RE:Visualizing the Impact of Resource Size and Grade at OrenadaNP,
NPV is a good exercise, but in my opinion, it would be more appropriate for a major to consider a company that has an RE of ~5Moz. AZX is still in the early phase of exploration and we are still talking about 1-2 Moz for Orenada. Kaiser has a good discussion on Visualizing Outcomes you might find interesting.
https://cambridgehouse.com/news/4672/visualizing-outcomesjohn-kaiser
He also mentioned the S-curve (at 14:22). Follow the yellow line that has the peak and going down during the construction period before recovering when production starts. Some company would have a steep drop during construction, especially if the junior decides to go into production itself. A major would have less impact, but the SP increase would not be dramatic either.
For AZX, we hope that the SP jump would be dramatic after the new RE and subsequent development to improve the future potential of the deposit. All this would be expected to occur before the peak of the yellow curve.
If a senior decides to take over the deposit to the production stage, one of the key factors would be the CapEx which could be significantly reduced if a company already has an under-used processing facility. The other would be the OpEx which would depend on may factors including grade, tonnage, PoG, financing, etc...
Cheers,
GH
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NextPhase wrote: Hey all,
I'm continuing to work on my NPV model for Orenada. I used information from several mines in the area to help with many of these assumptions. The following assumptions in the table are fixed, so we can focus on the impact of grade and resource size to the final NPV.
| Fixed Items | Metric |
| Operating Cost / t | $ 15.00 |
| LOM Sustaining Capital | $ 300,000,000 |
| Preproduction Capital | $ 150,000,000 |
| Construction Period | 3 years |
| Tonnes per day Mined | 4,500 |
| Recovery | 87.5% |
| Discount Rate | 5% |
| $CAD per g of au | $ 50.00 |
The following three visualizations attached to this post show the variable changes in NPV when resource size and grade assumptions change. Changes to these factors along with the fixed factors impact the mine life, all-in sustaining cash flow, and revenue realized per tonne mined, which drastically impact the NPV estimate for Orenada.
Please be aware these numbers reflect different scenarios for pre-tax NPV, it's still difficult to come up with a truly accurate estimate until our uncertainty is reduced from seeing the actual numbers from the upcoming resource estimate. Once we receive this new information, we can more accurately predict an estimated NPV, and thus, the market should have more confidence in the economic potential of Orenada. If you're interested in the after-tax NPV, then taking 60% of the pre-tax NPV will get you pretty close.
The orange highlighted numbers are based on Orenada's current resource estimates. The purple highlighted scenarios use LRG's estimate for grade for two of the charts, but I took a stab in the dark on the new resource area. Do not take these as accurate projections, but more helpful assumptions to demonstrate the potential economics of Orenada.
So, what should you take away from this exercise? Here are several points I think are important to appreciate before seeing the new resource estimate.
- Grade improvements are extremely important for the overall economics for Orenada, especially for lowering price sensitivity, smaller payback period, and overall project risk.
- Resource size helps justify a higher fixed capital cost by supporting a longer mine life and higher tonnes of material mined per year.
- Improvements to both grade and resource size simultaneously turbo charge increases to final NPV estimates.
- If we receive a positive resource estimate, then the market will more likely value Orenada on a notional PEA calculation rather than the current early-stage explorer blanket valuation, which assumes AZX lacks a standalone economically-viable resource
Let me know if you have any ideas on how to improve these assumptions, and thanks for reading!
NP
Disclaimer: I own AZX, this is not financial advice, these numbers are not predictions, do your own DD.