Everything to play for in Kazakhstan for Frontier Mining

It's now eighteen months since Frontier Mining announced the acquisition from Coville Intercorp of a 50% stake in the Benkala copper-molybdenum-gold deposit in northwestern Kazakhstan. Benkala is a copper-porphyry stockwork deposit and is one of the five largest of its kind in Kazakhstan, with plenty of exploration potential on its flanks.

The project is owned by KazCopper LLP, a wholly owned subsidiary of US Megatech BVI which is a 50/50 Joint Venture between Frontier and Coville. KazCopper has commenced serious work at Benkala, starting with the mobilisation of three drill rigs to the site to confirm the Soviet work carried out some 30 years ago after the deposit was first discovered in 1968.

Over 70 core holes were drilled at Benkala between 1976 and 1980, some to a depth of 700m, at 100m and 200m spacing. This had led to the establishment of a C2 Russian resource of 35.5 million tonnes at 0.55% copper in the upper layer of oxides, and 444 million tonnes at 0.42% copper in the underlying sulphide mineralisation, for just over 2 million tonnes of contained copper.

More recently, a Competent Person’s Report completed by Wardell Armstrong International estimated 2.8 million tonnes of copper contained in 47.75 Mt at 0.36% Cu in oxides, and 873.75 Mt at 0.30% Cu in the sulphides. Both these estimates require confirmation and recalculation in compliance with the JORC code prior to completion of the feasibility study, which is what the current drilling programme seeks to achieve. Frontier plan to have drilled 20,000 metres by the end of this year, although as yet no results have been released.

However, during due diligence in 2007, limited verification drilling was carried out under the supervision of SRK, and three of the Russian holes were twinned within 3 metres of the initial drill collar. As well as confirming thicknesses, the verification cores produced similar grades, and included gold, which the Russians had mostly not evaluated. The best intersection was in hole 198, which showed almost continuous mineralisation over 90 metres from 41 m depth to the end of the core, including intersections of 1.39% copper over 22.4 metres and 0.56% copper over 16.3 metres in oxides, and a further 38.4 metres at 0.4% copper which continued in the sulphides.

A flavour of what the drilling at Benkala might currently be discovering comes when you look at the original Russian hole 198 – drilled vertically, it was 700 metres in depth, and encountered mineralisation over almost its entire length, showing 40 metres at 1.14% copper in oxides, 420 metres at 0.44% in sulphides, and a further 129 metres at 0.32% in an underlying lower grade sulphide zone.
 
Metallurgical testing began last Autumn, using oxide samples from the three verification cores and a heap leach process, with good results of up to 65.3% copper extraction in 70 days. These results confirmed earlier Russian work which had determined that low-cost heap leaching followed by SX-EW processing would be the preferred method for the oxidised part of the Benkala deposit. Further samples were tested using flotation processing of both oxide and sulphide ores, and demonstrated a 5%-6% improvement in recovery over the Russian results. Recovery rate from the sulphide ore was 80.2%, with accompanying molybdenum at 82.3% and gold at 47.9%. Flotation of the oxide ore resulted in copper recovery of 77.4%, molybdenum 55.6% and gold 34.6%.

These preliminary test results give Frontier the option of processing all their ore using flotation, but it is likely that the capital and operational cost advantages of traditional heap leach methodology will win out for the oxides, whilst the sulphide ore will be processed using flotation technology. This opens up the possibility of an early, low-cost start using heap leaching on the oxides to generate cash-flow, whilst the sulphides are developed for later mining and processing.

And at long last, after several months of negotiation with two different lenders, Frontier have the funds they need to progress Benkala. The original arrangement was for £9 million plus warrants equivalent to 50.1% of the shares in issue at 1.5p. Part of that agreement was the acquisition of assets from Silk Route, and Mark Calloway of Silk Road was appointed to the board with the intention that he should be CEO once the deal had been finalised.

However, this deal fell by the wayside in early February, when a new lender was announced, prepared to lend $10 million allied to the acquisition of 50.1% of the shares in issue via a warrant at 1.5p. Erlan Sagadiev joined the board at that time, and Mark Calloway resigned, marking a clear change of direction. “Mr. Sagadiev”, said the company at the time, “is well respected as a capable and responsible developer of Kazakh businesses whose economic advice and insight is sought by both private business and government officials on a regular basis.” On 10 March, Sagadiev became CEO and Chairman of the board of Frontier.

Finally, on 30 April, Frontier announced funding arrangements with Zere Group, a company which Erlan Sagadiev controls. A total of $10 million would be made available on a drawdown basis, of which the company had already drawn $2 million, and warrants equivalent to 50.1% of the shares in issue would accompany the funding at a price of 1.5p per share. The funding was also accompanied by a placing of £4 million at 1.5p per share to Sokol Holdings, a company controlled by two directors of Frontier, Brian Savage and Tom Sinclair, who would then own 54% of the company between them prior to exercise of the Zere Group warrants.

The funds raised are sufficient for some years of development at Benkala. The $10 million drawdown facility, plus additional proceeds of £6 million when the warrants are exercised, should be able to take Benkala at least part of the way to a bankable feasibility study.

But at what cost? The placing to Sokol Holdings at 1.5p dilutes existing shareholders to a substantial degree, but when the Zere warrants are exercised, today’s holders will own only 23% of the company. Sinclair and Savage will own about 27%, whilst Zere will own 50.1%, giving them effective control of Frontier Mining.

So is 23% of the company worth having? Frontier’s recent Proactive Investors   presentation revealed the conceptual NPV produced by Wardell Armstrong in the CPR conducted at the time of the purchase of Benkala. Key parameters are:

- 10% discount rate
- $1.50/lb copper
- 47.8 million tonnes @ 0.36% copper in oxide resource
- 874 million tonnes @ 0.30% copper in sulphide resource
- Average operating cost $4.32/ton, using combined SX-EW/Flotation route
- Initial mining at 7Mt per year, ramping up to 30 Mt per year
- SX-EW copper recoveries of 70%
- Sulphide copper flotation recoveries of 85%

These parameters point to a $490 million conceptual NPV for 100% of Benkala, or £327 million. Frontier’s half share of that is worth well over £160 million. Following the immediate dilution of the Sokol placing, with 406 million shares in issue, Frontier’s market cap at today’s price of 5p will be only £20.3 million.  Given the potential of a further 100% dilution because of the Zere warrants, the market cap at today’s price is still only about £41 million – just one quarter of the conceptual NPV.  

And that completely ignores the fact that Benkala joined a portfolio of existing 100%-owned projects, including the Naimanjal exploration and mining project, a pre-feasibility stage gold project at Koskuduk, and a series of copper prospects along a 25km long trend.

There’s still everything to play for, it seems! Although it has to be said that if Frontier were more up front about what they are doing in Kazakhstan, including a substantial update of their website, then the intrinsic undervaluation of the company’s assets which management continue to complain about would not be so much of an issue. Our last report was entitled “Keeping quiet in Kazakhstan”, with good reason. If Frontier want the market at large to (a) understand what they do and (b) allot some value to their operations, then it’s time they started making a noise. A big noise.

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