Gascoyne Resources Ltd (ASX:GCY) is expected to achieve a significant improvement in cash flow by its decision to postpone Stage 3 cut-back of the eastern and western walls of the Gilbey’s pit at its Dalgaranga Gold Project in WA.
The optimised Gilbey’s Stage 2 provides a two-year baseload production at Dalgaranga to be enhanced by other deposits and stockpiles at Dalgaranga and Firefly’s Yalgoo tenements plus regional stranded deposits.
Despite the reduced capital investment in FY2022 and FY2023 by deferring Stage 3 cut-back, Gascoyne has reiterated its FY2022 production guidance of 70,000 – 80,000 ounces at a significantly lower all-in cost following the removal of ~$60 million waste stripping from the deferred cut-back.
Meanwhile, Gascoyne’s board remains committed to its merger with Firefly Resources Ltd (ASX:FFR) to create a leading regional gold production and development business in the Murchison Region of WA.
Dalgaranga produced 16,744 ounces and generated $6.5 million in cash in the September quarter despite rain events that impacted access to ore in July and August.
Gascoyne is in a strong financial position with $26.4 million cash, $10.5 million bank debt and an ‘in the money’ hedge position of $3.2 million as at September 30, 2021.
Decision preserves future optionality
Gascoyne managing director and CEO Richard Hay said: “Gascoyne’s decision to defer the Stage 3 eastern and western wall cut-back of the Gilbey’s pit will greatly increase cash generation from Dalgaranga and Melville over the next three years and protect the business against avoidable financial risk in the current environment.
“We have been able to take this pathway by capitalising on the operational flexibility emerging from the proposed merger with Firefly and exploration success within our Dalgaranga tenements.
“Under the new optimised Stage 2 plan for the Gilbey’s pit, baseload ore feed will be produced for the next two years which will be further supported by satellite feed and stockpiles from FY2023.
“Importantly, production guidance in FY2022 remains unchanged and the deferral of up to $60 million in waste stripping will reduce the All-in Cost of production, thereby significantly increasing cashflow generation this year.
“Furthermore, the decision preserves the future optionality of the cut-back when the operating cost and gold price environment improves.”
Revised business plan
Since the original decision to delay the start of the Stage 3 cut-back of the Gilbey’s pit in the first half of the year, Gascoyne has considered the current heightened cost profile of the Western Australian mining industry, the current gold price trend, potential alternative lower cost ore sources, capital requirements and both financial and operational risks.
The outcome of this process and proposed imminent merger with Firefly has resulted in Gascoyne’s board endorsing the recommended deferral of the Stage 3 cut-back in favour of the introduction of regional higher grade ore sources, including from Firefly’s Yalgoo deposits.
Under the optimised business plan, ore from the Stage 2 cut-back of the Gilbey’s pit and stockpiles will continue to be processed from FY2022 to FY2024.
Ore from Gilbey’s will be supplemented with additional ore sources from FY2023 onwards when Firefly’s 196,000 ounces Melville deposit is being targeted for first production.
There will be no impact to FY2022 production guidance and the all-in cost of production during this period will be significantly lower as a result of an estimated reduction in aggregate waste stripping costs at Dalgaranga, of which the capitalised waste stripping cost component decreases by $41 million to $44 million.
Opportunities for more commercial supplemental higher grade ore feed exist at both Dalgranaga and Firefly’s Yalgoo tenements and importantly other stranded regional deposits that currently do not have access to processing facilities.
Strategically important processing plant
Gascoyne Dalgaranga processing plant is in a strategically important position in the Murchison region.
Not only is the processing plant a new, modern facility, it is also one of the lowest cost per tonne plants for its size in the gold industry, consistently processing at less than $14 per tonne over the preceding three years.
This plant and the broader Dalgaranga operations infrastructure is a valuable asset with its replacement value today far in excess of the $100 million spent in construction three years ago.
Beyond the Dalgaranga and Yalgoo existing resources and exploration potential, additional regional opportunities for joint venture, ore purchase, toll treatment and acquisitions exist where the Dalgaranga processing plant is the logical and most cost-effective processing option.
Gascoyne has received several inbound enquiries to discuss such opportunities from parties with significant resource inventories and is in the early stage of discussions regarding these opportunities.
Updated guidance
As a result of the revised business plan, Gascoyne has updated aspects of the FY2022 production and cost guidance provided on June 4, 2021. The changes are outlined in the following table.
September quarter performance
Dalgaranga produced 16,744 ounces in the September quarter at an AISC of $1,976/ounce despite rain events which led to a minor wall slip impacting access to ore in July and August.
By September, consistent access to the central and southern GMZ high-grade ore was re-established in Stage 2, returning to normal operations throughout September.
As at September 30, 2021, Gascoyne’s cash had increased to $26.4 million from $23.4 million at June 30, 2021.
The increase came after $3.5 million in debt repayments during the quarter with bank debt reduced to $10.5 million at quarter-end.
Proposed merger with Firefly Resources
Gascoyne’s board remains committed to completing the proposed scheme of arrangement with Firefly.
The company has discussed the revised business plan with Firefly management and Firefly is supportive of the updated operating strategy.
Gascoyne’s board has also unanimously recommended shareholders to reject Westgold Resources Ltd’s (ASX:WGX) intention to make a takeover offer for Gascoyne.
The company believes the offer from Westgold undervalues Gascoyne shares and does not represent a superior alternative for Gascoyne shareholders when compared to the merger with Firefly.
Support from Deutsche Balaton AG
Hay said: “While we still await the Bidder’s Statement from Westgold to support its intention to make a takeover offer for Gascoyne, the board is of the view that the offer does not represent a superior alternative to the proposed merger with Firefly.
“The board firmly believes that Gascoyne combined with Firefly provides greater value to shareholders than the individual parts.
“Also, our major 22% shareholder Deutsche Balaton AG has stated that it does not intend to accept the Westgold Offer in the absence of a superior proposal.
“Accordingly, Gascoyne shareholders are advised to take no action in response to correspondence from Westgold and to REJECT the Westgold Offer.”