I am not an expert in this kind of analysis so I will defer to the expertise of others in this area. There is an individual on SH by the name of 'mycroft' who has posted extensively on this topic. FYI, the following are some of his posts. I have also included Patrick Souami's post on copper evaluation. The #'s in bold preceding each post refers to the post # on the SH KRY forums if you wish to read more. This is a long read but well worth it IMO. (I sincerely hope that neither Mycroft nor Patrick mind my cross-posting.)
[mycroft: 69489] In #69134 Moucow asked me for an interpretation of Peter Grandich's discussion of drilling that might be needed when KRY takes possession of LC4+6. I deferred answering until I could collect my wits.
If PG's statement in the ninth paragraph of his #68956 means that extensive drilling is necessary prior to construction, I disagree with PG's contention. Admittedly, there is some reason to expect that the existing feasibility study may be unavailable or in need of revision, but it is not necessarily a deal-breaker.
[I hasten to add that Peter and I seem to have a difference of professional opinion and there is nothing sinister in that. Further, Peter has been investing in mining stocks far longer than I have, and I must defer to his superior knowledge in many areas of inquiry. To protect my own credibility I hereby state the limits of my knowledge (ASL, incidentally, has already revealed disappointment that I am neither geologist nor mining executive). To the extent that my "credentials" are relevant, here they are: I have a BA in chemistry and an MBA, and I worked for a major oil company in marketing for 11 years and as an energy economist at a think tank for 7 years. Since early 1993 I have specialized in investing in metals exploration companies because it was a business I felt I could understand, at least better than the average mutual fund manager understands the vast array of businesses in which he invests.]
Now, as to my disagreement with PG: someone in this forum has already answered the question about whether KRY would have access to PDG's drill cores and assays, etc., and the conclusion was that such information had to have been shared with people at MEM because CVG was PDG's partner. If so, almost certainly access to the information would have been included in the extensive recent negotiations between KRY and MEM. As to the study's relevance in the currently weak market for gold and copper, it seems to me that changing the revenue assumptions will alter the cash flow projections and such, but the fundamental assessment of the size and grade of the resource will remain credible.
The property is unquestionably a trophy concession. It is large, long-lived enough to last through this period of temporarily low gold prices, and bears little risk that it will never be mined, because the Venezuelan government is eager to diversify beyond oil, provided development can be done with respect for indigenous people and the environment. The long-term appeal of this property is further acknowledged in print. I have at my side Barron's interview of 5/10/93 with Richard Pomboy, who observed that (nearly 5 years ago) PDG was an appealing buy, largely because Las Cristinas was thought to have 10-15 million ounces. The price of gold at the time was between $340 and $350, not the $375 premised in the more recent feasibility study. Although the gold price has surged and then weakened between then and now, the blue sky has been realized in the reserve and resource figures.
As for the need for additional drilling, almost none would be required if complete information were available from MEM. (If it were not available from MEM in sufficient detail, it could be bought at far below cost from PDG, because it is worth nothing to them. Perhaps much of the data has already been published in technical journals anyway. The design work on the pit and processing facilities may be available from PDG on the same basis. Although the mine design has economic value as intellectual property, it is worth nothing to PDG, and it would be better for them to sell it for several million dollars than to let it gather dust.)
In addition, the resource is well characterized by a credible technical source. This contrasts strongly with the situation at Bre-X, where an unknown junior was involved in the original drilling. But even at Busang, Freeport's due diligence drilling was originally planned to be only about six holes twinned with an equal number of original Bre-X holes. The reasoning was that collaring a parallel hole a few feet away from the original hole, and drilling at the same angle, should have established the truth of the original assays when a relatively homogeneous porphyry was being confirmed. Because the deposit at Las Cristinas is a large, low-grade, bulk tonnage resource, a similar approach to confirming PDG's numbers should be sufficient to confirm the reserve.
Some portions of the existing feasibility study might be tossed out because a prospective buyer or partner of KRY might have a differing opinion as to how to proceed with resource development, mine design, or ore processing, but that will not be KRY's problem, because by that time the deal will have already been arranged.
All of this relates to the question of valuation. Given the work invested here and the lateness of the hour, I think I will stop for now with a reference to my #68233. The question as to whether (prior to a buyout or a joint venture) Grandich's C$15 or my C$20 is closer to reality must await another time.
I hope this is helpful.
mycroft
[mycroft: 70192] Further to my #69489, I agree that detailed information would be necessary for pit optimization, etc. But I have today received correspondence supporting my contention that such detailed information would become available to KRY one way or the other (this is, from the MEM or by negotiation with PDG).
In discussing this issue we must remember that a great deal is known about the deposit now that was not known when the drilling was in progress. The earliest diamond drilling was to confirm that surface showings of mineralization continue to depth. Then the areal extent of mineralization is determined. Then infilling work determines continuity of mineralization and consistency of grade. Once the mechanism for formation of the deposit is well understood, a model of the deposit can be determined with reasonable certainty. Such models are most reliable when continuity of mineralization and consistency of grade can be confirmed. I believe this is true of the low-grade, bulk-tonnage Las Cristinas ore body. I understand it is consistent and continuous and homogeneous enough to simplify pit design.
Interestingly, Placer Dome had some difficulties with their condemnation drilling. Such drilling is undertaken to determine where economic mineralization is absent, so that facilities can be located where there would be no future mining. Placer encountered the delightful difficulty of finding economic grades of mineralization all over the place -- sort of like "Oh shoot, we can't put the bunkhouse there either!"
I would imagine that there will probably be further exploratory drilling once the mine is in operation, but I remain convinced that very little would be needed to confirm PDG's overall findings. Incidentally, the time required for such confirmational drilling probably would be in the range of the time required for permitting, and it seems almost certain that negotiations with MEM have addressed the expedited issuance of construction and other permits.
mycroft
[mycroft: 74213] I agree that Woodie's cash flow analysis (as cited in SI: Crystallex #5768/5776)is a useful approach to valuing a one-mine company with production expected in the reasonably near term. His cash-flow approach is a sound analytical methodology favored by many respected analysts. Net income is not particularly relevant in this industry as a measure of value; IMO the most knowledgeable investors in this sector buy in order to hold undervalued assets. Cash flow is a measure of a resource company's ability to survive as a financial entity until the assets become fully valued in the marketplace.
I agree that dilution of KRY's percentage of LC4&6 through joint venture or dilution as a result of issuance of additional KRY shares to develop the property would occur, but I disagree with Woodie's conclusion that such dilution would be severely damaging to the share price. This is because development of a world-class gold mine to production status results in an increase in the market capitalization per ounce of reserves multiplier. When a mine like that envisioned by KRY at LC comes on stream, the multiplier will no longer be $25-50 per ounce; it will more closely resemble that of a major firm like PDG. Thus, Woodie overstates the threat of dilution.
I think Woodie and others have also overstated concerns about the costs and delays associated with confirming or even reproducing PDG's feasibility study. I have already addressed this issue at some length in my #s 69489 and 70192. To my remarks about Freport's initial plans for confirming Bre-X's results at Busang (about six holes as I recall) I would add my recollection that Strathcona's audit was to be limited to about the same number of twinned holes. Because only shallow holes are needed to confirm PDG's results, I would imagine this kind of drilling could be completed in a month or so.
I have made two other extensive posts on valuation (#s 68233 and 72379). There is little more for me to say on the valuation issue, because ultimately the valuation will be determined by a major's bid for buyout or joint venture. Their opinion will be more relevant than Woodie's or mine or ....
mycroft
[mycroft: 74288] I assume Woodie must have slipped when he referred to TRAILING cash flow, since projected cash flow is relevant here. As for his multiple of 10, its usefulness depends on a full spectrum of assumptions about costs and revenues, etc. I did not wish to imply that I agreed with Woodie's conclusions about C$15 being a top share-price manifestation of LC's value. I have in numerous posts stated my opinion that something near C$20/KRY share for LC was reasonable, given a sound, credible management that can gain access to financing, and can also manage political and regulatory affairs and the mining activity.
I think KRY shares could realistically exceed C$15 on a clean, favorable court ruling because prospects for a buyout or joint venture would take the price higher. Short covering or an actual bid for LC on a buyout basis would IMO carry prices higher. Others here assign still higher valuations because of the expectation that Las Cristinas is but a small portion of the shareholder value to be created by this management team. I am not prepared to dismiss such opinions, because they might be based on real knowledge of management's intentions. In any event, a favorable ruling clearly would take the price much higher than today's price; how much higher depends on succeeding events and the market's perception of them.
Slave re your #74228: Thanks for your question about copper. I would imagine Freeport's motivation for its purported interest in Las Cristinas is diversification out of Indonesia. The presence of copper is not necessarily of compelling interest, unless it would be to supply feed to a copper smelter or refinery (I forget which) located on the Iberian peninsula (I don't know if Freeport still owns it, but the advantage of Venezuela as a source of copper concentrate is of course its proximity, in contrast to the great ocean distances from Indonesia).
If filling up the smelter in Spain or Portugal is not a crucial interest to Freeport, the copper nevertheless is of value because revenues from its sale offset gold mining costs. In short, by-product credits offset gold production costs and improve overall project economics.
mycroft
[psouami: 74247] In response to the question about valuation of copper: 803,000,000 lbs of Cu at a recovery rate of 72% (PDG assumptions) gives 578,160,000 which at current copper prices (about $0.74 USD) provides roughly 1,794,290 in gold equivalent.
Note, that even if you grant LC 4&6 20,000,000 of proven and probable oz (not yet a foregone conclusion), the recovery rate of 82% (again PDG assumption) would translate into 16,400,000 oz of Au.
Please keep in mind the RECOVERABLE percentage. No deposit yields 100% recovery.
A $50USD per oz is still a good measure for 100% of proven and probable, 50% of possible and 20% of resource categories. |
