"The same friends say another rumour is that a second mill is being prepared in Russia to be shipped to Taparko to double production."
I have been scratching my head wondering as to why they haven't tried something like this as yet. I was thinking more of a small (low capital cost) mill though, to compliment the existing one (assuming they can cope with the vibration problem for now, until they build up enough surplus cash to replace the existing mill).
They said this in Q1’s MD&A: “While vibrations are currently at levels that allow operation of the mill at throughput rates of 80-90 tonnes, to ensure proper long term functioning of the mill and reach a specified production capacity, a reduction to lower levels of vibrations is required.”
They also said this: “High River believes that most of the technical start-up problems at the Taparko-Bouroum mill have been resolved but the continuing vibration problems remain a concern. The Company looks forward to reach in the second half of 2009 steady state production of 90 to 100 tonnes per hour with minimal down-time.”
It sounds to me like the vibrations get worst as they increase the tonnage per hr. It sounds like optimum level for the mill to operate at is around 80 – 90 tonnes per hr without impacting long term functioning capabilities. However, it also sounds like they are expecting to realize improvements to allow them to achieve steady state production in the second half of 2009 of 90 – 100 tonnes per hr. The bottom line is that it sounds like they can manage with the vibrations short-term, just as long as they don’t move the throughput too high.
If the rumours are true and they are already getting up to 100 then that’s very good (and potentially ahead of schedule). If they can go above 100, that’s even better. They did 95, 94 and 87 in the Q1 months. It was trending down though. It’s good if they were able to pick it back up, as the rumours are suggesting might be the case, if true.
Now, the designed capacity is 125 tonnes per hr. I don’t know what the debt covenant requirements are for Royal Gold, but I imagine the primary one would be achieving a certain percentage of steady state designed throughput capacity. It would likely be around 90% or 95% that needs to be achieved. Regardless, assuming Taparko can generate 90 – 100 tonnes with the current mill then HRG only needs to increase throughput by 25 – 35 more tonnes to achieve the original designed capacity (and potentially less to achieve covenant requirements).
So, the reason I have been scratching my head is I have been wondering why HRG hasn’t purchased and installed a low cost small mill to generate the remaining 25 – 35 tonnes per hr. IMO, there should be no excuses now. After all, they just did a financing for $10M, but only used $5M of it to retire debt. The other $5M should be surplus. You cannot convince me that they can’t locate a small mill to purchase for $5M, especially in this environment where mine closures, especially with base metal companies, have been prominent.
IMO, this solution would likely:
1) go a long was in eliminating the Royal Gold debt covenant breach (assuming that the other breaches are solvable with benefits from increased throughput) – naturally, I cannot know for sure without seeing the compliance requirements (for example, if Royal Gold insist on the elimination of the vibrations, even after 125 throughput gets achieved, then obviously the breach will not be lifted)
2) generate significantly more working capital, thus go a long was in eliminating the Severstal (formerly Standard Bank) debt covenant breach (working capital ratio appears to be a key breach) – naturally, I cannot know for sure without seeing the compliance requirements
3) generate significantly more cash flow to pay down debt
Doesn’t our entire problem in West Africa essentially come down to the missing 25 – 35 tonnes per hr? In my mind, a short-term solution should be simple enough to implement at this stage.