Thoughts on the ErnestoPau-a-Pique ProjectElgin1,
Page 23 of the EPP Feasibility Study summarizes the baseline economic evaluation of the EPP project based on a gold price of $1300 USD/oz as follows:·
- Proven and probable mineral reserves of 2.3 million tones at 3.17 g/t Au containing 233,600 ounces of gold,
- Average annual production of 36,100 ounces over 5.8 years,
- Foreign Exchange Rate 3.2 to 1 BRA to USD,
- Initial capital $18.2 million USD partially funded with a $9 million dollar loan from Yamana and an Aura Minerals Rights Offering in 2016 which raised $4 million USD,
- NPV after tax of $28.5 Million dollars USD,
- IRR of 100 percent at $1300 USD gold price and baseline net cash flow of $26.1 million dollars.
- IRR of 1652 percent at $1500 USD gold price with $78 million USD in cash flow
On page 26, the author of the EPP report states that the Ernesto property contains a 130 tph CIL process plant which includes crushing, milling, and tailings facilities with power supplied from the national grid via a 12 km 138 kV transmission line from Pontes e Lacerda. 130 tph is 3,120 tonnes of ore processed per day.
So I was very surprised to see slide 20 of the management presentation which states that the CIL at Ernesto has a 4,300 tpd capacity which is about one third larger than assumed by the FS consultants which implies that the average gold production could be as high as 60,000 ounces per year. Have a look at the following graphic which shows the Presentation Slide 20:
Aura Minerals Presentation (See Slide 20). At that production rate, the net cash flow at $1300 USD gold would be $43.4 million dollars, and $130 million dollars at $1500 USD gold. The EPP project economics were excellent at the process rate assumed by the FS consultant!
But if the process plant is run at its capacity, then the project economics are OUTSTANDING!! So in my January 13 post on the value of Aura Minerals, I gave the EPP project a valuation of CMCL divided by 4 based on CMCL’s stock float of 10 million shares compared with 40 million shares after the Rio Novo acquisition. How is Ernesto Pau a Pique like Caledonia Mining’s Blanket Mine in Zimbabwe?
Both mines have 6 tank CILs with identical capacities of 4300 tpd. Both mines were acquired for a song and a dance. Back in 2006 when Stefan Hayden, the CEO of Caledonia Mining, bought a 100 year old dilapidated gold mine from Kinross Gold, he paid one million dollars plus 20 million shares of CALVF stock which Kinross subsequently sold at 5 cents per share. That amounts to a purchase price of $2 million dollars for a mine which has generated $475 million dollars in revenue since Caledonia Mining purchased it.
Jim Bannantine, the former CEO of Aura Minerals, bought the EPP project which Yamana had spent $140 million dollars to build for 2 million shares of Aura Minerals (pre reverse split) plus another 3.5 million in warrants, and an $11 million dollar note which comes due in May 2018. Plus Aura Minerals has to pay a 2 percent royalty on the first million ounces produced at EPP to Yamana.
The difference between these two bargain basement acquisitions is that when Hayden bought Blanket in 2006, the CIL could process 4300 tpd
, but the plant only had 1500 tpd of milling capacity, and the underground mine was constrained by inefficient ore handling to 600 tpd, and so Caledonia Mining had to refurbish the entire plant piece by piece out of a meager 2000 ounce per month gold production. So it has taken 11 years to increase throughput from 600 tonnes per day to 1556 tonnes per day which is the average throughput in Q4 2017. The number 4 shaft at Blanket is still constrained to 1600 tpd, so Caledonia Mining is sinking a new central shaft down to 1330 meters and adding 4 new production levels below the current bottom of the mine at 750 meters . That $50 million dollar project will increase daily throughput to 3000 tpd of high grade ore grading over 4 g/t gold. At present the central shaft sinking is down to 950 meters, and it will take until 2021 to ramp gold production up to 80,000 ounces per year.
In contrast, the process plant at Ernesto is brand new, modern, and computerized with a Siemens distributed process control system where a single plant operator can operate the entire plant at a throughput rate of up to 4300 tonnes per day in one of three modes: Automatic mode, manual mode, and Expert mode. Yamana was nice enough to include 2 used high grade underground mines , Pao a Pique and Ernesto, with gold ore grades comparable to Blanket and 3 surface gold deposits which can be mined with open pits. The underground mines have all needed infrastructure in place including power supplied by the grid, and the additional capital expenditure other than underground development is minimal. Yamana left 80,000 ounces of high grade ore at Pao a Pique, and at Ernesto, there over 200,000 ounces of gold. The Lavrinha open pit has over 100,000 ounces of gold.
So let’s compare the most recent quarter at Blanket with the most recent quarter at EPP and see how these two mines are performing.
Caledonia Mining just reported its Q4 2017 gold production—a new quarterly record gold production of 16,425 ounces which implies that gold grades at the mine have recovered from 3.5 g/t last quarter to 3.91 g/t in Q4. Assuming that the realized gold price last quarter was $1300 USD, I estimate quarterly profit attributable to Caledonia Mining shareholders of $4.2 million USD or 40 cents per share compared with 29 cents per share in the previous quarter. The following graphic shows Blanket’s operating data for Q3 and Q4 2017 where the Q3 numbers are reported actual numbers, and the Q3 data are my estimates based on my revenue model plus the following news release from Caledonia Mining.
At the EPP project, Aura Minerals is paying an outside contractor to mine the Lavrinha open pit at a rate of 750,000 tonnes per month, and in Q4 2017 I expect the contractor to have mined 2.1 million tons of rock and obtained 404,000 metric tons of ore grading the same as last quarter about 1.2 g/t. The strip ratio has been lower than projected in the PEA, and the amount of ore substantially higher, so I assume that they are using a cut off ore grade lower than 0.5 g/t. Aura Minerals has a 2 year contract for mining Lavrinha, and contractor mining saves the company about $15 million dollars relative to owner mining. The contractor has been mining about 15,000 ounces of gold per quarter, and so far, 7,700 ounces of that production have gone to an ore stockpile.
For Q4 2017, I expect that 320,000 metric tons of Lavrinha ore will be blended in about 600 tpd of Pau a Pique high grade ore to process a total of 374,000 metric tons. That is a throughput rate of 4156 tons per day which is substantially higher than the run rate provided in the Feasibility Study .
Q4 2017 should be the first quarter of underground production at 600 tpd at an average ore grade of 4.7 g/t at Pao a Pique. The only uncertainty is how much ore dilution will they get this quarter. Last quarter, the ore dilution factor was 39 percent, and I am assuming that they will be able to get dilution down to 20 percent. If so, then gold production at EPP would be 18,400 ounces, and pre tax profit of $6.70 million dollars at $1300 ounce gold. If the ore dilution remains at 39 percent, then gold production at EPP would be 17,400 ounces and pretax profit at $4.9 million dollars.
The bottom line is that the process plant has the potential to produce the 60,000 ounces per year per slide 6 of Aura Minerals presentation, and at peak production with the underground producing 1000 tpd at 5.0 grams per tone, EPP could produce 20,000 ounces of gold per quarter which is the same as Caledonia Mining’s goal of 80,000 ounces per year by 2021. EPP’s Q4 2017 gold production should be very close to Caledonia Mining’s Q4 gold production, so CMCL is very much a peer stock.
From a valuation standpoint,
ORA.TO = ALO + CMCL not counting Aranzazu which remains on care and maintenance. The following graphic shows my projection for Q4 earnings and EPS. I am expecting Aura Minerals to have a slightly higher EPS than CMCL, and the following figure includes production from both San Andres and the EPP project.