Risk on, page-55

Pretty quiet on the Hidden Gem Opportunity front.

I put the current prices through the economic study spread sheet with the following changes.
* annual throughput up 100KT with the addition of Spit Fire to 1.5mt
* increased AU recovery from 55% to 85% following the Kneelson separator trials.
* increased royalties from 5% to7,5% following the sale of a 2.5% royalty.

The spread sheet throws off $235m of revenue and $128m of costs for free cash flow of $107m. pa.

Escalation in costs is the big unknown.

Mining is the biggest cost coming in at $70m. On that subject when I was sitting at Lachlan's stand at the Noosa mining convention listening in on the conversations mining was discussed. A contractors margin of 18% was mentioned along with the merits of using owned equipment and staff to get the job done.

Whilst there seems like the opportunity to save a lot a decent portion of the margin wouldn't be gained due to overheads and administration. A mining company with a long life mine of course would save the profit margin and wouldn't have to recover the lost tender costs so could well save at least half the margin If they could do the work as efficiently and all went well.

The down side involves
* the loss of the opportunity of delayed payments. Delaying $6m a month for 3 months is a fair wack.
* wearing the construction risk which most lenders would shy well clear of.

Given that HGO s a prime job site for good operators with families there is every chance that as the employer they might end up with the same staff that a contractor would attract so maybe efficiency, and accurate budgeting aren't issues.

All of which might mean that there is a bit of fat in the study costs to offset some of the escalation and if so the capital required for the restart would increase significantly.