A preliminary economic assessment of the 55 zone at Roxgold’s (TSX: ROG; US-OTC: ROGFF) Yaramoko exploration permit in Burkina Faso, 200 km southwest of the capital city of Ouagadougou, demonstrates an after-tax internal rate of return of 47.7% with a 1.4 year payback on initial capital and an after-tax net present value at a 5% discount rate of $192 million based on a gold price of US$1,300 per oz.
“We’re very pleased with the way it turned out to be honest,” president and chief executive John Dorward told The Northern Miner. “It’s always good to get it out and have it well-received. It’s pretty much in line with our expectations. Given the starting grade we were expecting it to have a pretty modest capex and pretty compelling operating costs and that came through in the final analysis.”
Pre-production capital is anticipated to reach $93.8 million, which consists of US$37.7 million for the underground mine, $24.2 million for the processing plant; $14.4 million for infrastructure, $7.1 million for owner’s costs, and $10.4 million to cover contingencies.
During the first five years of production, average total costs, including royalties, are estimated to be US$455 per oz., with all-in sustaining costs of US$681 per oz. during the same period. Over the full ten-year mine life, average total cash costs including royalties will run to about US$530 per oz.
During the first five years of production the PEA outlines average annual production of 98,300 ounces of gold at a mill feed grade of 11.9 grams gold per tonne. The average metallurgical recovery of gold is 96%.
Dorward says work on the feasibility study got underway in August (the company has already hired SRK in Toronto and Mintrex in Australia) and believes that it should be completed in the second quarter of next year. The timeline is relatively quick, he explains, because Roxgold does not plan to do any interim resource drilling. “It’s a very well-drilled deposit already,” he says, “with well over 250 holes in the resource.”
The company is also looking at optimization opportunities and believes there is potential for lateral development and the reduction of waste, as well as potential to extend the use of backfill to maximize mining recoveries and reduce dilution. Management will also examine ways to optimize the flow sheet and provide engineering inputs for design and construction.
Dan Hrushewsky of Jennings Capital in Toronto has a speculative buy rating on Roxgold and a 12-month target price of $1.25 per share. “The higher grade, compact nature of the deposit results in a small tonnage operation,” he wrote in a research note after the PEA was released. “As such, larger components of the process plant (such as the milling equipment) are smaller in size and, therefore, off-the-shelf and not as susceptible to cost pressure as the large throughput mills that are built ‘on spec.’ As well, the lower capex results in a lower, more manageable, funding requirement, and the higher grade results in higher cashflows and an enhanced repayment ability.”
David Sadowski of Raymond James in Vancouver commented in a research note that the study considered a smaller mine than his model (and his view of the eventual mine), and therefore a lower NPV, but emphasized that “initial numbers demonstrate a significant, low-cost operation with room to grow/optimize and which should work in most gold price environments.”
Sadowski added that he sees “considerable room” to optimize the parameters of the PEA, “including a decrease in mining dilution from 21%, which should boost life-of-mine head grades from 10.2 grams tonne, and further optimization on mining (it is currently long-hole stoping only, an unlikely eventuality) and process flow sheet.”
The analyst also pointed to three areas where he believes Roxgold could boost the mined ounces assumption beyond the 1.1 million oz. forecast. These include first, the 127,000 ounces of resources grading 11.7 grams per tonne that were “left out of the PEA due to low drill density in the deeper part of the deposit"; second, 181,000 oz. of resources grading 9.3 grams per tonne that were left out “as they are within unmined pillars (with geotech work currently being completed, optimization on mining is likely to result in a lower unmined component in the bankable feasibility study); and third, further exploration along strike and to depth at the main 55 zone, as well as in new areas.
Toronto-based analyst Pierre Vaillancourt of Macquarie Research described the PEA as “solid” and said he believes that “as deeper levels of the mine are better defined by additional drilling, the lower grade in the second half of the mine life will be upgraded and improve project economics.” He also believes that the mineralized zone “will continue to extend down dip, providing further upside to the project.”
And while capex was higher than he expected (“...in addition to the construction capital of $94 million, development capex is $103 million for the first five years of production before dropping off to $3.6 million annually [and] we had modeled less than half that amount”), nevertheless, “all-in costs remain very reasonable at $712 per oz. over the life of mine.” Vaillancourt has a 12-month target price on the stock of $1.35 per share.
Roxgold has no debt, holds cash and cash equivalents of about $8.6 million, and has a market capitalization of about $103.7 million.
In Toronto at presstime Roxgold was trading at 62¢ per share within a 52-week range of 36¢-$1.02.
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