Richland Resources' (LON:RLD) first foray into mining outside Tanzania looks positive as its newly acquired sapphire mine already has resources delineated, says broker RFC Ambrian, which rates the stock a 'hold'.
It also has existing infrastructure and is in Australia, where there is low political risk, points out analyst Craig Foggo.
Richland has exercised its option over the Nardoo project for A$1.18mln (£653,000) and aims to re-start production within nine months. It's been forced to consider other opportunities after illegal mining at its tanzanite operations in Tanzania
Foggo notes the alluvial deposit was previously open pit mined by Australis over 11 months before it closed in 2005.
The site produced 2.3mln carats and it is estimated to be able to produce 20.8 million carats per year, with Richland targeting around 12.5 million carats a year.
Operating gross profits of around A$7 mln are possible if a price of A$4.5 per gramme sapphire was received.
Although Australis achieved similar prices when operations were optimised, it saw under 40 Australian cents during its long commissioning, which would make the mine unprofitable, notes the broker.
However, Richland reckons it can achieve improved profitability from both reducing costs due to the current climate and increasing revenues.
"Richland has indicated that there is an increased availability of mining contractors due to various coal mines closing. As a result, costs can be fixed at a per unit cost basis and this greatly de-risks the cost profile (as long as grade control is achieved)," says Foggo.
Richland also believes it can significantly improve the marketing of sapphire parcels given the changing gemstones’ market landscape since 2006 and they will be marketed on the firm's retail-focused website.
RFC Ambrian notes that historical production at Nadoo has proven high-value special gemstones, namely those above 10 carats, exist there.
"Sapphires in this size range carry a significant premium to smaller ones," says Foggo.
"The project viability is dependent on Richland achieving the assumptions of: higher plant throughput, low capital costs and — most significantly — achieving the required revenue from the sale of its sapphires to sightholders. As we see further details emerge that will de-risk these key elements of the assumptions we will consider re-valuing the asset," he added.