So many variables and so little information to estimate a resource there is always a risk of over-call. Also a risk of grade under-call, except in these circumstances which happen all the time, management are heroes, shareholders are clever investors and all is good but not much talked about. It is for very good reason that the JORC code requires the word "estimation" when referring to Mineral Resources, where as Mineral Reserves are "calculated". Geology is an inexact science, especially when dealing with only a few point samples then having to extrapolate that point data into physical and grade reality. Anybody who understood this process would not be surprised by 15% over-call, though would be disappointed.
GCY was a completely different over-call to DCN. Can't be bothered going into it but the "nugget effect" is a very real problem for resource geos to deal with and geostatistics is not a perfect science either. The orebodies at Mt Morgan are, by and large, simple well understood geologically from both historical mining knowledge and geological reality. However, when there exists a high degree of grade variability with a ore lode, drilling two holes next to each other can return two very different assay grades. The term "nugget effect" refers to the difficult reality of gold being distributed in unevenly rather than evenly within ore. The ultimate nugget effect would be in a placer deposit, of the recent Pilbara 'watermelon seed' discoveries popular a year or so ago. A drill sample will return either zero grade or many ounces per ton depending on whether it jagged a nugget in the core and assay sampling process. What has happened, so far, is that the ore lodes mined have both had higher grades estimated based on geostatistical math than has proven the in reality. Some of that may be caused simply by the randomness of the sparse exploration drilling snagging more higher grade intersections than lower grades. Like seeing a run of 8 reds at the roulette wheel, random distribution of samples does to always follow the logic of averages. Some of this perhaps should have been picked up by geostatistical variation analysis but then again these things do happen. That is what Rohan was referring to regards +/-15% variation from reserve grade being with statistical norms, even over longish periods of time.
To be realistic DCN now has to reduce the reserve grade to match the mining reality to date, anything less would clearly be inappropriate. That is not to say that the next 12 months doesn't return higher grades than what was estimated from resource drilling. BIF's are notoriously nuggety ore lodes. The most crucial difference with GCY is that they just didn't have a handle on the physical geometry of the ore lodes, possibly exacerbated by grade over-call, compounded by mining dilution and ore losses etc. Simply a dog of a deposit as things turned out where such risks were not identified early enough. DCN on the other hand have a very good understanding of ore lode geometry, even more so with the subordinate lodes that have been causing most of the trouble. The much more dense grade control sampling would have confirmed exactly what the ore lodes are doing and they have 98% accuracy for grade control against the mill. The mine plan moving forward will have a very high confidence in the reserve ounces present and even the resource will benefit in confidence once adjustments for grade control knowledge are extrapolated out, even though the nugget effect from sparse resource drilling is an ongoing variable.
Yes there is risk in DCN, fear is driving the price down, but it has been much hyped by some on HC. The situation is complicated to analyse, too complicated for most without industry experience, but DCM is not going into administration quickly without some disaster. Those with u/g mining experience will know that mining contractors can be a disaster for production levels, no point explaining the situation any other way than what it is. Lack of machine availability means less ore to the ROM and less gold out the plant. Likewise, dilution from stopes is a ever present problem for most u/g mines but one which most companies get better at with experience, understanding and better practices. There is every reason to expect with the knowledge gained this last 6 months that the new mine plan will focus on better grade ore panels, improve mining practices in the narrow subordinate lodes and sterilise some of the riskier areas identified with geological and mining knowledge gained etc. Company will be riding the mining contractors so hard to maintain staffing levels and availability one also expects that to improve.
DCN is wiping it's own face for total cash flow out each quarter at current production levels around 77,500 Oz per qtr. This total cash out is more than total costs, and much more than AISC of $1400 obviously, but is a critical mark to hit regardless. The debt repayments is the sole negative drag on cashflow which can be resolved by a modest improvement in monthly production. Costs are largely fixed, they simply need to leave some of the lower grade, riskier or behind, reduce dilution and keep up machine availability. A 5000 Oz per quarter improvement on the last two (ie 42500Oz) would provide $40-50M free cashflow per annum. That looks easily achievable based on modest improvements in practices. I believe new guidance is conservative and improvements beyond that can be achieved. Especially if say a NST came in with their best people, went owner operator and did things right...
So DCN has put in some $200M in capex by end MArch 2018 qtr, and more capex beyond production and sustaining capex since then. This is on top of the value of the plant and infrastructure, plus much exploration spend that has added more resource ounces and made likely an ultimately much longer reserve. This value is what DCN was valued at $3 until recently. Don't get me wrong, the reserve grade reduction and therefore reduced annual gold production has diminished the vale of Mt Morgans absolutely. Has it damaged the mine enough to let it fall into administration with $50m odd net debt, very unlikely. Choices are:
Keep eating through existing cash, maybe fall short of debt repayment schedule and fall into administration.
Re-negotiate new debt terms with existing bank syndicate to buy a years grace to get well ahead of the curve.
Replace the existing lender with another on more punitive terms but which also pushes out debt repayments.
Raise money in a very distressed market at very diluting prices
Sell down 50-100% of project to a cashed up WA miner that has the balance sheet and skills to add value to the mine and the mine to their stable at a large discount to NAV.
Place your bets people, I tend to think it is worth more to shareholders to fold into the arms of another WA miner than the first four options. Obviously I assume that the production problems and grade over-call to date are not terminal, and that this mine highly geared to production levels can only get better given the three main problems identified are manageable and fixable. Glad I didn't own before the sell down, happy to buy at these levels for a speculative play.
Good luck
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