Galileo Resources PLC (LON:GLR)
Early stage gold-copper mine development in a low risk location
Galileo Resources PLC is a late exploration stage/early development stage junior miner with an entrepreneurial outlook. Shareholder returns will be based on value add development and deal flow rather than metal production, with the company taking part-developed projects and reworking them under alternative development scenarios.
Strategy: Most mining projects developed within mid-tier and top-tier miners get rejected or shelved prior to an investment decision because they do not meet internal corporate expectations on revenue. Smaller operators can take development closer to proving profitable production and still realise a profit without production.
Portfolio: Galileo is concentrating on developing mixed resources in three land packages in Nevada, USA. The Gabbs gold-copper project holds a Canadian NI 43-101 compliant resource of 1.6Moz gold equivalent at 2011 prices. The Ferber and Silverton Projects cover small historic mines that have been past producers of copper-lead-silver and gold-silver-antimony, but have no current reportable resource. The company also holds a legacy property in South Africa.
Valuation: Until more detailed studies on the projects have been published, the per share market valuation is appropriate. However, our early-stage internal estimate of revenues that may be available from Gabbs provides evidence that it is a significant asset and well able to support the market’s current valuation.
Risks: Nevada is a low-risk, mining friendly legislature with excellent infrastructure. The primary project risks are therefore technical (geological) and financial, but the primary equity investment risks are the decisions made by the company’s board with regards to timing eventual project sales and acquisitions.
Investment summary: The Board are led by an experienced mining entrepreneur seeking to recognise value in extant projects that do not meet the internal requirements of larger mining houses. Activity on these projects could be on-the-ground or it could be in-the-office or lab e.g. new modelling or processing insights. Dilution should be expected as cash is raised to fund geological exploration and mine engineering, but the current market valuation appears conservative, even in these troubled times for miners.
Strategy
Galileo Resources is a relative newcomer to the junior mining sector, having been incorporated in 2011, but not actively marketed until recently. It could be thought of as part of a Colin Bird stable of resource companies, whose commonality is a substantial holding and presence on the board of the ex-coal miner and UK mining entrepreneur.
Galileo was established to pick up unappreciated late exploration or early development stage projects that have been shelved by larger mining houses. It has been commonplace, in the past at least, for mining majors to have an in-house project development pipeline, as well as undertake M&A to acquire projects and production capacity.
Within large organisations these in-house projects can go in and out of favour, based on geology, economics, politics or even management personality, with their costs often written off as tax-deductable R&D. As a result mining majors often have a number of projects that might be available for sale at a fraction of their development cost to date. These are Galileo’s primary targets, so long as they meet its own internal criteria.
Galileo’s Nevada Properties
In general terms Nevada is a mining-friendly legislature, with over a hundred years of well regulated mining cadastre and gold production regularly over 5Moz per year. It is the home to several large mines and the focus of exploration, for gold especially.
The University of Nevada in Reno works with the Nevada Bureau of Mines and Geology to provide an open file system for patent claims and underlying geological interpretation. The public system run by UN Reno is easy to use and provides a comprehensive list of interesting data and publications on all Nevada’s mining districts. Follow this link to reach a tool that will run in most browsers and provide access to this system https://gisweb.unr.edu/flexviewers/miningdistricts.
The Gabbs Project
First explored for gold by a John Sullivan in the 1880s, the Gabbs district has been mined and explored for iron, tungsten and magnesite as well as gold, silver, mercury and copper. The most recent local mining activity was the Paradise Peak gold-silver mine, located some 4 km to the south of the Gabbs Project claims, which extracted a reported 1.46Moz gold and 39Moz silver between 1985 and 1993. The processing plant is still in place, is on a Care & Maintenance program and has a reported capacity of 4000t per day. The district has grid power and all weather road connections.
The Gabbs Project is made up of over 340 adjacent mineral claims and holds eight recognised mineral resources, representing four areas of mineralization, that are reported under the Canadian NI 43-101 standard. Galileo acquired both Nevada-based projects from St Vincent Minerals, a company that was listed on the Toronto Venture exchange, and looks set to continue to report resources under that regime despite the projects now being listed in the UK. The UK’s stock exchanges have no preferred mineral reporting standard, a fact that is a strong attraction for overseas miners seeking an exchange listing.
All four areas of mineralization are thought to be surface expressions of the same underlying porphyry-style system. For the purposes of resource estimation and mine planning each area of mineralisation is divided into a shallow oxidised zone and a deeper sulphide zone. These zones are created naturally by the effects of weathering.
The property has been owned almost continuously since 1969, and developed by at least 15 different exploration companies, many of which have added to the project data archive either through primary exploration or metallurgical testing. Immediately prior to Galileo’s subsidiary, St Vincent Minerals, acquiring 100% ownership, it was held under JV partnership with the gold major, Newcrest Resources Inc. (now Newcrest Mining Ltd, NCM.A). Newcrest divested all its US properties in 2009-10 as it re-trenched to Australian home territory, allowing St Vincent to acquire the balance of interest in the project and the vast majority of the scientific data, samples and reports that Newcrest generated. St Vincent completed the latest resource estimation (2011) using those data, but otherwise has carried out little primary exploration and no further metallurgical testing over and above that carried out by Newcrest and the preceding companies.
The NI 43-101 compliant resource estimate required that some economic evaluation be carried out in parallel with the volumetric (grade-tonnage) estimates. It used the following economic parameters to define the resource; gold price US$1,350/oz, copper price US$3.70/lb, Mining cost US$1.5/t rock, oxide processing cost US$6.50/t of mineral by leaching, sulphide processing cost US$9.50/t of mineral by flotation, General and Admin cost US$2.25/t. Metallurgical parameters were 50% recovery of gold in oxide mineralisation, 90% recovery of gold and 80% recovery of copper in sulphide mineralisation. The resource estimate inferred 57.2Mt @ 0.56g/t gold and 0.23% copper combined across both oxide and sulphide mineral zones.
All of these parameters are unoptimised and, though around 30 metallurgical reports have been generated on the four areas of mineralization, giving us confidence that metals are recoverable from them, there is obviously space to improve both costs and recoveries as well as a requirement to prove up the certainties on the resource grade and tonnage before a mineable reserve can be estimated and a mine plan published.
First Pass, Barn Door Evidence of Value (with caveats)
With no mine plan available we don’t know the actual mining rates or capital costs and, as we said above, the figures used previously are subject to revision. In the case of the gold price that revision is significantly downward from 2011 when the model was run. However, if we update some of the parameters and split the resource estimate into two hypothetical mining exercises of our own devising, but still based on the NI 43-101 report and its findings, we can start to provide some evidence supporting a very approximate estimation of value for Gabbs.
Our initial hypothetical project is a gold heap-leaching operation that has 11Mt @ 0.80g/t gold (weighted average across four separate pits) for 300koz gold, of which 150koz is currently assumed to be recoverable. This material must be mined before the underlying mixed copper-gold sulphide material is reached, but not necessarily processed immediately. On the current inferred mineral resource estimate, we predict an approximate mine life of around 7 years, producing 22koz gold doré per year, though the actual digging phase may be significantly shorter. Doré is an impure gold product in bar, button or billet form. It would normally be sent to a gold refinery that charges a percentage of metal the recovered, and possibly any by-product metals such as silver, for the refining service. The gold is then suitable for sale on the open market as bullion.
The second hypothetical project is a three-pit copper-gold mine with a flotation-based mill producing around 850t per year of a copper concentrate but with 75oz/t (0.23%) gold in concentrate for 66koz gold per year over 10 years. Whether the copper and gold were separable on site would need further technical information than is currently available.
At US$1000/oz gold and US$5000/t copper the first operation would provide revenue of around US$22m per year for 7 years and the second provide revenue of around US$79.25m per year for 10 years. This gives a hypothetical revenue stream of between US$22m and $101.25m over a period of around 15 years (assuming some overlap). Total revenue based on the NI 43-101 estimate updated with recent metals prices is then US$946.5m. This figure does not include capital costs, operating costs, tax, depreciation or financing costs, but should provide some reassurance that the current market capitalisation of Galileo has significant backing through the Gabbs asset.
Some more technical caveats;
- The NI 43-101 report points to a ‘nugget effect’ that is evident in some of the gold-bearing vein systems on Gabbs. The nugget effect is a statistical problem for establishing a reliable estimate of grades that are present between drill cores and can result in significant variations between estimated and actual mined gold grades, either positively or negatively. At this stage in development the statistical techniques being used in resource estimation are relatively basic, but as the project advances this is an area to watch as a mathematical model may be discovered that can take account of this effect and so make gold grade estimates much more reliable.
- Much of the geological data on Gabbs has limited use in reporting terms because of its age and sampling methodology. These data are still useful in structural definition, but cannot be used to estimate grade for external reports.
Forward on Gabbs
Obviously there is a clear development path for Gabbs with the collection of more, higher resolution data through drilling and more metallurgical and mineralogical tests to support future resource estimations at a higher level of certainty. At what point the cost of such a program is more effective in generating returns for shareholders than using the project as an asset upon which to leverage a deal-flow, is a decision for the board to make.
Substantial work is required before a mineable reserve may be estimated and a Bankable Feasibility Project completed, but a reworking of existing drill data could provide a revised resource estimate relatively quickly.
The Silverton Project
Located in Nye County, Central Nevada, Silverton has shown both vein-hosted and disseminated epithermal gold-silver mineralization with some antimony. Both mineralization styles have been mined intermittently between 1930 and 1953. Since then the properties have been explored by several companies before their acquisition by Newcrest. Silverton was owned by Newcrest between 2002 and 2009, and like Gabbs and Ferber, was divested when it re-trenched to Australia.
The geology has been well mapped and, unusually, its mineralising geochemistry tested. The results of these tests show that the mineralization is probably related to the growth of a volcano and its caldera between 17 and 34 million years ago. A report from 2011 notes that the economic geology at Silverton has similarities to the Round Mountain Mine, held 50/50 by Kinross Gold (K.T) & Barrick Gold (ABX.T), where two-stage heap leaching has produced 10Moz of gold over the last 20 years. Current grades at Round Mountain are around 0.8g/t gold and 9g/t silver. Round Mountain lies about halfway between Gabbs and Silverton.
The potential exists for bonanza grade gold-silver deposits within a N-S oriented vein complex known as The Silverton Shear and disseminated gold in four other areas that have previously been sampled. There is no formal definition of what bonanza grades are, but they are generally understood as over 30g/t gold and/or 300g/t silver.
These kinds of young, volcanically related ore deposits can be very productive, with lots of hot mineral rich fluids moving through the earth’s crust supplying potentially high grade veins of ore relatively close to the surface. However they can also be structurally complex, with the faults and landslips inherent in volcanic activity providing the opportunity for new mineral deposits as well as displacing existing ones. For a mining junior like Galileo, their primary attractions are their low cost of entry in terms of CAPEX and their quick returns if bonanza grades are found.
The Ferber Project
The Ferber project is less well understood than Gabbs or Silverton, with no reportable mineral resource and a relatively basic geological map, but the district has historic workings and the mining cadastre shows historic production from those mines implying grades that in most situations would be economic if still present in bulk.
The geology of the Ferber project is dominated by skarn-type mineralization, where acidic mineralising fluids carrying a range of metals, rise up and interact with limestones chemically. That interaction changes both the limestone and the fluids, resulting in a complex melange of minerals and mineral textures within a relatively small footprint. However, the intensity of those chemical reactions means that the potential for high-grade mineralisation may be found across several different economic minerals.
Copper, lead, silver and gold have all been mined on these properties before at a small scale since the initial discoveries in the 1880s. However, the geology and geometallurgy are complex and there are potentially several different types of economic mineral deposit present, so the primary need on these properties is a good geological map upon which to define areas of focus.
South African Property – Sale Pending
Prior to Galileo’s acquisition of St Vincent Minerals, its prime project was the Glenover Carbonitite Project in South Africa, which saught to mine Rare Earth Elements (REEs) and by-product phosphates.
This project was evaluated in August 2012 and found to hold SAMREC-reportable resources of;
17Mt Indicated at 1.45% TREO (Total Rare Earth Oxides) + Y2O3 (Yttrrium oxide) and 9.7% Phosphate with
12.1Mt inferred at 0.98% TREO + Y2O3 and 9.25% Phosphate
The sale of the balance of the project to its JV partner, Fer-Min-Ore Proprietary Ltd, a local company focussed on mineral processing innovation, for US$4m has been agreed and is currently being held over until April 2016, by mutual agreement, as due diligence is carried out and regulatory approval is given.
Investment Conclusion
As, effectively, a single asset company (that asset being the NI 43-101 reportable resource on Gabbs and the underlying mineral leases), Galileo is in a safe district, with access to low cost development scenarios (such as heap leaching). However the grades are relatively low and the technical uncertainties still quite wide. The question here is not whether there is value in 1.6Moz of gold equivalent resource, but whether the company can release it cost effectively and at what margin. The bonus for shareholders is the pending release of value from the South African property that should help reduce dilution in the early phases of development and will provide a working treasury (US$4m/GBP£2.6m) that underwrites the majority of the current market capitalisation.
We believe that it is the right time in the mining cycle to be starting this kind of development work and the equity has attractions for gold watchers and mining fundamentalists alike, but it is definitely not one for the widows and orphans fund.
Financial Analysis
At this stage it is not possible to produce forward estimates due to lack of production. The predictive capacity of the financial data shown below is limited.
Disclaimer
The information above is published solely for information purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, or related financial instruments. It does not constitute a personal recommendation as defined by the Financial Conduct Authority ("FCA”) or take into account the particular investment objectives, financial situations or needs of individual investors. The information above is obtained from public information and sources considered reliable. This is a marketing communication document and has not been prepared in accordance with legal requirements designed to promote independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Although Shard Capital Partners LLP is publishing the research, it is not restricted from dealing in the stock. Please note risk warning section on our website with regards high risk AIM shares. If you are unsure of the suitability of share dealing specifically for you then you should contact an Independent Financial Adviser, authorised by the Financial Conduct Authority.