Re:Nice post/for those who havnt read it SITE VISIT NOTES: ZAUMA PROJECT, ECUADOR
9 January 2012
Junior Mining Weekly | 2
22 February 2012
We recently visited Dynasty Metals & Mining Inc.’s Zaruma project in Ecuador.
Our visit to the Zaruma project has left a positive impression regarding how Dynasty has
moved the project forward, despite the uncertain circumstances surrounding the
Ecuadorean mining industry and the Ecuadorean government’s negotiation of
exploitation contracts with mining and development companies.
Zaruma has been producing gold and silver at pre-commercial levels since early 2010,
and Dynasty has used those profits to fund further plant and mine infrastructure, built to
the extent possible using locally trained labour and materials, despite the virtual nonexistence
of a modern mining infrastructure in Ecuador. As a result, the company has
built Ecuador’s only self-sustaining, modern mining operation with the potential to
produce over 100,000 oz Au, for approximately C$50 million in capital.
In this regard, we believe that Dynasty has been able to deliver shareholder value for
Zaruma’s development, while being limited to pre-commercial levels of production in
anticipation of full-scale production.
We have expected a slow production ramp-up period, including lower grades on start-up,
and expect that negotiations for an exploitation contract with the Ecuadorean
government will likely be a slow process. We currently model production ramp-up in
H2/12, and forecast 18,900 oz AuEq at US$948/oz AuEq in 2011E, and 57,600 oz AuEq
at US$591/oz AuEq in 2012E. However, due to slow government negotiations, there is a
possibility that production ramp-up will be further delayed.
Our 12-month target of C$5.10 is based on a 0.45x multiple to our NAV (10%), using our
peak Au scenario of US$1,750/oz, after adjusting for expected equity dilution 12 months
out. We have a SPECULATIVE BUY rating on DMM.
Zaruma project overview
The Zaruma project covers a 103 km² property in El Oro province, Ecuador, consisting of
46 concessions, of which 44 are 100%-owned by Dynasty, one is 50%-owned and one is
25%-owned. The El Oro province of southwestern Ecuador is a historically prolific area
of gold and silver production
Modern mining at the Zaruma-Portovello district began in 1905, operated by South
American Development Company (SADCO), an American company, which until 1950
produced an estimated five million ounces of gold and 12 million ounces of silver.
Following this period, an Ecuadorean government mining company took over the mining
operations at Zaruma, until the 1980s when the area was taken over by artisanal miners
that continue small-scale mining to this day.
Dynasty obtained the Zaruma concessions from IAMGOLD Corp. (IAG : NYSE : US$16.31
| BUY, covered by Steven Butler) in 2003. Royalties payable by Dynasty included two
concessions subject to a 1% NSR payable to a company director, three concessions
subject to a 2% NSR payable to an arms-length third party, and 39 concessions subject to
a 1.5% NSR payable to a subsidiary of IAMGOLD.
Dynasty is also currently paying a 5% NSR to the Ecuadorean government pending
definite royalty terms under an exploitation contract. Current production is also subject
to the 1.5% IAMGOLD royalty.
Current pre-commercial mine and plant production
Mining and processing operations at Zaruma are proceeding on a pre-commercial basis
pending Dynasty’s conclusion of an exploitation contract with the Ecuadorean Ministry of
Non-Renewable Resources. Mine production has averaged approximately 450 tonnes per
day (tpd) in 2011, with the processing plant averaging between 350 and 400 tpd, with
over 90% gold recoveries. On achieving full ramp-up, the plant is expected to process
approximately 820 tpd on average, and could potentially produce up to 100,000 oz Au
annually. Cash costs per ounce of gold produced are currently estimated by the company
to be running at approximately US$500/oz. In the nine months to September 31, 2011,
the company had sold approximately 16,000 ounces of gold and 64,000 ounces of silver.
Mine production is currently proceeding from lower-grade resource and non-resource
areas, principally from the underground workings that extend from the main Cabo de
Hornos decline, which the company believes can ultimately accommodate from between
700 and 1,000 tonnes per day. From Cabo de Hornos, Dynasty has access to the
Matalanga vein, which is one of the principal mineralized structures at Zaruma, varying
between 0.7 metres and 1.2 metres, with an average grade of 19.3 in Measured and
Indicated resources. Other veins, such as the Tamayo and Tamayo Este (Figure 26), are
also accessible from Cabo de Hornos.
Two other production declines have also been developed: Barbasco and Ayampamba,
which connect to currently defined resource areas, and are each expected to be able to
deliver between 100 and 150 tpd of ore.
Ore is currently being mined using hand-held drilling, and Dynasty expects to eventually
incorporate Alimak stoping (uphole bench retreat, narrow-vein mining) in order to
increase production with minimal mine dilution. Ore is scooped and loaded onto trucks
operated by local third parties engaged by Dynasty, and transported to the nearby
processing plant.
Production estimates
Owing to Dynasty’s need for an exploitation contract, we have expected a slower rampup
period than previous company guidance, which includes lower grades on start-up,
and expect that negotiations for an exploitation contract will likely be a slow process. We
currently model production ramp-up in H2/12, and forecast 18,900 oz AuEq at
US$948/oz AuEq in 2011E, and 57,600 oz AuEq at US$591/oz AuEq in 2012E. However,
with potentially slow exploitation contract negotiations, there is a possibility that
production ramp-up will also be delayed.
Plant and facility expansions
Dynasty is completing the construction of a small flotation plant (Figure 27) with rubber
mesh-barrel gold gravity separators, in order to improve silver recoveries and produce
base metal concentrates from the poly-metallic (Cu-Zn-Pb) veins at Zaruma. The
company is also installing a Falcon gold gravity circuit to improve overall gold recoveries.
The existing plant was designed to be modular so that additional processing capacity
could be incorporated – potentially doubling plant output – once full-scale mine and plant
production is underway.
Mine production is currently from gold-silver veins only, but is expected to eventually
include base metals from poly-metallic veins not presently included in resources.
A new tailings facility is currently being completed near the processing plant (Figure 28).
This facility is expected to be able to hold 3-4 years of production tailings before which a
new tailings facility is required. Dynasty has already scoped an adjacent valley that will
eventually be dammed in order to contain tailings from production beyond the current
facility’s capacity.
Current resources and exploration potential
Existing resources (Figure 29) at Zaruma are based on a compilation of underground
development and assay plans from historical operators’ records, as well as from more
recent underground sampling and diamond drilling by IAMGOLD and Dynasty in areas
expected to be mined as part of Stage 1 (Measured & Indicated) and Stage 2 (Inferred)
resources.
Figure 29: Zaruma resources
Category Tonnes Au g/t Au Ounces
Measured 1,568,000 13.93 702,100
Indicated 915,000 13.87 408,100
Inferred 3,38 2,000 12.72 1,383,400
Source: Dynasty Metals & Mining
Based on our visit, we believe that there is significant near-term resource upside
potential from underground mining development along strike of the Matalanga, Nudo,
Tamayo, and Tamayo Este veins, in areas adjacent to current underground workings.
The potential for resource upside through underground development along strike is
evident from the direction of these known veins within existing underground workings,
as well as from interpretations of the direction and length of the overall gold vein system
at Zaruma-Portovello (Figure 30).
In addition to strike extensions of the known resource veins adjacent to current
underground workings, Dynasty believes that there is considerable potential for longerterm
resource development at depth. Historically, mining has occurred between the 300
metres above the Amarillo River that runs through the Portovello valley, to 200 metres
below the river, a range limited by the early 20th century technology used by historical
operators, and the ability of small miners to extract at depth. Dynasty’s current
resources are contained within this 500-metre vertical range.
Given the ability of the modern mechanized mining techniques employed by Dynasty to
extract gold at greater depths, and the high grades and pervasive veining along strike
and known depths, it is possible that future resources at Zaruma will also be defined to
greater depths than currently established resources, potentially allowing for a
considerably extended mine life.
Keeping an eye on Ecuador
Dynasty has kept production at Zaruma at pre-commercial levels pending the negotiation
of an exploitation contract with the Ecuadorean Ministry of Non-Renewable Resources.
Unfortunately, progress in Ecuador’s mining sector continues to be slow, as the
government has yet to sign any exploitation contracts with the handful of mining
companies advancing projects in the country, notwithstanding previous indications that
agreements with numerous parties are imminent.
Despite the complicated political landscape, we have recently suggested that investors
should begin to keep an eye out for potentially improving conditions for miners in
Ecuador, in view of the potential gains relative to today’s steeply discounted asset values,
should the government begin concluding its exploitation contracts.
Our view is based on the government’s vocal support for building a modern mining
sector in the country. This is despite the high royalty/profit sharing/windfall tax structure
being proposed by the government - or because of it, which may induce the government
to ease its requirements to incentivize mining development, or else see development
capital skip Ecuador entirely for better investment climates like next-door Colombia.
In particular, Dynasty could be expected to have considerable upside leverage to an
improving political scenario for miners in Ecuador, given that it is currently the only
high-grade, modern mining operation in Ecuador, with significant exploration potential
not only at Zaruma, but also from its wholly-owned Jerusalem and Dynasty projects, also
in Ecuador.
Valuation
Our 12-month target of C$5.10 is based on a 0.45x multiple to our NAV (10%) of
US$539 million, using our peak gold price scenario of US$1,750/oz Au. We currently
model production ramp-up at Zaruma beginning in H2/12, and value Zaruma on a NPV
(10%) of US$176 million.
Our 0.45x risk multiple reflects the ongoing uncertainties associated with the exploitation
contract negotiations with the Ecuadorean government, which affects all of Dynasty’s
projects, and the pre-commercial status and mining and plant production ramp-up risks
at Zaruma.
We have a SPECULATIVE BUY rating on DMM shares.
Figure 31: NAV 12 months out (US$1,750/oz peak Au)
Shares out (M) 47.4
Au US$/oz $1,750
Exchange C$/US$ 1.0
5.005.00% 10.00%
Company Properties
00 per share
00 per share
Jerusalem $247,260 $5.22 $172,804 $3.65
Zaruma $373,917 $7.89 $284,026 $5.99
Total NPV US$ $621,177 $13.11 $456,830 $9.64
Dynasty Gold Field* $62,000 $1.31 $62,000 $1.31
Resource expansion* $7,000
.15 $7,000
.15
Dynasty Copper and Gold* $3,000
.06 $3,000
.06
Working Cap US$ $9,000
.19 $9,000
.19
Long term debt US$
.00
.00
TOTAL NAV US$ (000) $315,980 $6.67 $242,023 $5.11
TOTAL NAV C$ (000) $315,980 $6.67 $242,023 $5.11
Current share C$ $2.23 $2.23
Disc in price to NAV 67% 56%
Multiple to NAV 0.33 0.44
*zero discount – in-situ value