My take on VTTAn article I posted on CEO.CA end of July :
THE KEY DRIVERS TOWARDS IMPROVED ECONOMICS AND VALUATION AT VENDETTA MINING ( VTT )
One of the most interesting developments to follow the coming months at Vendetta Mining, next to the progress on the ASX listing side off course, will be the sensor based ore sorting study for Pegmont.
We should not underestimate the potential impact on project economics, since pre concentration/ore sorting influences multiple domains within the broader economics :
– positive impact on the mineable resource and LOM
– positive impact on the NSR
– positive impact on OPEX
– positive impact on CAPEX
– positive impact on mine plan
1. Impact on mineable resource and LOM
The key advantage of ore sorting is an increased head grade of the mineable ore and improved recoveries for that higher grade ore.
Thanks to the increasing grade and improved recoveries , resources that were considered to be sub economic before, could be economic through the use of ore sorting.
As a consequence , based on a lower cut off , the mineable resources will increase and so will the life of mine of the project.
Quote from VTT latest NR on JULY 10th : “ The Company has shipped three composites from three previously completed drill holes for sensor-based ore sorting screening test work; two holes from Zone 5 and one hole from Zone 2 (both sulphide mineralisation). Included in each sample was material from both the hanging wall and footwall at below cut-off grades to simulate mining dilution, at twice the amount of dilution assumed in the PEA mining study. “
So VTT clearly has the intention to test the impact of ore sorting on subeconomic material from footwall and hanging wall in both Zone 2 ( one of the bigger open pit zones ) and Zone 5 ( a deeper lying underground zone ).
I was very positively surprised by the fact that Zone 5 is already included in the sorting study. For those less familiar with the Pegmont project, the Zone 5 was so far not included in the mine plan and the related maiden PEA published early this year.
During the latest Metal Investor Forum in May, Michael Williams stated about Zone 5 that it needs an additional 20% to be taken into the mine plan giving the additional capital expenditures for that zone.
So it will be very interesting to follow the specific results of this ore sorting study for both the open pit resources and Zone 5 underground zone at Pegmont.
Just to serve as a possible indication, I want to refer to the results of another ore sorting study performed by Steinert for Paguanta , the zinc/lead silver project in Chile , owned by Golden Rim Resources ( $GMR.ASX ) in Australia.
Quote : “ With the ore sorting successfully removing the barren waste, an upgrade in the zinc, lead and silver grades of between 60 – 75% was achieved on the samples from Paguanta. The moderate grade ore sample was upgraded from 7.4% Zn Eq to 12.8% Zn Eq and a low grade ore sample was upgraded from 2.6% Zn Eq to 4.3% Zn Eq (Table 2). “
For the full NR , see https://www.goldenrim.com.au/site/PDF/2532_1/OutstandingResultsfromOreSortingTestWorkatPaguanta
2. Impact on the NSR
There is no doubt that based on higher head grades and increased recoveries on these higher grades through successful ore sorting , the related NSR should be higher compared to the data without sorting.
3. Impact on OPEX
– Sensor-based ore sorting reduces ore transportation costs per ton of produced metal when a sorting plant is installed at the mine.
– Waste rejection before the mill reduces energy consumption and carbon emissions per ton of produced metal in concentrate.
– Using sensor-based ore sorting technology reduces water consumption per ton of produced metal in concentrate.
– The same logic also applies for the use of reagents in the processing plant and the related cost per ton ( or lbs ) of produced metal
– Rejecting waste from ore at an early stage in the processing circuit allows the mass of fine final tailings to be reduced, which in turn reduces the space required for tailings storage and the related costs per ton of produced metal in concentrate.
4. Impact on CAPEX
Ore sorting and its related advantages gives the management of a company a double option to take advantage of these benefits.
Management can choose to maintain the size of the ( planned ) plant and benefit from the higher volume of produced metal or they can opt for the same volume of produced metal , while benfiting from a reduced plant and as a consequence a reduced capex to build that plant.
Again referring to the VTT NR from early July, it seems VTT management is aiming for the last scenario by going for a reduced plant and considerable upfront capex reductions.
One of the key metrics in determining how much the processing plant can be reduced , is the so called mass pull index , the lower this index ,the more capex can be potentially reduced.
In May , Osisko Metals ( $OM ) , published successful material sorting results for their Pine Point project zinc/lead project ,while comparing Dense Media Separation with XRT sorting. The mass pull for the XRT sorting had an average of 49%. https://ceo.ca/@nasdaq/osisko-metals-announces-successful-material-sorting
Depending on the specific outcome on the mass pull index, the improved head grade and increased recoveries for Pegmont, there is a lot of room for reducing capex on the plant level, given the fact that the specific upfront capex for the processing plant is at 70 M AUD.
5. Impact on mine plan
When looking at the original 10 year mine plan , the ore came for 85% out of open pit zones and the remainder from the underground zones , including the Zone 3A, 3B and the Bridge Zone, requiering a total of 37 M AUD of additional capex in the last years of this mine plan.
A first big impact on the mine plan, will potentially come from the increased mineable resource spread over the open pit and underground zones based on a lower cut off.
Chances are more than realistic , that VTT will be able to process ore solely from open pit zones during the first 10 years of production, delaying additional capex to later in the extended mine plan.
In addition, based on the application of a lowered cut off, more than likely also the resource in Zone 5 will grow more than enough to compensatie for the required capex to bring that ore in production, to get this ore also in the new and extended mine plan.
Another important impact will come from the reduced tailings. As stated before, ore sorting reduces the mass of fine final tailings and as a consequence the space needed for tailings storage.
The mine plan and mine sequencing so far was mainly directed by the need of creating sufficient space for in pit disposal , thereby reducing the possibilities of optimizing the mining of the zones with the highest NSR’s.
As a consequence the reduced need for tailings storage , will give VTT more room for optimizing the mine sequencing and as a result the project economics.
The Technical Report on the PEA provides a very clear chart on page 223, demonstrating based on undiscounted cashflows per zone, that the majority of the zones with the relatively highest undiscounted casflows are mined rather late in the mine plan. A strongly reduced need for tailings storage will provide additional room for improving and optimising this mine plan.
6. Nothing new but technology has strongly improved
Pre-concentration has been a important part of mining for thousands of years. Ore sorting has strongly evolved over the past decades and recent imrovements in sorting technologies has spurred renewed interest from mining companies. In the following we will discuss some successful implementations or studies of ore sorting technologies in the base metal sector in general and in the zinc/lead space in particular.
Glencore”s Mount Isa lead-zinc successfully uses heavy media separation to remove sillicate minerals from their flotation circuit.
Volcan Compania Minera, one of the largest producers of zinc , lead and silver in the world, has performed a very positive bulk ore sorting testing program on their low grade open pit stockpiles in Peru. In collaboration with Steinert and using their XRT technology, the testing confirmed the high level of waste rejection and significant lifting of grade values.
Darnley Bay, the predecessor of Osisko Metals, positively concluded a dense media separation study for their Pine Point zinc/lead project , up to the level of releasing a PEA that included a DMS separator.
Very similar to Darnley Bay, Callinex Mines ( $CNX ) also released a PEA for their Nash Creek zinc project, including a rejection rate of 50% by the DMS separator.
In January 2017 , Rambler Mining ( $RMM.L ) completed trial testing for a 2000tpd expansion plan at their Ming Copper Mine, demonstrating increased head grades around 45% and improved recoveries up to 94% through dense media separation.
In September 2018 , Avalon Advanced Materials ( $AVL ) announced positive results from their sensor-based oresorting testwork program for their East Kemptville Tin project, confirming that ore-sorting technology can be successfully implemented at East Kemptville to reduce both capital and operating costs and to reduce the volume of tailings generated from the proposed operation.
In the same tin space , Kasbah Resources ( $KAS.ASX ) in 2018 completed a highly successful 2 tonne bulk sample ore sorting program with run of mine ore from the Achmmach in Morocco, and in the same year, Metals X started with the commissioning of its new crushing and ore sorting facility at its Renison tin mine, expecting an annual increase of tin production by 15 to 20% .
7. On our way to improved economics
Progressing towards an updated economics study , be it an updated PEA or a PFS , multiple elements could come into play , leading to better economics of an already solid project knowing that it is based on a standalone scenario ( including the contruction of an own mill ) while there are 2 other mills in the immediate neighbourhood with either spare capacity or even worse , out of ore to process :
– As covered in detail higher , a positive outcome on the sensor-based ore sorting study for Pegmont will influence its economics in different ways, first by reducing the upfront capital ( smaller plant ) , by reducing opex ( see higher ) , by an extension of the mine ( increase mineable resources including Zone 5 , not included in the original mine plan ) and finally by a better optimisation of the mine sequencing ( bringing zones with higher cashflows earlier in the mine plan)
During a webinar this week , Michael Williams indicated a possible impact of around 20 to 30 M , even if we take AUS$ as currency, a nice improvement ,certainly because in combination with a lower capex, it will resort in a big impact on the IRR and also because I am more than confident that the benefits of an extended mine plan including Zone 5 are not included in this number.
– Additionally a geostatistical study is underway proving that based on the volume of diamond drilling performed by VTT , that the head grade assumptions ( based on the previous RC drilling ) used by AMC in the PEA study are too conservative, and supporting higher head grades of up to 1% in the combined lead/zinc grade in an updated calculation. Since this improvement goes directly to the bottom line , Michael Williams expects a positive impact of around 15 M on the NPV.
– Next to it , the new elected Australian government has agreed to reduce ( gradually ) the corporate tax rate from 30% to 25%, since the PEA from early this year used 30% as tax rate, Michael Williams expects a positive impact on the NPV of around 15M.
– Knowing that AMC Consultants managed both the latest Resource Update and also the maiden PEA, with 6 months between the related news releases, it is remarkable to see a big gap between some assumptions used in both reports. The one that particularly caught our attention , are the transport charges for the lead and zinc concentrates. Transport charges for zinc doubling between RU and PEA , the same charges for lead increasing 35%. Without any logical explanation for the difference, applying the RE assumptions will affect the NPV favorably.
8. An Australian project quoted on a Canadian stock exchange
When I started reading about Vendetta Mining and their Pegmont project, I was very much surprised to see an Australian project owned by a Canadian company, quoted on the Canadian Stock Exchange and NOT quoted on the Australian counterpart.
In addition we cannot deny that mining stocks in general and base metals stocks in particular have been underperforming heavily on the TSX and TSXV the past years. Investor appetite seems to have focussed more on other segments like the cannabis space and the crypto and blockchain world.
On the other side , in Australia those same mining stocks have been doing very well, driven by great retail investor interest and pushed even more by local Australians institutional investors , especially their pension funds.
So given the valuation gap between both exchanges , it was interesting to see VTT management announce the evaluation of a dual listing in March , reporting progress in May by stating they are in discussion with different groups regarding this ASX listing and hear Michael Williams state during a webinar last week that a listing on the Australian exchange could happen through a regular IPO or through the acquisition of a shell quoted on this exchange.
To quantify this valuation gap, Michael Williams presented during the Metal Investor Conference last May , an overview of 13 ASX listed base metal companies with their relative valuation based on enterprise value over contained ZnEq metal , hereby demonstrating that on average those base metals companies have at least a double in valuation and that peer companies are quoted 3 to 4 times higher.
Personally I do not like to compare companies solely on contained metal. Other key elements to consider are recoveries and metallury, mining model ( open pit or underground ) , availability of infrastucture …
Practically , taking into consideration that the ASX does not know a PEA as an economics study, we will be forced to compare either with base metal companies that have a resource and no economics study by ASX rules and standards or to compare with other base metal stocks that have a much more advanced economics study ( than a PEA ).
In the following , I will comment on the main companies from the comparative list , trying to find peers as close as possible to VTT , taking into account grades, size of the resource, mining model etc.
Starting on top of the list with Heron Resources ( $HRR.ASX ), their Woodlawn Zinc-Copper project is a combination of an underground with a tailings project and are in production since Q2 2019 , so in my opinion not to be considered as a peer of VTT at this moment.
Terramin Australia ( $TZN.ASX ) falls into the same category, having multiple assets including 2 zinc projects and 1 gold project, the Tala Hamza zinc project being located in Algeria ( considerable higher country risk ).
The Abra project of Galena Mining ( $G1A.ASX ) is a lead dominant lead-silver project ( Pegmont being a lead dominant lead-zinc-silver project ), based on underground mining , much more advanced , already published a DFS and with a resource of over 37 MT. Not really comparable to Pegmont.
Myanmar Metal’s ( $MYL.ASX ) hupe open pit dominant lead Bawdwin Project is located in Myanmar ( Asia ) . Also not be considered as a peer of VTT due to size and especially location.
Sulphur Springs , the copper-zinc project of Venture X ( $VXR.ASX ), located in the Australian Pilbara District, is similar to Pegmont in resource size ( 14 MT ), mine plan ( 10Y ) , is a combined open pit and underground operation like Pegmont , zinc equivalent grades are slightly higher based on the grade assumptions in the PEA, but taking into consideration a positive geostat and ore sorting study the grades could be very similar, the Sulphur Springs project being much more advanced , having published a DFS and in permitting phase, nevertheless having most similarities with Pegmont so far
Consolidated Zinc ( $CZL.ASX ) has with the Plomosas Mine , a very high grade zinc producing asset but with a very small resource base ( 1.2 MT ) in Mexico, not to be considered as a peer to VTT.
Red Metal’s ( $RDM.ASX ) Maronan project is , like Pegmont , located in the Mount Isa District , 130 km north of S32’s Cannington Mill, is a lead dominant lead-silver project with a 30 MT inferred lower grade resource but scoped for underground mining, project seems dormant , multi asset company with company having other priorities.
The Superior Lake project of Superior Lake Resources ( $SUP.ASX ) , is a high grade zinc project located in Canada with a limited JORC compliant resource of 2.4 MT , early stage project, not derisked enough.
Ironbark Zinc’s ( $IBG.ASX ) flagship project is Citronen, a zinc-lead project in Greenland, a very big but low grade project ( around 5.7 Zn+Pb% ) , in the socalled orphan phase looking for project financing.
White Rock Minerals ( $WRM.ASX ) owns both a gold project in Australia and a zinc project in Alaska. The Red Mountain Zinc project , still in its exploration phase , containing a 9 MT resource using a 3% ZnEq cut off grade, unsufficiently derisked given the capital requirements and lack of infrastructure in the area.
Metalicity( $MCT.ASX ) is also a multi-asset company, rebranding to a gold focussed company , the Admiral Bay Zinc project has been sold to Kimberley Mining Limited and KML is pursuing a listing on the TSX.V, holding an inferred 170 MT , 7.5% ZnEq resource.
PNX Metals ( $PNX.ASX ) also combining focus on gold and the VMS Haeyes Creek project holding a 4 MT resource with a 12% ZnEq grade, combining open pit and underground mining,
Now arrived at the bottom of the list with Alta Zinc ( $AZI.ASX ) , having unsufficient critical mass with a zinc resource of only 3.3 MT in Italy.
As an overall conclusion, we can say that it is very difficult for a variety of reasons to find really comparable situations and projects for Pegmont. Open pit base metal projects , near mature mining infrastructure and with manageable upfront capex are really difficult to find. From the list of 13 , the one that matches the best, seems Venture X , even though it is more advanced.
Another conclusion we can draw is that there is a lack of quality economical deposits that , still having to go through the permitting and construction phase , that will be able to profit from this cycle. Knowing that the biggest part of the Pegmont Resource and certainly the open pit part is sitting on valid mining licenses , Pegmont will be among the happy few to be producing within this cycle.
9. Conclusion
While in parallel VTT management is making progress on a listing on the Australian exchange , be it through an IPO or through the acquisition of a shell quoted on the ASX, I am more than confident that the multiple parties under CA and as a consequence having acces to the data room and the calculation model, will see the immediate impact on NPV of the reduction in corporate tax and of the outcome of the goestatistical study and the ore sorting study as soon as those results come available.
If South 32 was considering Pegmont open pit ore above their own open pit ore earlier, then they surely should consider it even more when the studies results come in positive.
If Chinova was considering to acquire Pegmont as a resource for their idle Osborne Mill, then positive outcome for ore sorting and goestatistics should be an even bigger trigger.
If other third parties were considering buying Vendetta Mining with the goal of having the ore processed at another local mill, their interest should increase based on improved economics on the condition of positive results from both studies.
For really interested suitors , the strategy of waiting is not likely to be the best one. The closer to the ASX listing, the more likely institutions will anticipate on the gap between the valuation on the TSX and the valuation for peer companies on the ASX and start building positions. With Australian peers quoting at 3 to 4 times the market cap of VTT , there is a lot of room for rerating and making money.
Even more when the ASX listing is behind us , arbitrage will further reduce the gap between both exchanges . And being on the ASX , without any doubt will increase the number of potential suitors that aim for a transaction including shares.
So interesting days, weeks and months ahead of us.