We have a scoping study underway which should be due for release this month (see ann. 3 May pg 2). I have amended my spreadsheet to give me a NPV on the OP resource to try and predict what NPV a scoping study might come up with. I previously had allowed for $15mill per year for exploration as well as $5mill per year on admin. Scoping study NPV’s do not factor in exploration and rightly so as the valuation is based only on the current jorc resource and not the exploration potential. I deleted the exploration expense and amended the 5mill for admin to 3mill. Deducting the exploration had a big impact on the NPV of the current resource.
The NPV will obviously be affected by cash cost assumptions, capital cost estimates and through put rates. I have tried to be conservative, but not too conservative. I have allowed for an owner plant rather than a toll treatment agreement for the certainty our own plant would give us. The company recently discussed a gravity plant being considered as a potential alternative to toll treatment. Doray’s scoping study estimated $55mill cap costs for a complete plant at 180,000tpa. A gravity only plant should be much cheaper. I assume $45mill for a plant likely to process more than 300,000tpa. Anything less seems too small considering the very strong exploration upside. Considering the average ore grades and mining widths of an open pit and the very high grades that should be achieved u/g with selective mining and the very simple gravity only recovery, I am using a cash cost assumption of $450 averaged over the o/p and u/g operations (the majority should be o/p). That compares to the Doray scoping study findings expecting $500-600 on a much smaller scale operation using predominantly u/g mining and full processing (not just gravity). My $450 should be conservative.
My spreadsheet gives me a NPV of $290mill (5% discount rate). Chances are that a part of the resource will not be included in a mining plan but that should easily be more than offset with very early results from the current program to extend the resource. That gives 100% upside to the current market cap, and more based on the current EV after allowing for the near 26mill cash. That cash will very likely result in a much larger resource being defined before production begins. My target to my NPV is 9c based on the CURRENT resource for OP ONLY.
Looking at the 2012 planned trenches, including extending trenches of very high grade veins which continue outside of the current resource, I find it difficult to imagine the resource not increasing by a minimum 50% over the next 3 months. Allowing for this strong exploration potential being achieved, my target increases to 13.5c. I can certainly see further strong potential for at least a doubling of the resource just from work to be carried out on known mineralised veins. If they achieve that (good probability based on known mineralised veins), then the upside potential is for 18c. That is ignoring the potential of what may be found in the wider areas outside of the current exploration area. A doubling of the resource is certainly not the maximum potential. The actual value to be added by resource extensions will depend mainly on grades achieved, depths and mining widths but I see very large upside (100%) just based on the known resource and huge, good probability upside potential that comes for free anywhere below 9c.
All this also ignores any value at all for the defined resources of millions of ounces of lower grade gold at Buccaneer, 200,000oz at Hyperion at a reasonable 2.2g/t which lies near a potential toll treating plant, and the many other targets including Kroda with its reasonably high grades near surface.
This is outstanding value. I have continued buying yesterday at 4.4 and today at 4.3. The more I study this thing the more I want to buy. I don't know when this sell off in gold stocks will end but I feel its not far off after the extreme falls of many gold stocks. Even the larger ones are off nearly 50% including NCM. When this turns, ABU has extraordinary upside and I will be there for the ride.
ABU Price at posting:
4.4¢ Sentiment: Buy Disclosure: Held
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