BEST BUY IN THIS KIND OF A MARKET-TODAY !!!
Today at 8:16 AM HRA Journal Issue 234 June 9, 2015 Lion One Metals (LIO-V; $0.475) released the results of its PEA on the Tuvatu project in Fiji with attendees of the Metals Investor Forum getting the first look. The study definitely lived up to my expectations and then some. The highlight numbers from the study appear in the table on the right and they are indeed impressive. After tax, Tuvatu reports a US$86.5 million NPV and IRR of 52% from the production of 353,000 ounces over its 7.4 year project life which includes 1.3 years of development and construction, using a $1200/oz gold price and 5% discount rate. The payback period is a very impressive 1.5 years on an after tax basis. Cash cost and all-in sustaining costs of $567 and $779 respectively are quite low, and the estimated pre-production capex of US$48.6 million is really low, well within the reach of a junior with some debt financing in the mix.
The key to this PEA is grade. Lion One management developed a mine plan that focuses on the highest grade areas which results in an average diluted head grade of 11.3 g/t gold. Many of the best ore shoots are mined early and LIO expects to produce over 262k ounces in the first three full years of production. The estimated production profile is shown on the bar chart below. Lion One made many references to the exploration potential of Tuvatu in the PEA release and with good reason. It’s important to understand that management made a conscious decision to pursue Tuvatu in the time honored way that has been largely absent in the sector in the “bulk tonnage” and “post 43-101” era. LIO is taking the “old school” approach to the development and mining of a high grade underground resource, following a well-trod path many successful mines before Tuvatu have utilized. The idea is to get Tuvatu into production as expeditiously and cost effectively as possible then use cash flows to continue development and exploration drilling to extend and expand the resource. Traders are used to seeing companies spend a lot of money to maximize the size of a resource then try to maximize the production scale. That makes sense in a bull market when it’s easy to line up money for capital intensive projects but that is not the market we are in. It also makes sense (sometimes) if you’re dealing with a low grade disseminated resource where its crucial to capture as much economy of scale as possible in order to minimize your cut off grade. As my late brother David used to say “You can’t stope an open pit”. What he meant by that is that large bulk tonnage operations really depend on scale as much or more than grade. They don’t lend themselves to selective mining. A high grade underground mine on the other hand is designed to be selective. Most operations will have multiple stopes (working faces) delivering ore to the mill and altering the amount mined in different areas allows the mine manager to vary the grade. A key attribute of projects that recently succeeded in getting financed to development is capital efficiency and scalability. As LIO develops new ramps and levels it will put in drill stations that will be able to upgrade Inferred resources and test along strike and especially to depth more efficiently. There are a number of high grade intercepts on main veins up to 100 metres below the resource. Several of the main lodes have been intermittently traced with surface trenches for a kilometre or more in both strike directions away from the roughly 500 metre section that represents most of the Indicated and Inferred tonnage. If management can keep upgrading ounces and adding accessible high grade shoots we will see it in the mine plan as production proceeds. The development and mining plan has the costs for ongoing exploration drilling factored in already. Key goals will be to increase production in years 4 to 7 then adding years to the production life. Adding even 10,000 ounces a year in years four to seven on the par chart on the previous page would have a big impact on NPV.
Given how much untested target there is I think the odds they add that much or more and also extend the mine life are good. Mining will be carried out with shrinkage stoping that should mean less dilution. It’s an exacting way to mine but there are a lot of miners in the area with experience with this mining method from their time working at Vatukoula. There is also room to increase production with better gold recoveries. Recent testing has reported recoveries in the 90-95% range. The PEA uses early recovery averages of 86.3%. Adding 4-5% to the recoveries would make a big difference in returns. Management is talking to finance groups. The successful track record of management will help here, as will the fact that management owns a third of the stock. There are a number of other large shareholders who seem to be willing to wait to see Tuvatu get built.
I’ve been impressed at how well LIO has held its price and the relative lack of stock offered. Much of the float seems well owned and there is no cheap stock. Add management’s ability to promote and I think LIO will continue to trade higher. The potential for a short timeline to production and high IRR should attract a relatively high value per ounce. Companies that line up financing usually get an immediate re-rating. Lion One is a buy at these levels based on this strong economic study and potential for near term development
AI
