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The company’s share price sank almost 8 percent on the day the study was released. Operating and capital cost estimates were perhaps higher than expected, with some questions left unanswered.
Mid-cap Australian gold hopeful Gold Road Resources (ASX:GOR) hit a benchmark with release of a scoping study for its multi-million-ounce flagship Gruyere gold project in Western Australia. However, the company’s share price sank almost 8 percent on the day it came out as operating and capital cost estimates were perhaps higher than expected, with some questions left unanswered.
The base case for the Gruyere scoping study uses a plant with a capacity of 5 million tonnes per year with the ability to produce an average of 190,000 ounces per year over an 11-year life, with additional studies examining 7.5-million-tonne-per-year and 10-million-tonne-per-year options. The study suggests that such an operation might require a pre-production capital investment of AU$360 million, and then produce at an average life-of-mine cash cost of AU$838 and an all-in sustaining cost (AISC) of AU$916 million. While these figures suggest the project is robust, there are several issues that point to a higher risk profile in face of a volatile gold price.
Gold Road boasts almost complete control of the Yamarna Belt, a zone of Archean greenstone rocks within the Yilgarn Craton. Parallel belts to the west have shown varying levels of gold endowment, led by the Kalgoorlie-Norseman belt, which hosted, among others, the super-giant Kalgoorlie gold deposit. Yamarna has up until recently see little attention, stemming largely from its extreme isolation in the remote and hostile eastern regions of Western Australia. The belt now boasts a resource inventory of over 5 million ounces, largely as a result of Gold Road’s efforts, with Gruyere making up the lion’s share.
Gruyere is a large but low-grade gold project, with its JORC resource currently standing at some 97 million tonnes at 1.2 g/t gold for a total of 3.84 million ounces. On paper, the details of the project look reasonably straightforward — a standard open-pit operation with a low strip ratio of 1.6:1 and good metallurgy with greater than 90 percent gold recovery from a standard CIL plant. That said, there are clearly several hurdles stemming from the project’s low grade and remote location.
Several components of the scoping study give pause for thought. The company has stated that costs contained within the study have been estimated to an accuracy of +/- 30 percent, as is common for this early stage, but the capital costs have been estimated to an accuracy of -10 percent and +35 percent, suggesting that further CAPEX refinements during the feasibility study phases are weighted rather heavily toward the upside. In addition, the study also shows lower cash costs during the project’s early years as a result of higher-grade feed from the satellite Central Bore deposit, but during years five to nine, as that feed is exhausted, the estimated cash cost increases to over AU$1,000 per ounce. The AISC for these years is not shown, but would presumably push toward AU$1,200 per ounce. The implication here is that just as the start-up capital has been paid off, the costs increase and the project runs the risk of becoming marginal if the gold price weakens.
With control of a new gold province and a large gold resource, Gold Road has been justifiably well supported by institutional investors; however, this scoping study is perhaps something of a reality check for developing large operations in remote areas. The company has stated that preliminary studies of the 7.5-million-tonne-per-year and 10-million-tonne-per-year options show positive operating economies of scale, but has not gone into details of these economies or the substantial additional CAPEX that would be required.
Few major mining projects have been started in Western Australia since the mining industry began to cool in 2013, and while local costs have likely come off, the Australian dollar has depreciated substantially in recent times, potentially adding significantly to the equipment and infrastructure component of the project CAPEX.
The project, then, looks large, but by virtue of its low grade and remote location, also looks expensive. In addition, due to the early stage of the development and the transitional status of the local Western Australian cost base and exchange rate between the US and Australian dollars, the costs also look uncertain. The company is well funded to move the project through the feasibility process, but this study seems to have raised more questions than it has answered.
Securities Disclosure: I, Brad George, hold no investment interest in any of the companies mentioned in this article.
Brad George is a geologist by trade, and has spent over 25 years working in the mining industry around the world in a variety of capacities. Primarily focused on exploration, Brad has gained extensive experience in iron ore, base metals and gold on five continents. He has extensive experience in the management of public resource companies.
Upon completing an MBA, Brad spent several years in London as a partner in a boutique brokerage house, developing a franchise as a rated mining and metals analyst. Brad now resides in Perth, Western Australia.
