Noricum Gold PLC (NMG.L)
Near-term gold-copper production with a local partner
Noricum Gold PLC is currently a near-production stage junior miner seeking to advance into very low cost gold production in the very near future. It has a local partner that is actively mining similar resources only 7km from its primary geological focus, around 50km SW of Tbilisi, Georgia.
Strategy: In 2015 Noricum switched from its original 100% Austrian focus to an emphasis on near-term gold production and a 50:50 partnership with a local miner in Georgia. Near-surface low-cost gold ore production and sale is designed to fund the development of deeper copper and high-grade gold prospects nearby.
Portfolio: Noricum has license to mine over a large acreage of geology prospective for polymetallic Volcanogenic Massive Sulphide (VMS) type deposits with a local high sulphidation epithermal gold overprint. At shallower depths the epithermal gold (+/-copper) is present in quartzites without the VMS mineralization. Deeper potential is proven by extensive data from historic diamond core, but prior exploration was not to international standards.
Valuation: Until more detailed studies on the projects have been published, the per share market valuation is appropriate. However, based on drilling and assay data generated in the Soviet era, there does appear to be a significant potential for near-surface gold and copper at grades that would be economic in most constituencies. Noricum’s partnership offers means to unlock that potential at low cost with access to existing infrastructure and technical skills.
Risks: Geological and mining risks seem relatively well constrained with mines extracting both deposit types active adjacent to Noricum’s license and operated by its partner group, though under a different company. There is a regional political risk, though Georgia itself is much improved. Globally there is still a significant uncertainty over metal prices, both positive and negative.
Investment summary: For Noricum the model is self-funded exploration of a multi-million ounce gold potential, bootstrapped by an initial fundraising. Even with only a 50% interest and in the current price environment that potential is significant. The 2015 deal looks cheap but, if successful, Noricum’s partner gets a much longer life out of its existing processing assets and advanced exploration skills transfer in this much-improved and western-facing nation.
Following several years of private discussions, in Summer 2015 Noricum switched strategy from underground gold development in Austria, to near-term gold production in Georgia. Not only is this a switch from high wage to mid-low wage economy, but it is a shift away from attempting to develop and finance the whole mining package including all steps from discovery to production. Instead Noricum is using a local partner and leveraging its own skills to compress the potential time and cost of reaching gold production at a self-sustaining level. Revenue from that activity will fund more extensive developments, still in Georgia.
The Geology of Noricum Gold’s Georgian Property
Geologically Noricum Gold’s property in the Bolnisi mining district of Georgia is part of the trans-continental swathe of mineral deposits, known as the Tethyan Metallogenic Belt, which stretches all the way across Eurasia from The Himalayas in the East to Southern Spain in the West. More specifically the Bolnisi district has two main mineralising events that happened relatively closely in geological time, both within the Cretaceous Period.
The older event, at around 85 million years, was equivalent to the underwater ‘Black Smokers’, much loved of natural history film makers, and now subject to exploration and development as Seafloor Massive Sulphide (SMS) deposits by companies such as Nautilus Minerals (TSX:NUS). The slight variation with the Bolnisi district is that 85 million years ago the sea in the area wasn’t kilometres deep and these SMS’s periodically emerged as islands. This leads to some interpretive detail that is scientifically interesting but has little economic impact.
Later still, around 75 million years ago, the area had emerged from the sea completely and was covered by volcanic ash, lavas and eroded sandy material. The region was then host to some classic land-based volcanism. The injection of lava up through the pre-existing rocks fractured them, heated up the local groundwater and caused gold-rich hydrothermal fluids to circulate through the fractures, in places scavenging metals from the underlying VMS (SMS) deposits and re-depositing them higher in the stratigraphy. Technically these vein-based deposits associated with volcano formation are known as high sulphidation epithermal systems and today they can be found around some recent volcanoes, such as those in Fiji.
What we see today in Bolnisi is then a mix of deeper copper-dominated but polymetallic VMS deposits, in places altered and enriched with additional gold, and later, shallower gold-dominated vein systems with some high-grade copper scavenged from the deeper VMS systems and re-deposited.
Noricum’s initial targets are the shallower gold-dominated vein systems, but as exploration continues the existing data and additional work should help define the deeper, and larger, polymetallic systems. There is also the potential for insights gained during the work being carried out on the Bolnisi district to be applied to other properties that are known to Noricum’s partners and we will be interested to see if the combination of company skillsets being built in Bolnisi develops into a wider partnership that can be applied across Georgia.
A Tentative Operational and Economic Model
In general terms the order of business is for Noricum to define a series of starter pits, first at the Kvemo Bolnisi East prospect to extract quartzite-hosted gold for heap leaching, then the Tsitel Sopeli polymetallic copper-gold VMS-style prospect for processing through the Madneuli flotation plant, then open up the slightly deeper Kvemo Bolnisi West copper-rich Kuroko-style VMS prospect.
The cash flow from these operations should allow gaps in the existing drill data to be plugged, wider and deeper exploration targets to be addressed, and for the corporate coffers to be replenished such that Noricum can operate through the current downturn with relative comfort and minimise further shareholder dilution.
Cash costs to drill, blast and truck mined ore the few kilometres to the Madneuli processing plant is likely to be in the low tens of dollars per tonne. The ore will then be sold ‘at the mine gate’ to Madneuli, on the basis of grade, with an assumed recovery factor applied similar to that which the mine currently achieves, minus a small margin to cover the administrative and analytical costs. Somewhere around five percentage points on the ounce (so $50 on a $1,000 ounce) appears to be a reasonable assumption as a ‘handling charge’ in addition to the processing costs.
Typical heap leach recoveries for quartzite-hosted gold are of the order of 70-80%, with cash costs of the order of US$500/oz. Taking these broad-strokes estimates into account and using $1,000/oz. gold price, an attributable margin of between $100-200 per contained oz. of gold in ore seems a reasonable earnings estimate. So revenue from each of these starter pits might be $10-20m pre-tax over two years. Not enough to provide substantial shareholder returns as cash dividends, but certainly enough to see significant capital growth and protect against dilution.
Contained copper will be recovered through the existing flotation circuit. The ore arising from the starter pits may be significantly higher grade than that currently being processed but any mineralization arising from these starter pits should be chemically compatible with that currently mined at Madneuli, so operationally it should be as simple as dropping the trucked ore in a stockpile next to the primary crusher and adding it alongside the locally mined material.
Permitting and Environmental
With its Soviet history, permitting under the Georgian mining code works slightly differently to most western and other modern mining codes. A mining license is granted that includes exploration rather than there being a progression and gradation of permitted rights through staged exploration and development into production.
The Madneuli deposit and its surrounding area was permitted for mining in 1975 and has been in near continual operation ever since. The original acreage has since been split to more closely control the processing operations within the original mine site, with the unmined remainder now held by Georgia Copper & Gold (GCG), a local company that is, operationally, the exploration arm of the RMG group, owners of the Madneuli Mine. It is the ownership of GCG that has been split, 50:50, in the JV with Noricum Gold.
So the unmined acreage is already covered by Environmental Impact Assessments (EIAs) and Studies (EISs) for both mining and basic processing. However, the modern impact studies, carried out in 2013, to assess expanded processing operations and accommodate leach pads for quartzite material from nearby Sakdrisi mine are more specific. Their terms would imply that Noricum would have to undertake supplementary environmental work should it wish to run its own leach pads outside the current mine site. It has no plans to, so as a result there are minimal supplementary actions that Noricum will have to undertake to go into production of ore to be trucked and sold to Madneuli Mine.
The local population, having had a copper-gold mine on its doorstep for 40 years, is mining-savvy with a full, if basic, supply chain already in place to support operations. The most modern services and plant will still need to be imported. Noricum reports that local technical staff, from geophysical surveyors through grade control geologists, to processing plant and lab personnel, have shown a willingness and even enthusiasm to upgrade their own skill sets and take the opportunity to learn from an informal skills and technology transfer program that appears to be well under way.
We understand that one of the motivations for the partnership was that the Georgian group wanted access to modern techniques and practices that can only really be learnt in the field. This informal and commercially-driven program seems to be part of a wider national upskilling. For example; local academic output, from Tbilisi University Geology Department, has taken an enormous step forward in the last decade as it has developed international research partnerships, first with the UK’s Leicester University and more recently with Swiss and French academics.
Future Potential and Direction of Travel
With 40 years of recent gold and copper mining in the immediate district there appears to be a genuine will to extend the life of existing infrastructure, upgraded where necessary, from the mine site, mine owner and through to the political echelons of Georgian population.
With a western-facing and modernising economy it is reasonable to expect the old Soviet mining code to be updated in the not too distant future, but the ‘noises off’ suggest that any new code will be unlikely to contain unpleasant surprises for international miners and the prospect of code change shouldn’t put off potential inwards investors.
With the Georgian business scene radically improved since early post-Soviet days, international investment into the capital, Tbilisi, and the nation in general has been growing for a decade. Of particular interest within the World Bank ‘Ease of Doing Business’ Indices are the overall global rank (24th, ahead of Poland 25th, France, Spain, Japan, etc., etc.) and the ‘Enforcement of Contracts’ metric, where Georgia is globally ranked 13th, ahead of New Zealand (15th), The USA (21st) and Sweden (24th).
The Russian invasion in 2008 reset the local political landscape, removing Georgia’s NATO aspirations and establishing it as a buffer state between mainland Russia and NATO-member Turkey. Since then Russia has seemed content to allow the EU to help the Georgian nation to develop politically, constitutionally and economically. There is clearly a large western-facing constituency, outside the contested northern border regions, and the country appears to have found a kind of local stability that is lacking further south.
In recent years Georgia has developed international sport as a non-contentious means to engage on the global stage. In 2010 Sports and Youth Affairs was established as a separate government ministry with cabinet membership and the country will host several European and international sports events in the immediate future, including the U20 World Cup of Rugby Union in 2017. Fittingly the Georgian national rugby union team, ‘The Lelos’, are global emissaries for this rugged country.
Noricum’s high-grade underground Austrian gold properties have taken a back seat as the mining world undergoes its biggest downturn since the last one. As we have always maintained regarding the so-called commodities SuperCycle, a Super ‘Up’ implies a Super ‘down’ within the highly cyclical mining sector. The process of large-scale mine development normally takes many years and much capital, so supply and demand are rarely completely in sync.
However, gold cannot be considered a ‘simple’ cyclical commodity and the act of gold mining, for many, is the ultimate exercise in winning wealth through endeavour. Of course purity of concept does not always tally with purity of execution and the risks for mining investment of any type are extant and ongoing. Small mining companies have always been high-risk ventures.
What then of this particular project?
The ultimate question of the existence of gold on the property seems uncontroversial. By all accounts there is gold in the area, it is being mined and has been mined for many years. However, the property itself is separated from the contentious Sakdrisi mine site by some geographic distance and, before Noricum arrived, the shallow gold prospects on this property hadn’t been explored to international standards.
So certainly there is still risk in this investment, but what Noricum Gold is doing is telescoping the development timescale (and cost) on the back of existing infrastructure and historic exploration. By its own reckoning the drilling carried out on the property during the 20th Century (some 600 diamond drill cores up to 400m depth) would cost around US$35m to replicate if done today. Obviously in geological exploration data ‘quantity’ does not necessarily equal economic returns but, in an exploration process increasingly informed by statistics, data quantity can populate the distribution curve and point the direction of where (and where not) to look next. International reporting and assay standards do not negate rock solid evidence generated by drilling diamond cores, so far from being valueless even historic core samples decades old can be very useful.
In more prosperous times this project might have attracted several, even tens of millions in speculative finance to fund an exploration program of several years before a decision to mine. However, with the wider mining industry in survival mode, drill intersections of 4 to 5m at between 5 and 7g/t from surface and trenches of showing over 10m above 2g/t strongly support a relatively small-scale low-cost surface mining operation as a means to finance the development of the larger industrial-scale mining opportunities.
The near-surface gold contained by the planned starter pits, may contain the company-estimated 100koz each, or may not. This will largely depend on the ultimate tonnage extracted, so right now it is impossible to say either way. However, the heap leach pads currently in operation at Madneuli are working at a profit on 1.5g/t contained gold from similar geology, so any compatible material that approaches or exceeds that grade will have a ready local market.
The longer-term value of these starter pits is as a revenue neutral (or hopefully revenue positive) proof of concept whereby Noricum Gold project manages some significant local mineral exploration programs, upskilling the local workforce as it goes, and takes the projects into production using appropriate modern techniques to gain the highest metal recoveries economically possible.
At this stage it is not possible to produce forward estimates due to lack of production. Given the change in company strategy since the end of FY2014, the predictive capacity of the financial data shown below is very limited.