A ST BARBARA roadshow through Australia in late April publicly stated a long-term annual production target of 1 million ounces and 10Moz of reserves. With current production of around 160,000oz per annum, St Barbara is clearly stamping itself as a bona fide growth company. By Michael Quinn - RESOURCESTOCKS*
Ed Eshuys
The next four to five months are critical, with a combined study due in the September quarter that could potentially add nearly 300,000oz annually to the current profile over the next two to three years.
At stake are the Gwalia Deeps and the nearby Tarmoola openpit and plant. While both projects naturally have their challenges - Tarmoola is a low-grade, bulk tonnage scenario that has disappointed in the past while Gwalia Deeps is, as its name suggests . deep - the way the company has been rejuvenated over the past 12 months should give confidence.
As the company's Sydney-based broker Southern Cross Securities recently said: "This is a can-do management team that has delivered."
Justifying that assessment of the team led by ex-Great Central Mines exploration executive Ed Eshuys is not difficult - just ask major shareholder Resource Capital Fund, which had some very interesting times with St Barbara after initially investing three to four years ago, but which in March showed its belief by converting a $7 million convertible note into shares (albeit at 7c/share).
Since acquiring the old Sons of Gwalia (SoG) assets from the former blue chip miner's administrators in April 2005, a major turnaround at St Barbara has been commenced. The company has shipped 208,000oz at cash costs of $391 per ounce, significantly increased reserves, sold equipment, surplus assets and projects for more than $22 million (plus shares) and reduced $13.6 million worth of environmental bonds it had to post.
It now has almost no secured debt and, as at March 31, nearly $60 million worth of cash and investments.
It is probably also worth re-mentioning that the SoG assets cost $2.3 million - no, that's not a printing error, it really was $2.3 million! - plus the assumption of environmental performance bonds worth $35.7 million.
While cynics might say all of the easy yards have now been made, work to date illustrates the different operational philosophy being brought to bear on what many might also dismiss as the old assets of a previous failed miner.
At Southern Cross' mainstay Marvel Loch operation, for example, St Barbara is targeting the high-grade shoots to 500m depth and below - both from a production and exploration focus - rather than focusing on bulk mining as was previously undertaken.
At Tarmoola, major drilling programs to upgrade the resource was undertaken so as to allow bulk mining assessment/pit optimisations to be undertaken in detail, including the removal of the failed eastern wall of the pit that ultimately signalled the end for the operation when in the hands of SoG. Geotechnical work is also underway as is beneficiation work aimed at lifting grade.
Meantime, when Eshuys and the rest of the new St Barbara management team initially strolled up to the Gwalia Deeps project, they were confronted by a SoG feasibility study that described the possible development as "high risk". This was a fair description, given it was more or less based on spending $100 million or so on the basis of little more than 1 million worth of inferred ounces.
The idea was a shaft would be sunk ahead of underground drilling to increase and upgrade the deposit, with the shaft predicated on the assumptions that exploration and mining study work would be positive - and hence lead to development.
St Barbara was less convinced. Eshuys, who made a name for himself during his time at Great Central Mines as a being big fan of the 'rotary lie detector', felt the best way to move forward was to prove up the resource from surface drilling.
While drilling down to 1500m depth around $300 per metre was never going to impress the bean counters at St Barbara, defining more than 1 million reserve ounces at a cost of less than $10/oz has proven the strategy a clear success.
As with Tarmoola, it also illustrates a key plank of Eshuys' exploration/drilling philosophy, namely, aggressively drilling targets where there can clearly be seen the potential to add value. More than $11 million has been spent on drilling in the past nine months.
Subject to positive feasibility work at Gwalia Deeps/Tarmoola, Eshuys said it is expected to cost a combined $100 million or so to get into initial production at the two projects. Cash flow from the company's Southern Cross operations is expected to cover around $40 million of that total.
In terms of hedging, Eshuys said the company's policy is straightforward.
"We will hedge ounces where we can see there is a high risk . that is, a high-cash cost project where we want to protect the capital invested in the first instance," he said.
"And that's what we've done to date. We hedged 176,000 ounces or 60% of our production out of Southern Cross because we bought the Hercules pit into production and its cash costs estimates were around 480/oz.
"But there was a real benefit in bring Hercules into production because it allowed us to keep the mill full and allowed us a good operating cost for the Marvel Lock underground material . on balance to get a cash cost of $440/oz was acceptable risk. So we bought puts and sold calls to protect that.
"In future, if we proceed with the development of high-risk projects on the same basis, we will do some hedging . Gwalia we don't necessarily consider as a high-risk project in terms of gold production.
"The board hasn't made a decision but it's likely we would hedge some production from Tarmoola should the feasibility support a go-ahead."
Eshuys is also keen to assure shareholders, potential investors and critics that .
Golden assets do U-turn - Part 2
Monday, June 19, 2006
Eshuys is also keen to assure shareholders, potential investors and critics that an overall focus on lowering St Barbara's cost profile is foremost.
"We know that [we're a relatively high-cost producer] and we're working on reducing those costs," he said.
"It's possible at Southern Cross to invest some capital and reduce those costs and we're studying that in detail.
"At Gwalia Deeps, I think costs will be quite acceptable. At Tarmoola, again the way we would maintain acceptable costs is to get the right economies of scale, so that's what we're addressing.
"Obviously cash costs at $450 when the gold price is $850 is not a bad margin. But long term, you'd be a very brave man to say it's going to stay there, so that's why we're addressing the cost issue."
Post-Gwalia Deeps/Tarmoola, the question swings to where the 500,000 or so ounces needed for St Barbara to meet its 1Mozpa ambition are going to come from.
Somewhat unfashionably in this day and age, Eshuys is firmly of the opinion that Australia will constitute the company's future.
He maintains that Australia's prospectivity is unarguable, with the issue being that while the easy, surface discoveries have been made, 80% of the rocks that host Australia's mineral heritage are under cover.
"So when you accept that . and when we master that, there's a good chance of further major discoveries being made because of the prospectivity of those rocks," Eshuys argued.
The rhetoric is being backed by St Barbara employing three "very experienced geologists" to work full-time on identifying the areas in Australia where the next major discovery will be made.
"And that discovery doesn't necessarily have to be on our existing land bank, and it most likely won't be," Eshuys said.
St Barbara also has a team dedicated to identifying merger and acquisition opportunities, though as with exploration, the world outside Australia is off-limits. The rationale for the Australian focus is the sovereign risk issues in Africa and the strong competition from North American companies in South America.
* This report, first published in the May 2006 edition of RESOURCESTOCKS magazine, was commissioned by St Barbara
SBM Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)