Size and staying power…
March 22, 2010
Over breakfast this morning, my wife was expounding the virtues of size and staying power. I got to wondering just how small one could be and how quickly one could finish and still be able to make the grade… we were talking about mine development, of course.
Well, I’ve been doing a bit of reading lately about a relatively small operation located on the Sunda Banda Magmatic Arc in the south of Sumatra in Indonesia. Operated by Kingsrose Mining Limited (ASX:KRM), the Way Linggo project is scheduled to start producing gold within the next two months. My intent here is not to perform a complete study of the project. I’m taking only a brief sideways glance to better understand some of the variables necessary to consider the decision to go forward or not. The Way Linggo project has already passed the ‘go forward’ threshold so it provides a good starting point for such consideration.
This is a numbers game, so let’s look at some numbers. From the Company’s website:
- The total project contains approximately 181,000 ounces of gold and 2.8 million ounces of silver.
- The total resource is estimated at 669,000 tonnes, including 554,000 from the North Vein (itself including an A and a B ore body – see the video and the image below).
- Average grade of gold is 8.44 g/t.
- Average grade of silver is 129 g/t.
- AuEq is 10.6 g/t.
- Average thickness of the ore body in the main North Vein is 4.7 metres.
The North Vein is captured in the YouTube video at: http://www.youtube.com/watch?v=B9taQRJvHbo&feature=player_embedded
Looking at this video from about the 49 seconds mark, we can see that this vein looks like a window pane, positioned vertically in the ground, measuring about 300 metres in length, 150 metres in depth, and just 4.7 metres thick.
The plan is to mine this vein from underground, as shown below.
After blasting the vein from overhead, ore will be hauled across to a portal on the side of the hill, as shown below.
As high grade, low sulphidation ore, it will be amenable to extraction by cyanide leach and Merrill Crowe (http://en.wikipedia.org/wiki/Merrill-Crowe_process). This is key.
- 400 tonnes per day or 140,000 tonnes per year.
- Projections are for 45,000 oz Au and 750,000 oz Ag annually.
- 90% recovery.
- Makes for a mine life for the identified ore body of just four-to-five years.
- Plant construction cost estimated at USD 7.0 million. Total sunk cost to production: USD 24 million.
- Variable costs of USD 316 per oz of Au.
- Less silver credits and plus government royalties yields a projected cash cost at USD 150 per oz of Au.
- The site is within four hours drive from Lampung, a major industrial city and port. It has logistics in its favour.
- There is meaningful potential for additional discovery on this site once mining has begun. A good place to look for monsters is near small high grade epithermals.
Labour costs in Indonesia are undoubtedly lower than in many other places in the mining world. This noted, what’s critical to such a relatively small deposit going into production is the low capital cost to make ready to extract the gold. Good grades, ground conditions, and the topography together also make the stoping of ore into the haulage tunnel easy and less costly per unit. Silver credits are great… and any upside on the price of gold is a bonus. With such low fixed and variable costs, this project makes money even at lower prices. Clearly, this is all multivariate stuff at work, and beyond the scope of this brief commentary. At the same time, it does help to illustrate how a relatively small ore body (300m x 150m x 4.7m x 10.6 AuEq) can be made to work. This project has the potential to generate short-term profits of greater than USD 100 million.
My takeaway from the Way Linggo project is that good grades and low regional costs of mining, together, make small deposits very viable and potentially very profitable. Larger such prospects in this region offer an even more powerful upward bias in profitability. As evidenced by this one’s USD 24 million make-ready cost, it doesn’t take a great big deposit to get into the game.
So you see dear, while size is important, it’s apparently not everything!
With respect,
Kevin Graham