Medusa Mining: Coping with Complexity

This article was originally published on Gold Investing News on October 13, 2014.
Medusa Mining (ASX:MNL) announced last week that it reached its quarterly gold production target of 21,015 ounces at its Philippines operations, and is on track to achieve its half-year target of between 40,000 and 45,000 ounces. Although viewed positively by the market, in the context of struggling gold prices and general market malaise, the news had little positive impact on the company’s share price.
Like many mid-cap miners in recent times, Medusa has struggled with high costs and operational underperformance, but also like many of its peers, it seems to be coming to grips with its issues. The bleeding seems to have stopped, but improvements need to be seen.
The third quarter of 2013 leading into mid-2014 was not a stellar time for Medusa. Mill problems in late 2013, heavy rains and flooding in early 2014, underground fatalities, cost overruns, major restructurings and ongoing struggles with geological complexity weighed upon the company’s reputation, ultimately leading to the sudden departure of the CEO in August 2014.

New CEO cleans up

The new CEO wasted no time in stamping his authority, and on September 1 appointed a consulting engineering team charged with conducting a comprehensive review of the company’s entire Co-O gold-mining operation.
Three major issues were flagged as being of primary concern for the review:

1. The mill had consistently underperformed, with several major components operating below expectations.
2. The narrow, high-grade veins had proven more complex and unpredictable than first thought, resulting in large variances in head grade and dilution.
3. The geological complexity, coupled with a move to the newer 2012 JORC code, had made necessary a rework of the company’s resource and reserve base that most likely would significantly reduce total ounces.

Essentially, Medusa had to come to grips with a complex orebody. The new executive team wiped the slate and canceled all medium-term production targets beyond the next two quarters to allow itself time to assess and plan its next moves.

Co-O mine background

The Co-O mine in the Philippines is an underground operation, and it mines a series of steeply dipping, narrow, high-grade gold veins. Such mines are complex and labor-intensive to operate, requiring close attention be paid to development costs, productivity and dilution. They are also capital intensive to expand as extensive underground development must be established in advance.
Steeply dipping, narrow-veined orebodies are troublesome largely as a result of the high cost of drilling from surface. As mining operations deepen, the cost of drilling from surface becomes prohibitive, and so the resource must remain in the lower inferred and indicated resource categories until suitable underground drill access is developed, often only several months in advance of mining actually taking place. In addition, geological complexity is often not identified until quite late in the process, placing a limit not only on the accuracy of longer-term planning, but also on the process of converting resources into reserves.
As a result, the mining of such orebodies is generally an evolving process that is only bedded down after some practice and, almost invariably, some failures.

Results hit the market

In late September, Medusa announced a new combined inferred and indicated resource of 4.34 million tonnes at 9.9 grams per tonne (g/t) gold for 1,410,000 ounces (a reduction of over 500,000 ounces), and reserves of 1.92 million tonnes at 7.22 g/t for 450,000 ounces (a reduction of over 200,000 ounces). The reduction in resources and reserves from the 2013 figure was not only a result of depletion, but also from the change to the JORC code mentioned above. It requires that actual mining widths be used in calculations, not just a simple cut-off grade.
This reduction was well flagged and well explained by the incoming CEO, and so the market was not surprised.
The mill problems seem to have been identified and either rectified, or at least the path to rectification mapped out.
Mining and planning remain the issues to be resolved. Several mining methods are employed depending on the thickness and angle of the veins, but each has advantages and disadvantages in terms of cost and dilution. A better understanding of vein geometry and grade is required to allow more detailed planning so that the most efficient methods are employed in the correct places.
The company boasts a large land package, and recent exploration success suggests significant potential in the region; however, that may be not valued highly by the market until the company demonstrates that it can monetize the resources it has. Hitting this quarterly production target is the first of many steps.
 
Securities Disclosure: I, Brad George, hold no investment interest in any company 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.