Gold Idol: Killian Charles' Search for the Next Mining Super https://www.24hgold.com/english/news-gold-silver-gold-idol-killian-charles-search-for-the-next-mining-superstar.aspx?article=5188408358H11690&redirect=false&contributor=The+Gold+Report&mk=1
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TGR: You had some criteria that companies needed to have before they got included in your analysis: an economic study, no other assets in production, capital expenditures (capex) to develop the asset below $1.5 billion ($1.5B) and a value of less than 15 times capex divided by market cap. Why are those important?
KC: I think the mining industry is moving on from large projects�projects with capex over $1.5B. Large projects are just too hard to manage and cost overruns become problematic rapidly. Right now there's no appetite from producers and there's definitely no appetite from the equity market to finance large projects.
We wanted to make sure that the companies had an economic study of some sort because overestimation ends up being a large problem. Too many "back of the envelope" calculations are simply ridiculous and set unrealistic expectations. I don't have the time or the team to develop a perfect mine plan for all the projects at the resource stage and, honestly, neither do most people out there, so we have to rely somewhat on these third-party engineering firms to produce something that we can judge. I know many people will disagree with my statement but, at the very least, it's a more accurate starting point.
As for capex divided by market cap, we wanted to avoid projects that had an execution risk. If the market cap is $10 million ($10M) and the project's going to cost $600M to build, odds are the company will have a hard time raising the money.
TGR: The market effectively did some filtering for you there
KC: It doesn't mean that these projects won't come back. We feel that the 15x capex to market-cap ratio is elevated enough that most companies can meet this criterion. If the market cap comes back into an acceptable range, we could definitely take another look at them and include them in our compilation.
TGR: In one scenario, you used $1,200/oz gold, $20/oz silver and a 7% discount rate. In scenario two, you used $1,000/oz gold, $15/oz silver and a 10% discount rate. What were the companies that ultimately survived your scrutiny?
KC: We divided them into three groups based on how their projects perform in our more stringent second scenario. Our first group consists of projects with a positive NPV at $1,000/oz gold. Those companies are Dalradian Resources Inc. (DNA:TSX); Golden Queen Mining Co. Ltd. (GQM:TSX); Guyana Goldfields Inc. (GUY:TSX); Lydian International Ltd. (LYD:TSX); Midas Gold Corp. (MAX:TSX); Midway Gold Corp. (MDW:TSX.V; MDW:NYSE.MKT); PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE), which is now the focus of an acquisition by Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT); Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL); and Torex Gold Resources Inc. (TXG:TSX).
Then we had a second group that was more marginal. Their respective NPVs varied between $50M and negative $50M. These projects were on the inflection point and could go either way...............................