In the case of EKM, companies will produce whatever gold they can, as soon as they can, as long as it is profitable to do so and the CAPEX outlay in the first place is not insurmountable to get the show up and running. Positive cashflow pays the bills, reduces the potential for future shareholder dilution and buys you time to explore other parts of the tenements that reveal potential. I believe that EKM is focused on getting to the production stage as soon as is possible.
I have come across countless juniors who look to produce 30-80,000 ounces of gold a year just to get going. From previous experience and having talked to some CEOs about this, a heap leaching operation of the scale that would fit EKM's initial needs typically costs around USD25-30mm. Depending on operating costs to EKM (see previous news stories and posts I made a couple of months ago), if you assumed USD750 per troy ounce operating costs and, therefore, USD400 of net income at current prices of gold, then producing 50,000 ounces a year would yield net income of USD20mm!! In other words, it only takes 100,000 ounces to have generated sufficient income to completely pay for the costs of production - less than two years in this case! In countries like Mexico, operating costs for similar, relatively shallow, resources are between USD400-500 per troy ounce, providing even greater margins at current prices. This is just thrown in as a comparison.
As I have posted elsewhere, many juniors have lagged in the past 2-3 months, despite improving news. This happens in the markets sometimes. Applying micro analysis to situations which are under the influence of greater macro pressures does not make sense, as frustrating as it can be as a shareholder. As long as the story's fundamentals are improving, as is the case here, patience will ultimately be rewarded.
The key to understanding EKM is not how much ounces it necessarily has in the ground (i.e. 750,000 oz at 1g/T cut-off), but how economic it would be to extract and produce the resource. And in EKM's case, this is the beauty of the more recent finds: not only are the grades of the new finds impressive and should soon lead to a reasonable upgrade in the size of the overall resource, but they also appear to be economical to extract and would be perfect for a heap-leaching operation as described above. As per previous posts, if you were to be ultra-conservative and just assumed that, at current prices of gold, 20% of the existing resource would be economical to mine (i.e. 150,000 oz)and further assumed that at a minimum, when all the analysis from Central Bore and other areas are calculated, the total resource will be at least 1MM ounces (implying an additional 250,000 ounces would be economical to mine), then on a simple back of the envelope calculation, 400,000 oz at USD400 net income per oz, minus USD30mm for CAPEX produces a net value of USD130mm. Assuming a yield of 50,000 oz per annum = 8 years mine life, and using whatever discount yield you feel appropriate, you are still looking at a project IRR which is 4-5x the current market cap of EKM! If the new resource figures come in at greater than 1mm oz, then the current sense of undervalue will just be intensified.
When the time is right, EKM's big challenge will be to finance the heap leaching operation which can allow it to generate positive cashflows. Given current valuations and the potential blue sky which is opening up with successive positive finds and a soon-to-be determined resource upgrade, I believe that the share price will soon resume its upward trajectory, inevitably enhancing the company's financing options when the time is right. It is also sitting on 6mm lbs of U3O8 which, I imagine, will be flogged one day as part of the financing alternatives.
EKM = still very undervalued and has improving fundamentals. Any short term consolidation should be seen as a buying opportunity. Just my 12c worth.
G
EKM Price at posting:
11.0¢ Sentiment: Buy Disclosure: Held
