Equedia Update this sunday
Putting a gold project into production often takes hundreds of millions of dollars and years of patience, but finding the right one can often be a very rewarding investment risk.
That's why I have invested in companies such as Corvus Gold.
Corvus Gold (TSX: KOR) (OTCQX: CORVF)
This week, Corvus not only announced it increased its land position at the North Bullfrog Gold Project by 52%, itreleased an updated PEA that now outlines a two stage development and near term production strategy for the project.
If you are new to the story, please go back to: https://equedia.com/reportarchive/corvusgoldreport/.
The recent PEA shows:
- Two (2) phase project development with initial mining on patented mining claims to create potential for initial production in late 2014, two years early.
- Large in-pit resource of 1.0 M ounces contained and 765,000 ounces recoverable gold.
- High gold recoveries with low cost heap leach system averaging 75% gold recovery over life of project.
- Average annual production of 74,800 ounces of gold at total cash cost of $816/ounce.(I expect this number to be much higher)
- Low entry cost gold project with initial capex for both phases at $95M (phase I at $60M) inclusive of contingency and pre-production/indirect costs, phase II development drilling, engineering and permitting, added crushing plant and infrastructure upgrades.
- New PEA does not include 2012 exploration results which indicate significant expansion potential:
- high-grade Yellow Jacket results (4.3m of 20.0 g/t gold & 1,519 g/t silver)
- bulk tonnage step out drilling (52m of 0.8 g/t gold)
- the potential of by-product silver impacting the project economics - silver recovery unaccounted for in PEA
- Favourable low strip ratio of 0.48.Potential fast track development project that is within the scope of a junior producer having strong leverage to gold with NPV(5%) $345M, 43% IRR & 3.2 year payback at $1,800 gold.
- Favourable permitting environment with recent examples of timely approvals.
- Excellent infrastructure for mine development, highway and grid power a few kilometres from deposit and an existing, skilled mining workforce in the nearby communities.
- Recently expanded land package to 68 km² to cover potential gold system extension and to address potential future mining operation.
For those following the story, there's now a higher capex cost now than in their previous PEA (from $70 to $95 million).
At first glance, the added costs seem like it should have a negative impact. But a closer, and smarter, look into the details of the release shows that the added costs make the project even more robust than previously thought.
A Much Better Estimate
I wanted to make sure my calculations were correct, so I called Corvus' CEO, Jeff Pontius, to clarify.
It turns out that I was right; the higher costs associated with Corvus' recent PEA is a result of their growth, and not an inflation-created variable.
If Corvus came out and said capex costs for the overall project will be more $25 million more, but the project remains exactly the same, I would start asking questions.
But this simply is not the case.
Jeff and his team know they're onto something special, so they're not leaving anything to chance.
The PEA now includes $15 million of additional drilling and a crusher for around $3.5 million*, which is almost all of the added costs; costs that are typically left out by Companies who do these kinds of studies because they aren't necessary. Corvus could go into first phase production without the crusher (as many do), but they're not leaving anything to chance.
(*crusher cost is my own estimate)
The other costs include some minor sustaining capex increases as a result of adding more tonnes to the original plan, recovering more ounces, and building bigger leach pads; it's simply a function of the added size of the ore body.
I think there is great chance they can drop these capex costs down significantly, maybe even in half, if the additional drilling can prove up more ounces. Also keep in mind from my original report that the costs used in Corvus' PEA estimates are a lot higher than the costs generally associated with gold production in Nevada:
"Opex and admin costs used in the PEA are higher than 75% of operating mines. The process costs used is higher than any other existing Nevada operations. The Capex costs used in the PEA are 15% higher than mines constructed in the past 24 months."
Sum it Up
The odds of Corvus continuing with great exploration success is certainly in their favour and I would hate to bet against management on how they will return the $15 million in drilling to shareholders...especially considering that for every dollar raised thus far, they have returned nearly 5 times the market cap back.
Anyone that looks at the new numbers as a negative should think again.
The project is now more robust and will produce more than 75,000 ounces per year; all for less than $100 million in capex. Compare that with the many gold production stories whose capex end up in the hundreds of billions.
As Natural Resource Holdings noted:
"...Even high grade deposits with no infrastructure are inferior to easily mined bulk tonnage deposits with close proximity to infrastructure in stable geopolitical jurisdictions."
Corvus' North Bullfrog is a very simple oxide bulk tonnage deposit with close proximity to infrastructure in stable geopolitical jurisdiction that doesn't have many of the inflation-cost dependant variables of other gold projects.
Furthermore, the added costs of drilling included in the PEA should have a dramatic impact on the overall project itself. The PEA outlines a capex of $314 per ounce. This number could dramatically be reduced as more ounces are added.
There's already a lot of drilling not included in the recent PEA. If we added the high grade component into the calculations, we should certainly see a dramatic decrease in LOM (Life of Mine) capex per ounce; the type of numbers the big producers hide in their cost-per-ounce figures (see Secrets of the Big Gold Producers.)
Furthermore, recovery rates are now much higher than previously estimated; that means the project is now going to produce more gold per tonne.
Consider everything I just mentioned in this letter: Gold deposits with over 1 million ounces are extremely rare. That means economically viable gold deposits are one of the rarest real estates on the planet; literally land with buried treasure.
I've been to Corvus' North Bullfrog Project and it wouldn't take much to put the thing into production. Not only that, they may be chasing a large high grade discovery that could dramatically change the economics of the project.
Given the recent PEA, I'd say that's something to get excited about.
Until next week,
Ivan Lo
Equedia Weekly