Np - I'm just trying to get ballpark figures for myself to work out whether the resource has potential, so don't hold anything too loosely. I think it may as they are expecting the other areas to be bigger. 

One monstrous assumption here also is that resources aren't necessarilly reserves, though in the case of Bundarra, everything is within about 300m of the surface, so most of it should be able to be converted I'd imagine. 

Had a quick look just now @Stuey727, not sure you can assume they will go from zero income in year 2 to full production in year 3, there is usually a commissioning phase, ramp up and optimisation/debottlenecking, ironing out bugs, plant mods, that sort of thing.  Also, what assumptions have you used in relation to their funding.  How much is debt and how fast will they repay that debt, because that reduces profits or can even eliminate profits in the first few years, particularly if they intend to pay down their debt quickly, which is usually the best option.  I'll comment some more after I've spent more time looking at the spreadsheet.

Before I forget Stuey, many projects are only economic at higher metal prices, and it looks like this might be one of those, but the issue is that you have to have some really good economics to get the funding through for new projects, and if it takes a year or two to build and commission, who knows what the price will be then? 

These sort of companies can be good to hold when certain milestones are reached, such as a big discovery, a really good feasibility study (FS) result, funding approvals and a positive FID (financial investment decision by the company), the commencement of construction of the processing plant, and when they hit nameplate capacity in terms of production while the metal price is still high, however there can be long period in between these events when the share price can drift lower, or drop sharply if things do not go to plan.  I often get out between the "discovery" phase and the "production" phase, because that's the period that usually involves the most capital raisings, the most dilution to ordinary shareholders when they raise capital via placements to Soph's and Insto's, and it's also a period during which a lot can go wrong.  It can also be a period that takes quite a few years during which your "investment" value might head in the wrong direction (south instead of north).  But that's just me.  Tired and jaded.  The excitement has worn off perhaps.  

Thanks heaps Bear, that's much appreciated. Thanks also Tunnel.

Okay, a few things. 

- Gold wasn't included as it is not likely to be considered a credit in the concentrate. 

- Pretty sure that the grades mentioned are raw grades and not based on what is recoverable. That being said, expecting the copper recovery rates to be high - unsure on silver. 

- The ore processing cost of $31 to 34 does not include the cost of strip or mining, or the cost of smelting. 

- I've updated the processing to 50% for the 3rd year, 75% for the 4th year. 

- I'm not really sure how to estimate the running costs of mining. I think the strip ratio was about 3:1, so I'm estimating it will be similar to the strip cost, but I've got no idea. 

- I've made an assumption of 100% debt, which isn't realistic. Might calculate it on a 60% basis at some point. 

I've updated this into the spreadsheet and as currently reported, the resource is looking uneconomical to mine and while it might vaguley in the ballpark, I think it's still well in the inner diamond. This being said, this is just the start of exploration in Bundarra. They are expecting both this resource to grow and I'd be expecting other areas in Bundarra to be even better. To me, the key question seems to be around whether the nearby areas will have a better grade. 

Management still seems very confident that (the former CEO stated it would be a mine several months ago on small caps, when they had much less info and he has said that the exploration has exceeded his expectations substantially, so I'm a bit unsure of what to do with that).  

Bear do you have any ballpark figures of the mining costs excluding processing? I'm also pretty sure that Mt Flora won't work at a processing capacity of 500mt/yr, but I think it's possible that the regional capacity might be any of those figures, - do you know what efficiencies of scale are gained if the processing centre is doubled, quadrupled, or increased tenfold? 

 

Sorry Stuey - can't help with those queries.  Processing costs, like mining costs depend on many factors specific to each individual project.  Processing costs would depend on the chemistry used in the plant, the consumables, how efficiently the plant works, the overheads including labour, power, water, etc., and how much waste will be produced, and what needs to be done with it, and heaps more.  Also, if the ore ends up being as easy to process as they expect it will be.  Sometimes it isn't.  Sometimes it changes and they end up with too much clay or other stuff that slows down or inhibits the processing plant.  There are many factors specific to the ore that can impact on processing costs.  See here about just some of the issues regarding waste:  https://www.eesigroup.com/insights/easy-guide-to-mining-waste-characterisation/

Wait for their DFS - definitive feasibility study, sometimes called a BFS, where the "Definitive" is replaced by "Bankable", but the "D" is used more than the "B" these days.  Those are usually preceeded by a PFS, a pre-feasibility study, and often some modifications to the design of the plant, particularly if their resource has grown significantly and they need to increase the throughput.  The costs are usually spelled out in those feasibility studies. 

Remember that every assumption is another chance to feed an incorrect number into your modelling and produce a valuation that is way off.  It ain't easy!!  I would say it's damn near impossible actually at this early stage.

The efficiencies of scale thing again is dependent on so many variables.  Obviously, doubling or quadrupling the throughput capacity of the plant (tonnes processed per annum) should result in lower running costs per unit of finished product produced, but there is an increased up-front cost obviously.  It's also usually easier to engineer a larger plant from the start than to modify one later to try to double the plant's capacity after it has already been built and commissioned.  But as to the exact savings that could be achieved, no, I can't give you any numbers, either specific to this project or as a general rule, because I don't think there are any general rules that are that specific when it comes to the mining industry.  In terms of dollar values and percentages I mean.  It all depends on the project and the economics of that project.  Every project is different.  They don't know what they've got there yet, so we certainly don't know.  You'd just be throwing a dart at a board in the dark in my opinion.  Not only do you need far more information, some of which they don't have yet, but you also need to have a team of geologists, chemical engineers and mechanical engineers to provide input.  This is why most fund managers won't touch these companies with a barge pole.  They steer well clear of them.  It's way more of a gamble than an investment when they're at this early stage.

Thanks heaps again Bear - awesome stuff and very useful. 

Out of interest,  while it's usually not possible to tell if a project will be profitable, do you think it's sometime possible to tell if a project will not be profitable (barring commodity price change)? 

You're also not wrong about every assumption being a chance to get incorrect figures. I've been amazed at how much tweaking a few figures by small amounts massively affects the NPV. Shows you just how easy it is to fudge the figures... =/ 

Very interesting about the fund managers. I suppose that's not too suprising given their risk. 

Regarding whether it is easy to tell if a project will NOT be profitable... Not really Stuey - coz it's just the other side of the same coin - it all depends on the project and lots of individual factors specific to that project, but as a general rule, if they have lower grades than their competitors, and higher projected costs, that's not good.  It's the stuff that will increase costs significantly that often gives a reasonable indication that they might struggle to make a quid.  For instance, if the project is located somewhere remote with no existing infrastructure, and they have to build roads, airstrips, etc. in addition to the processing plant, plus source an energy solution (often build a power plant, or contract someone else to do it); If they need a lot of water for the processing plant and there isn't much available; If the good stuff is deep and there's a lot of overburden to strip away before they get to it; If the ore is not uniform, or more specifically if they are talking about having to modify the plant to be able to efficiently process various types of ores (something that is always better to consider BEFORE you commit to building the plant) because varying ore types are often an indicator that there may be some commissioning issues and mods required to get the plant up to nameplate capacity (which cost more, and cause delays).  Another thing to consider is the funding solution that they go with.  If there is a large debt component, have a look at what the term is for repayment.  If the debt needs to be repaid within a couple of years and they have commissioning issues and delays getting the plant up to speed they could get into strife meeting their repayment schedule.  If the lenders are also the companies who they have offtake agreements with, those lenders occasionally end up owning the project, and in hindsight it often looks like the funding was structured for the company to fail so the lenders end up with an asset for a very cheap price.  I've seen it happen.  In that event, shareholders usually end up with nothing, i.e. a 100% loss, because the company goes into administration or receivorship and the assets are not enough to repay the total debt, so there is nothing left for the shareholders, unless they are also secured creditors.  Ordinary retail shareholders are always the last people in the pecking order, and there is not usually too much left by the time it gets down to them in the case of a wind-up (a company being wound up due to not being able to meet their financial obligations as they fall due).

Other things I do not like to see include:

1. The company that does the PFS and DFS are passed over in favour of someone else when it comes time to award the EPC contract.  EPC contractors tend to do less well when they're working off someone else's plans.  If the company who did the feasibility studies is the same company who get to engineer, procure and construct (EPC) the plant, they have far more incentive to go the extra mile to ensure that everything works properly when they're finished.
2. The company has one or more large shareholders who could be perceived to have a vested interest in the company not doing very well.  Firstly, these guys can block any takeover attempt as long as they hold at least 10.1% of the shares, so that significantly reduces the chance of any M&A action.  Secondly, they may be looking to acquire either the company or its major asset(s) at firesale prices when the time comes.  This one is even more significant when that shareholder (or those shareholders) are also secured creditors, i.e. they have loaned money to the company and hold security over the company's main asset(s) because of that.
3. Companies where the board and management have little to no shares in the company.  'Nuff said!  Self-explanitory.
4. Companies where the people who found the major deposit and were the main drivers of the project have moved on - i.e. no longer have any involvement in the company or the project.  This can also mean that the people who founded the company no longer have any involvement with the company, regardless of whether they remain shareholders or not.  If the project is good enough, people will stick with it, not sell out and move on.
5. Companies where they do not own the land yet, or have the rights to mine on those tenements yet, or build anything, but they keep assuring us that it's just a transaction away, and they want to prove up the resource before committing the funds to make the purchase.  Once they are in a position to buy the land, the owners often want a lot more money for it, or do not want to sell at all.  People tend to change their minds when the facts change.
6. Companies who do their own PFS and DFS, or use a company I have never heard of to do it, instead of one of the main industry players.  Ideally, in the gold industry, and also in copper, I want to see the PFS and DFS done by GR Engineering (GNG) or Lycopodium (LYL) and I also want them to get the EPC contract to build and commission the processing plant.
7. Companies who use unproven contractors to do major work, like the EPC of the processing plant, or the main mining contract.  I like to see them appoint companies with a positive track record in the industry to give me some comfort that they know what they're doing and there shouldn't be any nasty surprises down the track.
8. No, let's leave it at 7.  7 is a good number.

There are heaps more red flags - for me - based on negative past experiences with early stage wanna-be mining companies, but that's just me.  Others will have different opinions.