High River Gold Mines Ltd HRIVF

Prognoz analysis (I orig. posted this Oct. `09)

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As mentioned, I orginally posted these 2 posts back in October 2009.  The $2 cash cost per silver oz ballpark estimate is what I would expect based on other high grade silver mines, the super high grade of Prognoz silver resource (the 700 g/t is as good as it gets on earth for a project of this size), the huge economies of scale that is expected from massive daily tonnage through the mill (I can see the possibility of 15,000,0000 to 20,000,000 silver ounces produced per year), the very solid 2 - 3 meter vein thickness, easy access to the ore body via primarily adit mining through the sides of the hills (the ore body is primarily in the hills as oppose to underground), by-product credits from other metals, etc.  However, the fact of the matter is that it is impossible (FOR ANYONE) to know for sure where the cash cost per oz will fall, especially without a solid feasibility study (or ever a pre-feasibility study for that matter).  It amazes me that someone can get away with writing down the project without such (reputable) independent comprehensive studies.   

Here are my 2 previous posts from last October:

1)   Glavnaya and Boloto veins = 205,000,000 silver ounces (43-101)

 

Micon (the independent technical expert) said that both Glaynaya and Boloto veins continue to remain open to exploration not only in both strike directions but also in the subsurface dip direction as well.  Clearly, the 205,000,000 total ounces from these 2 veins alone will increase substantially at some point down the road.

 

Limited test drill holes were done on 16 of the other veins, as well as rock samples taken.  Micon came up with a conceptual range of ounces for those 16 veins.  The high end range provided 369,000,000 ounces, with 776 g/t or 25 oz/t grade.  Micon said they were being conservative.   As such, these 16 holes likely hold significantly more ounces.  They were also not including sub shoots of veins and other ore bodies like that.  There were insufficient drill holes to add these 369,000,000 ounces to the 43-101 total ounces for Prognoz at the time, thus these ounces are considered conceptual at this time.

 

As a result, currently, we have already identified 574,000,000 (@ 24 oz/t grade average) conceptual silver ounces of the 1,000,000,000 ounces I am eventually expecting us to find on the Prognoz property.

 

Also, take a look at this statement by Micon:

 

“In addition, some of the other known zones and veins may prove to be just as extensive as the Glavnaya and Boloto zones as further exploration programs are conducted on them.”

 

In other words, Micon is of the opinion that some of the other 30 known mineralized Prognoz veins may be just like Glavnaya and Boloto – supplying 200,000,000 to 300,000,000 silver ounces from only 2 veins.

 

On a longer term basis, I can really see a path where strong potential exist for our Prognoz property to realize 1,000,000,000 ounces of silver in the ground @ 22 to 25 silver oz per ton grade.

 

Here is the original written conclusion from Micon (latest Prognoz Technical Rpt, page 187):

 

“While the Glavnaya and Boloto zones have proven as extensive as previously believed, they continue to remain open to exploration not only in both strike directions but also in the subsurface dip direction as well. In addition, some of the other known zones and veins may prove to be just as extensive as the Glavnaya and Boloto zones as further exploration programs are conducted on them. There is the potential to significantly increase the known amount of mineralization within the project area since both the Glavnaya and Boloto zones remain open in all directions and the exploration on the other zones on the property is only beginning to reveal the extent of the mineralization in these locations.”

2)    I would like to challenge the notice (those people are providing you) that Prognoz is too overwhelming for HRG.

Firstly, I would like a truly independent mining engineering firm to perform at least a pre-feasibility study before any write down actions are taken with Prognoz.  IMO, it is completely irresponsible to write down a world class project like this without performing the appropriate comprehensive independent study by technical experts in the field.  A pre-feasibility study will provide a comprehensive technical and economic examination of key parameters for large scale mining.  Without seeing data from such a study, I feel totally uncomfortable with such a write down of Prognoz.

Secondly, I am viewing Prognoz as the type of world class silver project that ultimately realizes a 50 year mine life.  In addition, with an incredible high grade of 25 silver ounces per ton, I am viewing Prognoz as having a cash cost per oz of $2 or below (and could be even lower as those Prognoz tonnes come with by-products that can be used as by-product credits to lower cash cash even further).  As a result, there is no urgency to go all out spending with Prognoz right now - the extremely low cash cost per oz means that Prognoz will be extremely profitable in any silver price environment, whether silver hits $30 or falls back to $5.  There is no drop dead time line because of the high grade component.

In addition, Prognoz would be extra challenging for a pure exploration company.  Fortunately, HRG is a significant gold producer (not an exploration company) in a period of all time gold price highs. 

330,000 annual gold ounces of production from HRG
US$1,100 gold price, US$430 cash cost per oz

It means that HRG will be generating at least US$221,000,000 in gross operating profit per year over the next few years.  Let's say that the gold price averages US$1,100 over the next 3 years.  That would mean US$663,000,000 gross operating profits for HRG (prior to paying off existing debts, paying Corp G&A, improvements on current operating properties, taxes and Bissa work).   However, there should be plenty enough cash left over to allocate towards additional exploration work and more comprehensive studies on Prognoz over the next 3 years or so.

In 3 years time, once the property is ready to be developed, funding can come from the following 3 sources:

1) significant profits from HRG's gold operations
2) non-recourse project debt financing
3) if necessary, issuance of HRG shares (HRG's share price should be at least $5 by then)

Let's say it takes $1.25 billion (BEING EXTREMELY CONSERVATIVE) to develop Prognoz to production, with development period being 4 years once construction begins.  Here is how the development can be funded:

1) contributions (to the Prognoz development efforts) from HRG's gold operations (over a 7 yr period) - $350,000,000 ($50M per yr for 7 yrs)

2) non-recourse project debt - $400,000,000

3) issue 100,000,000 HRG shares @ $5 per share - $500,000,000


Here is what I see as the long-term economics of Prognoz, if they do this right:

*50 years mine life

*Prognoz has about 32 known minerialize veins.  We have only begun exploration efforts on 2 veins (and still ways to go on those 2 veins).  There will be additional minerialized veins discovered in the process (in addition to the 32 known veins)

*we have 205,000,000 silver ounces so far, just from incomplete work from those 2 veins - this is equivalent to 4,100,000 gold ounces

*I fully expect to see at least 1,000,000,000 silver ounces eventually - this is equivalent to 20,000,000 gold ounces

*sub $2 cash cost per oz silver - in gold terms, this is equivalent to $100 per oz gold

*let's use 50 LOM silver price of $16 - this is equivalent to $800 per oz gold price, based on long-term gold/silver ratio

*LOM average production of 20,000,000 silver ounces annual - this is equivalent to 400,000 annual gold ounces on a LOM basis

*we are looking at the potential for $14,000,000,000 in LOM gross operating profits


Here are some added benefits to Prognoz:

1)  The type of mining we will use at Prognoz is called adit mining.  This is because the silver ounces are located in hills - for the most part, the ounces are located above surface.  The ore bodies are horizontal or near-horizontal.  We will go through the sides of the hills.  The use of ramps and shafts will be extremely limited (huge mining advantage).  Adit mining is way easier to perform than underground mining.  Here are very noticeable advantages on the project plan:

a) far less capital expenditures to build adit mines versus underground infrastructures

b) much faster to develop and bring into production

c) substantially less cash cost per oz

2) With production of 20,000,000 silver ounces (or 400,000 gold equivalent ounces) we are looking at amazing economies of scale


Another successful Russian project located in a remote location:

Kupol, now owned by Kinross.  However, it was Bema Gold that did almost all of the work.  Bema Gold was the size of HRG.  They even had to build an airport.  Kupol is hugely successful. 

In my view, Prognoz can be handled by HRG, if done properly.  I see Prognoz as being a 50 year mining operation, which will be capable of being successful in any type of silver market (a core operation for HRG).  I believe that HRG is well positioned to enable Prognoz to begin contributing to share price within a year (or so) and to bring it into production within 7 years (being conservative), without materially diluting HRG sharesholders.