Minera IRL’s Courtney Chamberlain has been having a busy time of it lately. On February 14th his company released the details of a feasibility study for the Don Nicolas gold project in the Santa Cruz province of Argentina. This showed that for a US$55 million outlay, plus US$7.3 million in sustaining costs, Minera should be able to get its second mine into production at the rate 52,400 ounces of gold and 56,000 ounces of silver over a 3.6 year mine life.
Then on, February 17th came news that Minera had commenced the construction of a 1.2 kilometre tunnel into its 2.6 million ounce Ollachea gold project in Peru. And in a flash note released directly after the news, broker Finncap didn’t mince words about the significance of this development. “This tunnel is expected to facilitate exploration of the eastern extension of the main orebody”, said the broker. “We consider that it has the potential to add at least another million ounces to the resource.”
And, with those two positive items of news under its belt, the company then decided the time was right to tap the market for C$30 million, to help it push all these projects along. “I don’t see financing as a huge challenge”, says Courtney when he gets on the phone to Minesite, having just left one set of investors, and en route to see another.
According to the official release, the C$30 million will be raised on a best efforts basis in the US and the UK by such luminaries as Jennings, RBC, Haywood, Collins Stewart and Finncap. All know that the company has a strong record of generating cash from smaller mines to support work on the development of larger ones. And all have access to a pool of funds that should be more than enough for Minera to carry through its plans.
Especially given that the company has been merrily generating its own cashpile from its small-scale but stalwart operation at Corihuarmi, also in Peru. The most recent numbers available, for the third quarter to September 2011, show that Corihaurmi produced slightly shy of 10,000 ounces at a cost of US$356 per ounce. Not a huge number of ounces, admittedly, but given that the average realised price for gold sold from Corihuarmi was US$1,683 during the same period, the source of significant cashflow nonetheless.
At the end of September, Minera IRL’s cash balance stood at US$21 million. We’ll have to wait until the full year numbers come out to see precisely what’s happened since then, given that there’s been some spend on the feasibility study at Don Nicolas, some spend on the ground at Ollachea, and that the company made a final payment of US$2 million to Rio Tinto in accordance with the original purchase terms of Ollachea. But all told, it would seem likely that the cash pile has grown since the last results came out.
If so, and taking the latest raise into account as well, that could mean that the company will be able to get Don Nicolas into production without further recourse to the market, and possibly by a comfortable margin. According to the original plans, as announced back in August, the underground drive at Ollachea will cost US$14.9 million, and take 15 months to complete. And on the most recent numbers Corihuarmi delivers earnings before tax, interest and other charges of over US$8 million per quarter, although Courtney does caution that after years of outperformance Corihuarmi will shortly go into decline.
But with that in mind, and allowing that it’s on a back-of-an-envelope basis, the following calculation shows that Minera ought now to be fully funded all the way to first production from Don Nicolas, due at the end of 2013. With US$21 million in the bank, the C$30 million from the raise and, say, five quarters generating earnings of US$8 million for a total of US$40 million, the total cash coming into the company over the next twelve months or so amounts to around US$90 million. Indeed, there could even be a bit left over, given that the US$55 million for Don Nicolas, and the current US$14.9 million spend on the drive at Ollachea only adds up to US$69.9 million.
But it’s worth remembering that Minera IRL won’t be standing still on other work during that time. There’s an approved US$8 million budget for exploration at Don Nicolas for one thing, designed to add to that all-too-short initial 3.6 year mine life. Then there’s the ongoing bankable study that the company’s currently undertaking at Ollachea, which should be delivered in the second half of the year.
And once it is, the financing requirements of the company will change exponentially once again. The pre-feasibility study that Minera put out Ollachea in September of last year showed that it was likely to require US$170 million to construct a mine that would produce 1.1 million ounces over a nine year period with first production anticipated in late 2014. And while the parameters of the project may well change as a result of the new exploration drive, it’s not clear that the company will be able to reduce the capital cost significantly.
But if it can show good progress on Don Nicolas, especially by pushing out the mine life, it may not matter. “The plan is certainly working”, says Courtney, and by that he’s referring to Minera’s method of supporting the development of bigger projects with smaller ones. Corihuarmi’s served well as the stepping stone to developing a 50,000 ounce-plus operation at Don Nicolas, which in turn will serve as a solid stepping stone on the way to developing Ollachea, which ought to produce at 100,000 ounces-plus when comes on stream. From a small acorn does a might oak grow, as they say. Watch this space for further updates.