RE:Excellent results...Lifegoeson, the comparison of Cerro de Oro to Picaho is not a good one
The Time for a basic lesson in mineral economics
Looking a Minera Alamos summary. It looks like it was written by IR rather than those who produced the underlying technical report. The report was held up 3 months and finally placed on SEDAR January 5 2023. I would guess that the regulators had some points that had to be addressed in the PEA before the final draft was publishable. There is plenty of information in it that shows how the mining and processing is done.
There are some assumptions that are a little generous.
- First is with regards to energy. The cost driver for all mines is energy, especially in Mexico where labour is cheap. The mine drills, bulldozers, loaders, haul trucks use diesel. They assumed the price of diesel for the life of mine will be $1.10/L., and the price of electricity is $0.13/kWh. In their model assumptions no inflation is assumed for the life of the mine. The diesel and electricity costs are subsidized and controlled by government monopolies CFE and PEMEX. I expect the price of energy to rise substantially as both monopolies require a significant amount of CAPEX in new power generation and in construction of new refineries and pipelines.
- Capital costs are based on 2020-2021 capital costs.
- They assume 100% equity based financing.
- There is no mention of the effect of climate upon operations. This project is east of the Sierra Madre and is not effected to the same degree as Picacho would be. Heap-leach operations are susceptible to rain or lack of it. Every year, May through September, production drops as rain dilutes the cyanide solution poured onto the pad, which reduces and delays recovery. In an ideal climate situation, they anticipate 70% recovery. In rainy season they can anticipate 50%, if they are lucky. The lack of water between December and May may prove problematic as evaporation rates are high and the likelihood of drying-up wells is high. Water for leaching operations may need to be sourced off site during the dry season. Trucking water is very expensive.
If you look at the Sensitivity of Project NPV we see a 10% drop in recovery reduces NPV by 26% or $40M USD. If we look at OPEX inflation will be the killer. If wee assume 8% inflation in Mexico, The compounding effect of energy and the compounding cost of the cost of good and the energy used steepen the OPEX NPV-sensitivity curve.
Interest rates also effect the company´s availability of equity based financing. With high interest rates, it is unclear whether the company will be able to attract this type of financing in a project where the real NPV is sensitive to OPEX. Equipment lease rates and financing have increased dramatically. Cerro de Oro is marginal at best if you apply real world assumptions.
I think you cannot compare Cerro de Oro to Picacho. Picacho based upon the drilling has a high stripping ratio in comparison to Cerro de Oro. You are not going to strip 100m to get 6m of low grade ore. The geology is much more complex at Picaho. The hope is that you have limited stripping and greater widths or higher grades and a favourable geometry. Crappy grades of less than 1g/t Au do not provide enough sweetener to justify anything.
I do not like Tocvan´s last news release. When they calculated the grade of 44.2m of 0.6g/t they included 31.8m of 0.06g/t rock, which is uneconomic by any measure. The intersection of 3.1 of 7.6g/t is much more impressive, I do not know why they think they have to make it a bulk minable target.
The Picacho project looks like it has great potential, but they may ruin it with over promotion!