Metals Exploration's Holzberger says "we are back in business full-time"

The message from Ian Holzberger, the chairman of Metals Exploration plc (LON:MTL), is very clear: “We are back in business full-time.” 

Holzberger is keen to make the point after a protracted period of wrangling between the company’s investors, which was prompted by Solomon Capital’s attempted takeover of the gold miner.

This hiatus period only really ended last month with the formal implementation agreement that gives minority shareholders a voice and a seat on the board.

There was also the exercise of options and warrants by major investors as detailed in the subscription and shareholder agreement announced in April.

With distractions out of the way, the Metals Exploration chairman is plainly keen to crack on with the job in hand – which is to bring the Runruno Gold Project, on the island of Luzon in the northern Philippines, into production as quickly as possible.

Not that things stopped completely during this difficult 18 months - far from it.

“There was a lot of below-the-radar work done such as permitting,” reveals Holzberger.

“We are now in the nice position of knowing what we need to do. We have got our gun cocked and loaded.”

Metals Exploration also came out of the process with US$70 million in the bank, which gives it the financial muscle to get the development of Runruno pit and processing plant underway as soon it receives the Declaration of Mining Project Feasibility.

The DMF is the official, definitive sign-off for the project, and according to Holzberger it is imminent.

“We have ticked every box required to be ticked,” he adds. “It now just requires the Secretary of the Environment and Natural Resources to sign it off. 

“It is imminent and that’s all I can say. There are no outstanding issues – everyone acknowledges that.”

Runruno, when it is up and running in the next two years, will produce an average 96,700 ounces of gold a year for the next 10 years and three months, according to the 2010 feasibility study.

But as we will see later there are already plans to extend the mine life by increasing the reserve and resource base.

From the current reserve and resource inventory in the first five years annual output from the open pit project will be close to 102,000 ounces, tailing off to 92,700 ounces. 

The capital costs of the project are expected to be in the order of US$149 million, though there may be some minor adjustment to that figure to reflect the weakening of the US dollar in the past year, Holzberger reveals.

The split between equity funding and debt is likely to be “between 60/40 and 70/30”, the chairman says. “In the past people would take on 75, 85 per cent debt and that is dangerous territory,” he adds. 

“We won’t gear that high though the project would support it. The project has extraordinarily high cashflow in the first few years when we have a tax holiday.”

The cashflow is so prodigious that the company’s debts could be wiped out in the year and the total costs of the project met within 13 to 14 months.

All talk of debt financing is a little premature. While the group is speaking to banks, it is still some months off agreeing a definitive deal.

“We are talking to the four potential lead banks that have the right credentials to do it,” Holzberger says. 

“We are in pretty advanced discussions on term sheets. We will then mandate one of the banks to go and do it. 

“They will bring in behind them probably two or three other banks to share it with them. 

“At that stage there will be some local bank participation. I would very much like to have some Filipino bank participation in the project. 

“One, because it keeps some of the benefits in the country. And two, because there is some skin in the game for them.” 

In the meantime, work will begin work on the supporting infrastructure such as roads, bringing in the electricity, water and putting down the pads for the plant. This is what is deemed low risk work that can be handled in house and using local contractors.

The plant itself, the riskiest and most difficult part of the development, will be built by an outside contractor on a “procure and construct” agreement that sets a maximum price for the work.  

Perhaps the most eye-catching aspect of the Runruno project is the predicted cash cost of US$477 an ounce, which puts it right at the lower end of the cost curve.

A plentiful and cheap source of labour is one reason for this, though it isn’t as big a factor as one might expect, the chairman says.

The access to grid electricity counts far more, and means the group is not at the mercy of the sky high price of fuel used to power generators.    

The company is billed as gold-molybdenum play. However, initially at least, the focus will be on the gold as the moly will have to be extracted using a new and experimental process.

“What you don’t do when you are starting up a new project is to try something novel,” says Holzberger.

“To put it bluntly there is US$200 million of gold to be got out of this mine in the first year and potentially another US$15m-worth of moly. 

“If I muck up the US$200 million of gold because I’m focused on trying to make a novel circuit work then I will have let the shareholders down badly.

“We have taken moly out of the economics for the time being, though we could retrofit a moly plant at the end of year one or year two start (treating) moly by-products.”

The current share price of 14 pence values Metals Exploration at a shade over £95 million with around £45 million in the bank. However a back of the envelope calculation suggests an NPV of between £190 and £220 million based on a conservative US$1,500 gold price.

As Metals Exploration hits certain milestones, the market will catch on. 

Longer term the company is looking to extend the life of the mine by adding to the resource base that stands at 1.4 million ounces of gold. 

Runruno shares characteristics similar to Cripple Creek in Colorado, according to research carried out by Dr Eric Jensen in 2008.

And this should give investors great heart, as the American mine produced over 23 million ounces over the period of a century.

“Am I telling you it is going to be 23 million ounces?” Holzberger asks. “Of course not, but if I got 5 million ounces I would be happy.”