April 14 Analysis of Reservoir Minerals by Brent CookWith luck, after today's drill result, geologist Brent Cook, will soon have an updated analysis. If you are not yet a subscriber ( "not cheap but worth it" .. - from somewith with a legitimate solid background) to www.explorationinsights.com, here is Brent Cook's April 14th analysis of Reservoir Minerals - which he offered to all Agora Vancouver Symposium attendees last July, (subscriber or not), and since gave the OK to post:. Comments anyone?
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On Monday,
Reservoir Minerals (RMC.V) released the assay results of drill hole FMTC-1223 (291 meters grading 7.17% CuEq) from the Cukaru Peki discovery in Serbia. In our subsequent comment (April 8), we looked at the hole in perspective, as well as Freeport’s aggressive program, and decided to hold. Our reasoning was that our cost basis is quite low, the Timok property already hosts at least one significant deposit, and it has exceptional potential for further discoveries. Today we are going to look at the economics of the possible high grade portion of the Cukaru Peki deposit in more detail. The conclusion explains why we are not trying to “play the market” on this one and ignore the value. Deposits of this grade and exploration potential come around only once in a very long while.
An engineer’s view
Phil du Toit is a mining engineer who has helped me in the past on mining details and cost analysis for various deposits when it is important to get closer than a geologist’s educated guess. For this study, Phil took all the drill data and geology, estimated an underground mineable resource at a 3% copper equivalent cutoff, and ran it through a 6,500 tonne per day, long-hole underground stope mining operation. He applied reasonable dilution and utilization factors, 90% recovery, and employed an 800-meter shaft and hoist to bring the ore to surface.
Using the drill log assays and reasonable extrapolations between holes, the high grade resource for this ballpark study is 21 million tonnes grading 6.54% copper equivalent (somewhat less than my estimate but we’ll go with this). For reference, that’s ~6.9 million ounces gold equivalent grading 10.2 g/t AuEq. Capex to build the mine and mill is $332 million, and the deposit will be mined over eight years beginning in 2018. Under that scenario, applying a 12% discount rate and assuming a $2.50 copper and $1,150 gold price, the pre-tax project NPV comes to $1.3 billion. At RMC’s current 45% ownership, their piece of the mine comes to $570 million ($13.00/fully diluted RMC share). If Freeport earns 75% by producing a bankable feasibility, RMC’s 25% comes to $317 million ($7.23/ fully diluted RMC share). Take note: if Freeport does take something to feasibility it will be larger and more valuable than our small high grade deposit.
Supporting our estimates, a reasonable comparison in terms of capital and operating costs is Nevada Copper’s (NCU.T)
Pumpkin Hollow underground copper skarn deposit in Nevada. A December 2012 feasibility study evaluated a proven and probable 27 million tonnes grading 1.49% copper plus a bit of gold in a flat-lying body located between 430 and 670 meters below the surface (at a break even cutoff grade of 0.8% Cu). The deposit is being exploited using long-hole stope mining methods; and a simple concentrate is produced and shipped to a smelter. The final NPV calculation, looking at only an underground 6,500 tonne per day operation, returned a pre-tax NPV5% of $419 million and an IRR of 28.6%, assuming $3.59 copper. Capex is $329 million, sustaining capital $222 million, and LOM operating cost $42 per tonne milled; production costs are estimated at $1.29/lb copper. Dropping the copper price to $2.75/lb results in a NPV5% of $276 million.
The fact that the average mined grade at Pumpkin Hollow is
half the cutoff grade we applied to Cukaru Peki, and that Pumpkin Hollow is being financed, adds to our confidence that Cukaru Peki will be a valuable deposit for somebody. Keep in mind that the mined diluted mill head grade in our model is worth $340/tonne (using $2.50/lb copper and $1,150 gold) against $46/tonne operating costs—there is some margin for error.
A few caveats
We are, of course, drawing plenty of assumptions about the potential resource from very little data. The big unknown is the actual tonnes and grade at Cukaru Peki—the foundation upon which this entire discussion is based. I am comfortable with this, as these types of mineral systems (large high sulfidation copper/gold) are generally predictable and display good internal continuity. Structural complexities within the ore body could prove to be a problem and increase mine costs or render some sections un-mineable.
We are hitting this pretty hard by applying a very high 3% CuEq economic cutoff which, realistically, we think will be quite a bit lower. Metallurgy and recovery can be readily estimated based on similar deposits, including the nearby Bor Mine and Smelter Complex, so not a problem.
Considerably more drilling and geo-technical studies will be required before we can get a better handle on Cukaru Peki and the additional potential of the Timok property package. In the meantime, I suspect we will get the opportunity to acquire more shares of RMC as the market fails to recognize the difference between a stock play and a true economic discovery.
That’s the way I see it.
Brent Cook
April 14 2013