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Frontier Mining – pushing forward to production

If Frontier can meet both its own and its brokers’ expectations and deliver steadily growing post-tax annual earnings from Benkala, culminating in $50 million in two year’s time, then today’s market cap of just $92 million will look a little silly.
Frontier Mining – pushing forward to production

It’s been an eventful year for Frontier Mining (LON:FML). At the beginning of 2010, the company was a small gold producer in Kazakhstan, with a half interest in a large copper porphyry which was at the time undergoing resource confirmation and infill drilling.

Now, 18 months on, the company is still a small gold producer in Kazakhstan, but is now the 100 percent owner of the Benkala copper-molybdenum porphyry – among the six largest copper resources in the country – and is anticipating first copper production before the end of this year.

Frontier is also in the process of acquiring an additional resource 10km to the south of the main Benkala deposit, known as Benkala South.

With a Soviet-established C2 resource of 175 million tonnes at a grade of 0.34-4 percent copper, Benkala South adds significant additional potential to the existing Benkala JORC-compliant resource of 362 million tonnes grading from 0.4 percent  (sulphides) to  0.62 percent (oxides).

The transition to 100 percent ownership of Benkala was finally achieved in April of this year, when the Kazakhstan government issued its consent to the acquisition by Frontier of the 50 percent  interest of their joint venture partner Coville Intercorp in US Megatech BVI, the owner of KazCopper LLP.

KazCopper, in its turn, is the 100 percent owner of the Benkala licence. Frontier also acquired Coville’s 100 percent interest in the Maminksaya Gold Project, a 1 million ounce Russian-classified resource in the southern Ural region.

Consideration for this acquisition took the form of 873,210,000 Frontier shares, which were issued last year, but secured by a mortgage over the US Megatech shares until final completion in April and in addition are subject to a 12 month lock in period.

The first production target at Benkala - which lies in the Urals Copper/Gold ore belt, close to the Russian border - is the oxide “cap” to the main orebody, which is predominantly sulphides.

This weathered, close to surface ore, some 30 metres thick, has grades of up to 0.62 percent copper, and represents less than 10 percent of the total defined resource, but is easy to mine via open pit methods, and relatively inexpensive to process using SX/EW technology (solvent-extraction/electro-winning).

The contained copper in the oxide ore is approximately 185,000t compared with the primary sulphide orebody which contains a further 1.38Mt of metal - both with potential for gold and molybdenum credits.

Wardell Armstrong International’s Competent Person’s Report, issued last year, estimated the oxide zone of the Benkala project to have a NPV of $190 million, based on 0.5 percent diluted copper grade, 63 percent recovery and 185,000 tons of contained metal at a 6,000 USD per tonne copper price. 

A recent pit optimisation study estimates a 7 year mine life, with production ramping up from commencement to 18,000-20,000 tonnes of copper by the third year. Should the newly acquired project at Benkala South come up to expectations, there is also a possibility of upgrading further to 30,000 tpa by 2015 to accommodate oxide ores from that source and increase the life of the process facility. 

Site stripping began during 2010, and the entire site has been cleared down to the level of the orebody. Stockpiling of ore ready for crushing and processing began in the spring and it’s anticipated that crushing will start in October, followed by leaching and production of copper cathode before the end of the year.

Output initially will be in the region of 8,000 tpa, but expansion of the SX/EW plant from its initial 10,000 tpa capacity will more than double the output by 2013.

Estimated capex to bring Benkala’s oxide orebody into production has been in the region of $51 million, funded, thus far, without recourse to mining project finance or the equity markets.

Funding has come from a variety of sources, including the Zere Group (now known as New Technology), an entity in which chairman and CEO Erlan Sagadiev has an interest, Sokol, a company owned by the two original founders of the company, Tom Sinclair and Brian Savage, and most recently by a 4-year copper offtake agreement with Red Kite Mine Finance Trust which brought a further $10 million into Frontier’s treasury.

The company has also issued $5 million of 1-year convertible bonds, taken advantage of local bank lending and has negotiated a SEDA with YA Global for a further $5 million, against which it has, as yet, made no drawdown.

The upshot of this is a significant debt burden, and until recently, Frontier faced the prospect of more borrowing to complete construction at Benkala.

But in July the company announced a very opportune asset sale – the Maminskoye Gold Project was acquired for $37.45 million in cash by Stanhigh Limited of Cyprus.

The rationale for the sale was presented thus by Sagadiev: “Although we have been excited about the potential at Maminskoye, its potential has not at all been reflected in Frontier’s share price and the development of Maminskoye would have been an extended and expensive effort outside of our home region. Importantly, the sale provides Frontier with all the capital required to launch the Benkala SX-EW project.” 

Further expenditure of approximately $15 million will be required during 2012 and 2013 to carry out the expansion of the processing plant at Benkala, but the bankable feasibility study for the entire project – which includes the sulphide orebody - is now almost complete, and with this in hand, Frontier will be well equipped to secure project finance, particularly given the large investment the company has already made from its own resources.

In addition, the company will by then be earning revenues from both gold and copper production.

Once the plant upgrade has been achieved, Benkala will be producing some 18,000 tonnes of almost pure LME grade copper cathode per annum, generating revenue – at a long term copper price of $3 per lb – of $120 million. House broker XCAP forecasts free cash flow from operations of around $60 million pa, yielding a profit after tax of almost $50 million by 2013.

Meanwhile, what of gold? In 2009, Frontier was mining its Naimanjal gold project, situated in their second key Kazakhstan licence area.

But as a clearer picture steadily emerged of its other exploration assets on the Naimanjal licence, the company decided to cease operations at Naimanjal itself, where low grades and narrow veins were proving difficult to mine at a profit and shift both focus and resources to Koskuduk, a near surface oxide gold prospect with sulphide potential at deeper levels. 

Once Koskuduk became the gold focus, Frontier moved fast. By early 2010, its Naimanjal fleet and equipment had been re-located, and construction of power supply, production plant and leach pads had commenced, along with the removal of overburden from the ore bodies.

A straightforward open pit/heap-leach operation, Koskuduk poured its first gold in mid July 2010, and by September had produced over 2,000 ounces, en route to output for the year of 4,180 ounces of gold and  11,300 ounces of silver.

This was below target due to power delays, which inhibited mining and crushing activities on site, but the company are confident that they can improve significantly for 2011. Koskuduk commenced 2011 operations in April,  following the winter shutdown, and output of up to 6,000 ounces plus silver is expected.

Already a gold producer, and about to become a profitable copper producer, Frontier seems worthy of investor interest. However, along with many of its peers, the share price remains depressed, and has steadily descended from a high of almost 8p in January to the current level of 3p.

In a recent interview, Erlan Sagadiev was asked why he thought this had happened. His response was that the interviewer should perhaps ask investors why they were selling the stock for half what they paid for it “…when nothing has changed?” He went on to state that “AIM has very little to do with fundamentals.”

In the current climate on the AIM market, where instant large gains are preferred to steady long term capital appreciation, it is worth noting his comment.

Because if Frontier can meet both its own and its brokers’ expectations, and deliver steadily growing post-tax annual earnings from Benkala, culminating in $50 million in two year’s time, then today’s market cap of just $92 million will look a little silly. And with 85 percent of the stock firmly in the hands of entities related to management - past and present - should investors regain their interest in Frontier the stock could acquire significant rarity value.

Market: AIM
Epic:  FML
Sector:  Mining

View full FML profile View Profile

Frontier Mining Timeline

January 23 2015

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