In the news: Kingsgate Consolidated
ASX:KCN | A$0.27 | US$46m
‘A New Hope’
We are updating on Kingsgate Consolidated, which, having placed its Chatree operations on care and maintenance at the end of 2016, is now firmly focused on the advancement of its 100% owned Nueva Esperanza silver/gold project in Chile, on which it completed a positive PFS in April 2016. Kingsgate is pushing ahead with permitting and a feasibility study that it is aiming to complete in 2QCY18. A systematic exploration programme covering the whole licence area commenced recently.
COMMENT: With a market cap of A$60m and net cash of A$38m, Kingsgate’s current EV is A$22m/US$17m. Resources and reserves of 1.9Moz and 1.1Moz AuEq at Nueva Esperanza imply in situ values of US$9/oz AuEq and US$15/oz AuEq respectively.
The 2016 Nueva Esperanza PFS derived a pre-tax NPV5 of US$168m and a pre-tax IRR of 25%. The company is fully funded for the completion of the DFS and for its expanded exploration programme, the initial results of which give encouragement that increases to the project’s resource inventory are likely.
Updating outlook after the closure of Chatree — Kingsgate closed its Chatree gold operations on 31 December 2016 at the request of the Thai government. The operation is on care and maintenance and the company is continuing to pursue remedies for the premature closure of the mine. As a result of changes to the mine plan to maximise the cashflow from Chatree prior to its closure, the operation’s performance in the December quarter was impressive, with production of 50,133oz at a cash cost of just US$416/oz. The resulting cash generation led to a significant improvement in the company’s net debt position over the period.
Cash at the end of January 2017 expected to be A$38m (equivalent to A$0.17/share) — In the lead up to Chatree’s closure, the company repaid all associated project-related debt, leaving the local subsidiary debt-free. As announced on 20 January, the company expected that, following the scheduled repayment of a A$5m corporate debt facility at the end of January 2017, its cash position at the end of January 2017 would be A$38m. The parent entity had no debt.
Nueva Esperanza Project Background
The Nueva Esperanza Project covers an area of 94km2 in an epithermal gold district at the northern end of the Maricunga Belt in Chile’s Atacama region. The project comprises three deposits each within 3km of each other — Arqueros, Chimberos and Teterita — the first two of which have been mined in the past as underground and open-pit mines respectively.
Although in the high Andes at an altitude of 4,000-4,200m, the project is well served by infrastructure. It is 11km from an international highway and has access to water from suitable, third-party owned boreholes 10km away, over which it has a supply agreement. The company expects to construct a 27km spur line to access power from the grid line that supplied Kinross’s nearby La Coipa operations.
Approximately 75% of the recovered value in the deposit is attributed to silver and the remaining 25% to gold. For ease of reference, we refer to gold equivalent ounces (oz AuEq), but acknowledge the silver dominance of the deposit at this stage.
PFS as of April 2016 — 1,058,000oz AuEq Recovered at a Total Cash Cost of US$706/t and Capex of US$206m
The PFS was based on the mineral resource estimate as of April 2016. Oxide resources within the three deposits contain a total of 1.9Moz of AuEq (contained in 39Mt of material grading 1.5 g/t AuEq, assuming a cut-off grade of 0.5 g/t AuEq). The mineral inventory used in the PFS financial model comprised 23Mt grading 1.7 g/t AuEq, containing 1.3Moz AuEq, of which 85% was contained within reserves and the remainder comprising Inferred resources.
The PFS proposes the development of contract-operated open-pit mining operations feeding a conventional crush, grind, leach and Merrill Crowe extraction processing operation, with dry stacked, valley fill tailings. This proposed mining the inventory over a six-year period in order to bring forward processing of the higher-grade material. Lower-grade material would be stockpiled to provide feed for the plant from Year 6 until the end of the mine life in Mid-year 12. The life-of-mine waste-to-ore ratio was 7.3:1. At the planned processing rate of 2Mtpa, the operation would have an operating life of 11.6 years. Recoveries are projected to be relatively low, although typical for high sulphidation epithermal systems, at 84% for silver and 80% for gold.
Owing to scheduling high-grade material first, grades are planned to decline from 3.1 g/t AuEq in Year 1 to 1.0 g/t in Year 8. Average production over the first five years of operation is planned to be 135,000oz pa AuEq, compared with a life-of-mine average production rate of 91,000oz pa AuEq. Total life-of-mine production was expected to be 1,058,000oz AuEq (275,000oz of gold and 47Moz of silver).
Capital costs were estimated at US$206m (equivalent to a capital intensity of US$2,264/oz of average annual production, or US$195/oz AuEq recovered), including US$30m of EPCM and owners’ costs and a US$24m contingency. Total cash operating costs were estimated at US$706/oz, or US$32/t milled, including US$10/t for mining (US$1.80/t mined), US$16/t for processing, US$3/t for admin and US$3/t for royalties.
PFS-based Pre-tax NPV5 of US$168m and IRR of 25%
Assuming a silver price of US$19/oz and a gold price of US$1,200/oz, the PFS generated a pre-tax NPV5 of US$168m and an IRR of 25%. The study indicated a high sensitivity to the silver price, with a +/-10% resulting in a 38% movement in the pre-tax NPV.
Outlook for Nueva Esperanza
The company has three main work streams ongoing, namely: the feasibility study work programme, permitting work and local and regional exploration.
Key for the project timeline is the permitting process. The company is targeting the submission of an application to update an environmental permit issued to the project in 2012 for changes to the scope of the project in April 2017. The original environmental permit was issued when the project comprised one of the current three deposits and will also need updating for the use of dry stacked tailings. The approvals process is typically around one year. If the permit were issued in April 2018, this would be sufficient time for the completion of the feasibility study work programme.
A relatively new and highly experienced exploration team is focused on a systematic district-scale approach to identifying gold and silver targets on the 45km2 alteration footprint and is using the regional knowledge gained at analogous deposits of La Coipa and Salares Norte elsewhere in the Maricunga Belt.
Gold Fields’s Salares Norte Project hosts 4.1Moz AuEq at grades of 4.7 g/t AuEq and is located approximately 100km north of Nueva Esperanza. Kinross’s La Coipa project is 20km (45km by road) from Nueva Esperanza. The mine was placed on care and maintenance in 2013 and a PFS into its re-start was completed in 2015. Given the presence of a processing plant at La Coipa, we consider that there are potential synergies between the project’s re-development and the development of Nueva Esperanza.
Nueva Esperanza’s US$5m exploration budget for FY17 includes:
• 40 line-km combined IP/resistivity geophysical survey completed in core of licence area in January 2017, identifying new targets.
• Follow-up of targets generated by RAB drilling programme to test basement geochemistry, below thin post-mineral cover:
o Phase 1 of 485 shallow (12-15m) holes completed in March 2016;
o Phase 2 of 300 holes commenced in November 2016.
• RC drilling, 40-hole programme commenced in November 2016. Initial holes focused on targets at depth to the north and south of the Chimberos pit:
o Carachitas target, 2.3km SE of Arqueros deposit — ten RC holes completed. Results from the first hole reported on 27 February 2017 included 10m grading 7.1 g/t AuEq from 12m.
• Diamond drilling — The exploration includes a number of deep diamond drill holes to test conceptual targets and to deliver geological information:
o Huantajaya target, 0.6km SW of Chimberos deposit — Three DD holes drilled in January 2017, each of which intersected silicified, oxidised breccia with results including 24m @ 3.2 g/t AuEq, 11m @ 3.0 g/t AuEq and 3m @ 3.8 g/t AuEq.