Vassilios Carellas must be wondering what he has to do to make investors sit up and take notice of his company!
- Acquire a nickel-copper sulphide project with potential to be a major new discovery. Zzzzzz.
- Produce some exceptional drilling results showing up to 158 g/t. Doze.
- Announce a 35% increase in gold resources to over a million ounces. Yawn.
- Present results from a geophysical survey which were better than his own expectations. Shrug.
With an average daily turnover of just £8,330 about 65,000 shares; Kryso Resources is the most thinly traded of all the pre-production development outfits on AIM. Only the out-and-out exploration minnows command less interest from investors and traders.
Yet Kryso is no blue sky merchant with nothing more than hopes and dreams. Its key asset is a 100% stake in the Pakrut mine near Dushanbe in Tajikistan, which is undergoing bankable feasibility studies due for completion in early 2008. Pakrut contains at least a million ounces of gold, over 80% of it measured/indicated, to JORC reporting standards.
The deposit sits in a rocky hillside above the Pakrut river valley, and has been explored and developed via both surface methods and by underground adits extending into the body of the hill. A great deal of work was done initially by Soviet geologists, including 6.5 km of underground adit development and 5,000 metres of core drilling. "New eyes on old data" have subsequently reinterpreted the Russian findings and further drilling and underground development have revealed additional zones of mineralisation.
Above: Surface trenching at Ore Zone 1
Pakrut's gold is hosted in three distinct orebodies, two of which are accessible from the surface by open pit mining, with a third higher grade zone extending to greater depth below the level of the river valley. Recent drilling gave excellent results from the third orebody (known as Orezone 1) from below the level of the existing adit, the most significant of which were:
6.5m at 37.97g/t Au (including 1.5m at 158g/t)
30m at 13.23g/t Au (including 12.85m at 29.07g/t)
42m at 11.17g/t Au (including 6m at 18.3g/t, 4m at 28.15g/t, 3m at 10.68g/t, 5m at 34.04g/t)
50m at 5.67g/t Au (including 5m at 41.54g/t)
41.5m at 4.08g/t Au (including 16m at 8.49 g/t)
40.5m at 3.94 g/t Au
76m at 2.53 g/t Au
Run the gram/metre rule espoused by geologist Keith Barron of "Straight Talk on Mining" over these results and you'll see some amazing numbers. Even given that much of the drilling is angled, and true widths are perhaps only half or even less - of the core intersection shown above, the worst gram metre count is 160, with the best being a huge 457. Barron says: "An intersection of 50 gram-metres is pretty good; of 100 or 200 gram-metres is pretty gosh darn good, and anything higher becomes exceptional!..." So even allowing for angled intersections, this zone at Pakrut looks "pretty gosh darn good!" The orebody is still open to the north, east and to depth, and will be tested further during the winter underground drilling campaign and in the spring by surface drilling to depth.
Given these grades, Pakrut, which was originally conceived as an open pit operation, with a possible underground mine once the surface deposits were exhausted, is now likely to be mined by both methods simultaneously, with the aim of producing 80-100,000 ounces of gold per annum. This has necessitated a complete re-write of the mine plan and has delayed the completion of the bankable feasibility study until Q1 2008. However, if implemented, simultaneous mining of the higher grade Orebody 1 at depth alongside the near surface zones 2 and 3 will add value to the project by increasing revenue from the outset.
Above Undground Adit & Drilling at Pakrut
Metallurgical testwork by Tajik Geology shows that Pakrut's gold is free-milling and about 50% is amenable to gravity separation, with a further 35-45% extractable by flotation. Capex will therefore not be astronomical, and house broker Fox-Davies estimated approximately $50 million in their 20 November Flash Note. Fox-Davies also estimated cash costs at $12 per tonne ? which equates to around $220 per ounce and arrived at a conservative 12.5% NPV of £33.3 million. At current gold prices, this figure rises to £63.4 million.
This tentative valuation completely ignores Hukas, the company's nickel-copper sulphide prospect in central Tajikistan. Hukas had also been the subject of exploration by the Soviets, who, in addition to investigating an isolated outcrop, had had also defined a blind geophysical anomaly some 500m to the south east of the outcrop, near the Hukas stream, which indicated that mineralisation was dipping gently and thickening to the east. Limited drilling of this had returned 2.2 metres at 1.43% nickel and 0.88% copper. This summer, a TEM geophysical survey has been conducted at Hukas and has located three significant anomalies. One of these, close to the Hukas stream, appears to correlate with the earlier findings, striking in a north-easterly direction over one kilometre and still open to the north. The anomaly occurs between 60m and 100m from the surface, and dips to the east, with a width of up to 50m, and depth of 200m which is still open. Two further anomalies in the northern part of the licence area have similar characteristics over a strike length of 300m. All three will be tested next year by a 2,000m drill programme.
Above: Temporary camp at Hukas
Successful drilling of these anomalies will mean a lot. The discovery of a new nickel sulphide deposit is an increasingly rare event, as most of those that were easy to find have already been found and are steadily being depleted. New sulphide deposits are barely keeping pace with depletion, and it is estimated that an increasing percentage of world nickel supply will in future come from the more abundant but troublesome laterite resources. The big advantage of sulphide deposits is their straightforward and inexpensive processing requirements, because, whilst laterites are cheap to mine, large scale processing is heavily capital intensive and still imperfect, as BHP and Vale have discovered at Ravensthorpe and Goro. For a small company like Kryso, a significant nickel-sulphide discovery and subsequent development at Hukas will be of company-making proportions.
So why don't people want to buy Kryso shares?
The key could be the location. The 'Stans, collectively, don't have a good reputation right now, after the recent behaviour of Kyrgyzstan and to a lesser extent - Uzbekistan towards their western mining investors. But Tajikistan has a different record altogether. Stable since the cessation of the civil war in 1997, it has hosted several western companies such as Nelson Resources, Gulf International and Avocet Mining who experienced no apparent administrative difficulties. CEO Vassilios Carellas and FD Craig Brown, both fluent in Russian (the business language of Tajikistan), have made their homes in the country where they previously worked for Nelson Resources and Gulf International before founding Kryso. They have built good working relationships with the relevant government departments, whilst Executive Director Abuali Ismatov is a well-known Tajik businessman with good links to the government. Kryso believe they were, in fact, the first Western mining company to have been awarded a 100% interest in a Tajik exploration and mining project. Although the mining law is somewhat bureaucratic, the government is pro-privatisation and no mining licence has ever been revoked.
Another off-putting influence, undoubtedly, is the recent activity of RAB Capital, who have sold Kryso down ruthlessly into any strength since the early summer. From over 13% at the outset, RAB are now down below 3% and appear to be selling out completely. Once the overhang has gone, might investors look more favourably on Kryso?
Fox Davies value the Pakrut mine at 42p on a conservative NPV basis, 65p on a fairly realistic basis, and optimistically, based on sustained high gold prices, at 80p. Yet Kryso is priced at a similar level to blue sky tiddlers without an ounce to their name.
Is £11.5 million REALLY too much to pay? Or are investors allowing the Russian bogeyman and Philip Richards to frighten them away from a significantly undervalued emerging gold miner?
The author holds shares in Kryso Resources