Interviewer: Hello, this is Harry Norman for Proactive Investors and welcome to another Proactive audio interview.
Today is the 15th of December 2010, and I’m talking with Barry Cahill, CEO of Norseman Gold, listed on the AIM market, mining sector. Stock ticker NGL. Share price 69.25 pence. Market Cap £139.81 million Sterling. Norseman Gold is also listed on the ASX, ticker NGX. Web address www.norsemangoldplc.com.
Barry, thank you very much for joining us for this interview.
Barry Cahill: Thank you.
Norseman Gold has been described as a real cash business. What does this mean in practical terms, and how does being a real cash business relate to the company’s business strategy?
Well practically, for us, gold mining, we break our rock, we haul it up to the ROM pad at the treatment plant and we treat it. We pour gold on a Tuesday. It gets picked up by the security van, gets transported to the mint and they give us a refined ounce number on a Friday. We sell the gold, and by Tuesday the next week the cash is in the bank. So from Tuesday to Tuesday we go from pouring gold to getting cash.
A lot of other mining industries, base metals and that, you have to produce a concentrate and put it in a truck, and then put it on a boat, and then it goes through a smelter, and eventually you get your money. For us, we get our cheque week-in, week-out, so it is really and truly a cash business. And our strategy is to grow our business, obviously, because it’s such as good business. So we’ve got our treatment plant at 50% capacity. And our first part of our strategy was to stabilise the production profile, which we did, and then the second part is to fill that treatment plant and produce as much cash as we can. And here we are we’re within six months of achieving that strategy. So it’s a very good time.
You have two underground mines that have been producing gold for a while—Harlequin and Bullen. What can you tell us about how these mines are performing, and what are your expectations of them, Barry?
Well Harlequin’s been performing reasonably well for quite some time. It produces about 3,000 ounces a month. It’s into an ore body called Redfin and a new ore body called Perch. And Perch has an undefined limit so it’s still open along strike and it’s still open up and down dip. And we’ve been trying to drill and develop and define the limit, which we haven’t successfully done to date, which is not a problem, it’s an advantage, but causes a problem in terms of how you schedule and you mine the ore body while you’re developing and growing it.
So we’ve been working on a strategy that would manage that a lot better, and we’re pretty well confident we’re there, and at the same time, while we’ve been managing that strategy, we still manage to do the 3,000 ounces a month. So future-wise I expect to see Harlequin do at least its 3,000 a month but actually improve over a bit of time because of the tweaking of the strategy we’ve done where we’ve tried to make it a bit more efficient and a bit more productive.
Bullen on the other hand has been a bit disappointing over the last 12 months. One of the major ore bodies there, Norseman, we were in a high grade patch and we came out of the high grade patch into a lower grade patch, and we haven’t picked up another high grade area with drilling. We’ve developed up to another ore body called St Patricks, which we’ve only just reached and we’re starting to develop now, and it’s starting to produce some ounces for us from development and a little bit of stoping, so we’ve seen a growth profile there. We’re also just about to start back into some long hole mechanised stoping at an ore body called Bullen, and we’re also developing down to another ore body called O’Briens. But we’re probably a couple of months away from O’Briens.
So in the medium term we see Bullen doing around 2,000 ounces a month, at the moment. There’s some months it does it and some months it doesn’t. Ultimately, by the middle of the year, we’d like to see it back up to the 3,000 to 4,000 ounce mark which is where Harlequin has been sitting. And that’s the range that we want with these narrow-vein, high grade, underground gold mines that we have. Generally the range is about 3,000 to 5,000 ounces a month. We get the occasional 5,000 ounce month when we hit a really high grade patch and we get a good run, but we don’t usually sustain that for the longer term, it’s generally between three and four. So we see Harlequin at about 3,000 ounces, we see Bullen at about 2,000, we’d like to bring Bullen back up to the 3,000 ounce mark.
You started producing ore from the OK Decline underground mine in October. What is your production target for OK Decline and what are your plans for OK Decline?
Yes, we produced our first stoping ore, we broke it and put it on the ground and put it through the mill in October, which is a good milestone for the operation. The production target for OK Decline is to do 20,000 tonnes per month, of which about 10,000 tonnes generally is going to be the stoping dirt. We’re doing about 2,000 or 3,000 tonnes at the moment and we’ll do that this month. But the grade’s a bit lower because we are at the top and the extremities of the ore body so the grade’s a bit lower than we expect so the ounces aren’t quite there. But as we move into the guts of these ore bodies where the grade’s a bit higher then we expect the ounces to come up. And as I said, ultimately we expect to do about 10,000 tonnes of stoping from this mine.
And then the other 10,000 tonnes is development —so we’ve had a couple of development headings going. And just this week, in fact yesterday, we just intercepted the Star of Erin ore body and we’re about to open it up so that will give us some more headings in ore and we’ll see how the Star of Erin ore body progresses.
So, so far OK is coming along as we’d hoped. Production profile’s ramping up and we expect that it’ll be a 3,000 to 4,000 ounce producer by the June quarter, so by the last quarter of this financial year, and that’s what we expected and that’s what we’re on target for doing.
When do you anticipate that mining will start at the North Royal Open Pit mine and, when ore from North Royal finally fills Norseman’s mill, how many ounces of gold a year will the company be producing?
Well, mining should start at North Royal Pit this week or next week. The trucks are already on site, the excavator’s been loaded out and is in transit at the moment. Manpower’s starting to be mobilised. So we’re pretty hopeful that, certainly by next week, we’ll start digging some dirt.
We would expect to start seeing a trickle of ore come through in January/February/March, and then a lot more hopefully May/June so that the North Royal ore fills the treatment plant by the end of the June quarter. So we expect to see June to have a full mill, and we expect to produce 12,000 ounces of gold. And from then on with a full treatment plant, 12,000 ounces is about the mark that we’d like to be, but there’ll be fluctuations there of course because, you know, the grade fluctuates, so you tend to get these fluctuations in grade. But overall, with a full mill for a full year, we expect to be 140,000 ounces. So roughly that 12,000 ounce per month mark. And basically that comes from North Royal, so North Royal fills the mill by June.
Please would you give us an overview of Norseman Gold’s reserves and resources and your plans for increasing them?
Yes, reserves are over 400,000 ounces at the moment, and the resource is 3.8 million ounces. We’ve been growing them, sort of, year-in year-out for the last three years, but we have a big resource base but a small reserve base at Norseman. It’s just the style of ore body, it’s quite expensive to drill out reserves, and we generally have this three to five year life. What we’ve been doing is to try and build the resource/reserve position, I think that we’ve done it reasonably successfully, in doing it—we’ve got four underground drill rigs going, drilling 24 hours a day, seven days a week. And we do a surface drilling programme once a quarter, so we drill, at the start of the quarter as an example, and then we’ll analyse the results, set up our programmes for next quarter, and then drill for the next quarter again.
And we’ve managed, as I say, to grow our reserve/resource pretty well. We will continue to do that so, over time, the resource/reserve will grow, but probably not the mine life because what we’re doing is we’re opening more mines to fill our mill and keep our mill full and to get the grade up. So in December of ‘09 we opened OK Decline, this month, December ’10, we’re going to commence mining at North Royal and, hopefully, December ’11 we’ll start mining at the fifth mine, wherever that finally may be. And we’ll keep on doing that, keep stockpiling the low grade, treating the high grade and trying to maximise the ounces while the gold price is very good for us.
So as I say I expect to see our reserve/resource build up but probably don’t expect to see the mine life grow too much.
Having raised £11.25 million in October, how do you see Norseman’s financial situation going forward?
Well basically we’re in our project development phase so we’re spending our cash on developing OK and now, more in particular, North Royal. In fact we raised the 11.25 million pounds to fund the development of North Royal, which we’re using and it’s going ahead. So we see us spending a fair amount of cash over the next three to six months as we get the project going, and then quite quickly we start to see a return on the investment.
Gold price, in Aussie dollar terms at the moment, is over $1,400 Australian. When we’re in full production our cash costs drop well below A$700 an ounce so, you know, we expect to see a minimum margin of about A$700 an ounce. So you can imagine when you’re doing 12,000 ounces a month cash comes back really, really quickly. And that’s really what we’re looking for, that’s what we’re spending all the money for.
We’ve spent a lot of money over the last three or four years to actually get to this point, to achieve the strategy of filling the mill, and we’re six months away from that position. It’s just a very, very exciting time for us. We’re financially robust and strong because we’ve got cash in the bank. But obviously we’d like to see a lot more cash generation out of the operation and we’re just at a point where very, very shortly we’re going to see that start to happen.
What milestones can investors expect from Norseman Gold over the next 12 to 18 months, Barry?
Well the first milestone is to start North Royal digging, which hopefully happens in the next couple of weeks. The first thing after that will be to get a bit of ore out of North Royal and get it into the treatment plant and then, by June, fill the treatment plant. And that is really going to be the significant achievement of the 12 months after all the work that we’ve done to ultimately fill that treatment plant, get our business up to 140,000 ounces, start to produce a lot of cash and then start to expand our business further—look for other ways and other opportunities to build a bigger and better gold business in a really good gold price market.
So the next six months will see us achieve our medium-term strategy which is going to be really exciting. But after that, when the cash starts generating, it’s going to be a really good time for us over the 12 months following that as we continue to grow our business.