Kryso Resources: All systems go for Pakrut gold mine development

It is all systems go for Kryso Resources (LON:KYS), which as we will see has done much of the hard work needed to develop the Pakrut gold project in Tajikistan.

So all being well it ought to be producing 82,000 ounces of the precious metal each year, starting in mid-2012.

However investors have been slow to cotton on. Okay, the shares have advanced around 50 percent in the past eight months, but the company’s valuation still lags competitors with less advanced and some would say inferior assets.

In fact research from Optiva Securities highlights this striking disconnect. 

Analyst Jason Robertson reckons Kryso’s current 15 pence share price values the company’s gold in the ground at a bargain-basement US$15 an ounce.

Obviously he rates the stock a ‘buy’ and reckons Kryso is worth 28 pence a share.

On the face of it things are coming together nicely for Kryso’s Pakrut project, which already has a well ticked checklist of the usual mine development milestones.

First of all the wholly-owned gold project has a comparatively large resource compared to its peers, with 3 million ounces in total JORC resources.

Kryso has already signed off a bankable feasibility study, which anticipates total production of 857,000 ounces of gold and 123,000 ounces of silver over a 14-year mine life. First gold is pencilled in for the second half of 2012.

The BFS assigned a US$227 million net present value to Pakrut based on a US$1,250 an ounce gold price.

It also put the internal rate of return at 58 percent, giving the project a payback period of less than three years. The total development total capital costs estimated at US$108 million.

Kryso already has the majority of project financing in the works.

Back in July its strategic investor China Nonferrous Metals International Mining (CNMIM) agreed it would arrange 70 percent of the project financing. 

Then earlier this month it revealed that it had lined up a deal with the Export-Import Bank of China (China Eximbank).

Crucially CNIMIM has guaranteed the funding, as part of July’s strategic investment agreement. Meanwhile Brown reckons the rest of the funding is in-hand and won’t be a problem.

Apparently it is all there already laid out for investors with the robust stepping-stones all there to see. However Investors would be wrong in thinking that the BFS included all that Pakrut had to offer.

While the study showed the viability of the mine development project, Kryso still has a few more exciting developments in the works.

The first of which was signalled by the latest drill results for the 2010 campaign, which will be used to upgrade Pakrut’s substantial current gold resource. 

Kryso said the results confirm that mineralisation is continuing at depth and they are consistent with the known shape of the ore zones. 

The drill highlights include 21 metres grading 7.28 grams per tonne (g/t) gold at ‘Ore Zone 1’, 30 metres grading 4.37 g/t gold at ‘Ore Zone 2’, 16.5 metres at 4.48 g/t gold at ‘Ore Zone 3’ and 4.5 metres grading 18.2 g/t at ‘Ore Zone 6’.

“These results will increase inferred resources further but will also bring up a certain amount of the current inferred resource up into the measured and indicated categories,” managing director Craig Brown told Proactive Investors.

Brown said the results compare reasonably well to previous years, with the deeper holes showing that the mineralisation is still coming through at lower depths – below the sub 200 metre level.

“The mineralisation keeps going down,” Brown added.

“Most of it was definition drilling (i.e. it was done as an infill to previous holes) to move resources up into measured and indicated so I don’t think the overall resource will increase much, although it will definitely increase.”

“The main thing is that inferred resources can’t be used in feasibility studies, for project planning or a project valuation whereas the resources we’re drilling out now can be.”

The resource upgrade is expected to be released in April and more drilling work is scheduled for later this year.

“There’s a considerable drilling programme planned for this year, which will be a lot larger than what we’ve done before.”

“We’ve bought two new drilling rigs that are coming over from China and we hope to do much more drilling this year. We are also going to focus on some of our other exploration projects that are in the area.”

Brown highlighted that the upgraded resource would obviously boost the current mine plan and economic model.

He also said the group was possibly looking at a Hong Kong listing, which would involve getting a project valuation and competent persons report – which would reflect the changes since the BFS.

Importantly the Beijing Institute of Metallurgy is currently preparing a detailed mine design. The company should be starting construction in a couple of months, with earthworks getting underway in May.

When asked about the negotiations with China EximBank to finalise project financing, Brown said: “Everything’s going well, we’re busy.”

“The idea is that we’re getting a guarantee through the group company, CNMIM. So it is not really an issue, it is not particularly difficult from the bank’s point of view because they’ve already got a guarantee.”

Overall Brown emphasised that most of the project financing is in place.

Toting up the source of funds he notes that Kryso has about US$17 million in the bank and it’ll pick up US$78 million from the Eximbank - taking it up to US$95 million, leaving just US$15 million left to find.

He also expects Kryso’s two strategic Chinese shareholders, CNIMIM and Golden Max Group, to take up their proportion of any fundraising - they currently have 29.13 and 13.44 percent of Kryso shares, respectively.

“So we’re probably only going to need to raise about 7 or 8 million dollars in additional funding. So financing does not look like it’s going to be a problem anymore,” Brown added.

Looking ahead to the coming months, Brown highlighted the resource update, the start of the mine construction phase and project financing news as the three key milestones that he believes will be important for investors.

Optiva’s Robertson concurs. In a note to clients he said that his current 28 pence a share valuation is based on the current mine economics stated in the BFS, and as such it may be re-calculated after the resource update to include any additional ounces in the measured and indicated resource categories.

“With the financing and project risks continuing to be reduced, on a per-ounce in the ground basis the stock looks substantially undervalued considering how near Pakrut may be to production,” Robertson said.

He adds: “Furthermore as the gold price is hovering around the $1,400 mark and cash operating costs are only $377 per ounce as estimated by the BFS, we would expect the per-ounce in the ground metric to be much higher than US$15.

“With the share price trading at around the 15p placing price at which China Nonferrous Metals invested its £11m last year and with all the above merits considered the stock offers clear investment appeal.”

The market may not be enthralled by the Pakrut gold project. But if all goes to plan the discount rating will unwind – and rapidly. In the meantime, Kryso plans to keep improving the project, and a series of upcoming announcements could spark new interest in the rapidly growing gold company.