cash to fast track exploration and resume operations.
There are a couple of commonsense points that need to be made.First, it does not make sense to resume production until the gold-bearing material is properly identified otherwise mining may well miss good gold-bearing material.They have recently found some trifectas: thick seams with good grades at shallow depths.Secondly, FML’s strategy, as outlined in the presentation at the AGM, is to resume operations with a Stage 1 mine life of at least five years and a stage 2 mine life of at least ten years.Thirdly, a company that only explores but does not mine will run out of money and a company that only produces but never explores will run out of gold but a company that produces and uses some of the proceeds to explore has sustainable viability.
FML did not resume operations at Coolgardie after obtaining a feasibility study that suggested an annual output of 40,000 oz.Before the mothballing, FML was producing 170,000 oz pa. My estimate is that they will resume operations at 100,000 oz pa and I get that from operating a plant with 1.4 million tonnes per annum (mtpa) capacity at just over 1 mtpa with an average grade of at least 3 gms per tonne. I note that the AISC before mothballing was around $1,200 and I assume the same figure when operations resume because they will be surface operations, not underground. With the gold price now above $1,900 that gives a margin on $700 per oz.So 100,000 oz will yield $70 million pa.
Initially there should be not tax due to tax losses and that will leave (1) further exploration, (2) expanding the mill capacity and (3) dividends as the competing options for that surplus.Even if a $10 million pa exploration program was continued, and even if as much as $40 million was spent expanding the plant capacity, that would leave $20 million for dividends and, with 180 million shares, that would mean a ten cent dividend. What do you think would be the share price under that scenario? The downside risk should be low with a long mine life and good AISC?
After the plant has been expanded, the capacity to pay dividends increases although by the time the plant has been expanded it may well be that company tax kicks in.The upside: how about higher production levels, better grades and a higher gold price as the world economy declines?
Not only will each extra cent of dividend only cost $1.8 million butthere are only 180 millions shares and more than 60% of them are held by two shareholders. Indeed the top twenty shareholders have more than 80% of the shares. So what will happen when people wake up to the reality of FML and there are only around 30 million shares or less that are not tightly held?
How long will it take for FML to resume production?I think next year (2020) is too optimistic. To do things properly may take as much as two years but it will be worth it.I know there are those who want FML’s share price to go back to what they paid for them and those shareholders may be running out of patience. But there will soon be those who realise that there is an ASX-listed gold stock with assets in Australia that has the benefit of an large, experienced Chinese company that knows what it is doing, that is trading for twenty-something cents and within two years is likely to be selling for two dollars something.That must surely be the target of Shandong because that is what they paid for their shares.
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