The other side of the coin

Hi Guys,

In my absence I have been busy re BDR. Management are in no doubt about my (and others) views and the ball is firmly in their court. With a not insignificant % of shareholders conveying their concerns I would hope that management take on board our concerns.

Some quick thoughts, not to be a Pollyanna, but to explore the upside and have my view challenged by others:

Shifting Dirt

Mining operations have now shifted to Urucum (from Tap AB and Tap C) and, from my understanding, MACA over estimated their ability to deal with the wet. Urucum was deforested and mined with the resultant problems of dealing with clay and mud. Poor really. This was compounded by fleet availability due to delays / inability to import second hand equipment from Australia that was only acknowledged too late.

I will flick up a couple of slides from a presentation I prepared as part of my recent efforts. This one shows the amount of new equipment that has been arriving at the mine over the past few years:



To talk to Loki's point about moving enough dirt to hit guidance; it's a fair point and, to-date, both BDR and MACA have been unsuccessful in hitting their targets.

MACA is currently shifting 60ktpd of earth (22mtpa). To achieve their FY targets earth movement in 2H needs to average 80ktpd (29mtpa).

So, is this achievable?

With the dry(ier) weather starting in a couple of weeks time and additional equipment still to arrive for the main pits (see slide above) you'd think that MACA will be able to lift tonnage from the current level.

In addition, 1.4mt will come from Duckhead which will have it's own dedicated mining fleet (hired). This means that from the main pits c. 72ktpd needs to be moved - or a 20% increase from current levels. Achievable given that 2H is dry and they will have more equipment? I think it is at least feasible.

In terms of a comment about sheeting the roads not being a concern for MACA - I disagree. MACA have a 5 year contract to deliver ore to the ROM. They will want to do this as efficiently and as consistently as possible - thus it is safe to assume that once they have ramped up production to steady state (in the dry) which is the immediate concern, they will start preparing for the next wet.

Loki questions whether this is achievable longer term - and fair enough.

You can slice and dice the various numbers in many different ways but if I use the following:

LOM annual production 170k oz p.a.
Reserve open pit grade 1.77g/t
Recovery 90%
Strip ratio 7.5 : 1

I work out that c. 28-29mt p.a. need to be shifted. Given the discussion above, I think that it is at least feasible if everyone got their act together.

Recently discovered Urucum West and MTL will assist this (higher grade, flat ore bodies with low strip ratios) and new discoveries such as Gold Nose (high grade from near surface) will add upside. This is in conjunction to MACA's continual incremental improvements and having the appropriate amount of kit available and operating on weather proof infrastructure.

BDR cash burn

I think that people are being too generous in their assessment of BDR's cash + bullion position at the end of Q2. The slide below shows my workings:



Investors need to decide for themselves whether this will be the low point for BDR's balance sheet or whether the decline is terminal - i.e. they will not (and never will) hit their targets for earth moving, etc.

AISC will be terrible for this Q but should improve materially for 2H especially if c. 20k oz of Duckhead gold is mined at low ($300-400) AISC.

Urucum Underground

Loki again questions the viability of Urucum U/G - and again fair enough. The difference between the Reserves & Resources statement from 2013 to 2014 shows that c. 228k oz have been removed from the reserves statement but will be "reinstated" when / if the underground PFS is released.

However, when you look closely you'll see that these are low grade oz and may not assist in the U/G economics of the mine - i.e. they are c. 1.3-1.5 g/t.

However when you look at the 31/12/13 Urucum pit shell:



vs. the reduced 2014 open pit shell (possibly a different cross section):



You can see that the higher grade material has never been included in a reserve statement and the outcome (positive or negative) will come from the deeper ore (grades get better with depth).

Also importantly, instead of a single lode as with many mines, Urucum has a double, parallel lode structure with combined widths of 7 - 25m (strike length of c. 800m). Thus from a single set of infrastructure (decline, etc) BDR can access two lodes. Others with more experience can probably confirm / refute me but a 800m x 7-25m x [?] depth should be economic - even at lower grades because the oz per vertical m is still good.

New exploration success

Mutum and Gold Nose are important for two reasons IMO. Firstly Gold Nose is potentially going to provide a source of high(er) grade, near surface gold soon into the mine plan - potentially in the 2H 2016 and shows that there may be multiple higher grade pockets present on the Tucano tenments.

Mutum provides a longer term but much more sizable prize of a sister system to the current mine that could potentially extend the mine life considerably.

Together, IMO, this helps put a firm floor under the downside prospects for investors as it shows that this greenstone belt may contain many more millions of oz than the current Reserves and Resources statement indicates (c. 5m oz when removing Tartaruga).

BDR's Tucano asset is, IMO, firmly moving up the list of attractive assets that a competent, Americas focused mid-tier miner will want to add to its production and exploration portfolio. Thus, if BDR and MACA can't operate Tucano effectively a buyer will emerge - thus an asymmetric investment proposition IMO.

If you want safe and steady then Eshmun is correct and TBR / RND have much better production metrics / balance sheet attributes. But if you can cope with the stress, BDR could generate significant alpha from this point (16.5c) if they (i) get their operations sorted (ii) increase their R&R statement, and (iii) the gold price trend starts to move up. Or not.

Cheers
John