-- Posted Friday, 20 April 2012 | | Disqus
[NYSE.XRA, TSX.XRC]
By: Simon Russell, GoldSeek Mining Analyst
Exeter Resource Corporation [NYSE,XRC; TSX,XRA] is led by an accomplished management team, has about $68 million in cash and a tight share structure so despite volatility in the market their downside risk appears minimal, while their upside is enormous. When Exeter’s team of mine finders went hunting for an elephant sized gold deposit in the northern Chile’s emerging Maricunga porphyry belt they bagged a woolly mammoth at Caspiche.
The results of Caspiche’s Prefeasibility Study were announced in January 2012, providing investors with many examples of how this project’s enormous Proven and Probable Reserves of 19.3 million ounces of gold, 4.62 billion pounds of copper and 41.5 million ounces of silver are currently on sale. These Reserves of 30.1 million gold equivalent ounces contained within over 1 billion tonnes of ore is the largest Feasibility stage gold deposit in Chile not owned by a major mining company. Caspiche is also strategically located in the booming Maricunga district between Barrick and Kinross properties so this deposit is an obvious acquisition target with potential for a much higher $/ounce in the ground valuation.
Company & Managment
Exeter Resource Corporation is an outstanding junior exploration company because they are developing one of the largest un-mined gold deposits in the world with an experienced management team, plus they have a strong corporate structure. The company has a total of 88.2 million Shares Outstanding and 100.5 million shares Fully Diluted, and are traded in both New York and Toronto. They have about $68 million in cash, zero debt, and minimal warrants and options in the money so with shares currently trading around $3.02 their Enterprise Value is only about $198.4 million. The company also has a strong shareholder base with management and insiders controlling 15%, institutions owning 60% and retail investors holding the remaining 25% of the shares.
When I visited Caspiche and met Exeter’s team it was apparent that this company is led by talented management from the office to the field. Executive Chairman Yale Simpson is a Canadian geological engineer and Professional Geologist with over 30 years of experience in the minerals industry. Mr. Simpson and his teams have discovered and developed numerous gold mines with companies such as Pennzoil Company, Chevron Exploration, Diamonds North Resources Ltd, and Dynasty Metals and Mining Inc. President Bryce Roxburgh is an Australian geologist and geophysicist with over 40 years of industry experience managing discovery projects in Australia, the Philippines, and South America with companies including Cyprus Mines Corporation, Climax Mining Limited, and Rugby Mining Limited.
Exeter’s General Manager of Chile is geologist Justin Tolman, who previously worked at the Charters Towers underground and Mount Isa open pit mines before discovering the McPhillamy’s gold deposit in Australia. Furthermore, the company has talented field geologists who played an important role in this world class discovery. Recently the company awarded managers and employees stock options near today’s share price as part of their incentive program, which incentivizes their staff to continue growing shareholder value.
Location & Geology
Exeter’s flagship Caspiche deposit is located about 120 km east of Copiapo near the center of northern Chile’s emerging Maricunga gold-copper porphyry belt. This project is 15 km (8 miles) south of Kinross Gold’s Mina Maricunga (or Refugio mine), which has Reserves of 5.9 million ounces of gold and produces approximately 156,000 ounces per year from a heap leach operation. It is also 10 km (6 miles) north of the Feasibility stage Cerro Casale project that is a Barrick and Kinross joint venture (75%/25% respectively) with Proven and Probable Reserves of 23.2 million ounces of gold, 5.8 billion pounds of copper, and 85.7 million ounces of silver that anticipates a decision to begin construction in 2012.
(Map courtesy of Exeter Resource Corporation)
Geologically, Caspiche is a stockwork hosted porphyry that includes several types of mineralized rocks. High sulfidation type epithermal veining has increased gold grades in an upper portion of the system. Gold also occurs in a large flat lying oxide cap that partially outcrops as a hill and is mostly covered by a thin lava flow so mining can begin at surface with minimal cost to remove overburden. Because most of the copper has been leached out of this oxide zone, it is ideal for near term gold production from an inexpensive heap leach operation. Metallurgical test results in the January 2012 Prefeasibility Steady also show the underlying Mac Neill zone sulfide mineralization is amenable to leaching, albeit with typically lower recoveries than the oxide rock. Detailed metallurgical testing of this zone is being pursued for the upcoming Feasibility Study of a stand-alone heap leach operation that will be completed around the end of 2012.
Technical Studies
Exeter’s NI 43-101 compliant Prefeasibility Study (PFS) for Caspiche was completed by their independent consultants in January 2012. This PFS evaluated three different mining and processing options including both open pit and underground block-cave scenarios, and ultimately recommends the company focus on pursuing the single super pit option because it has the best economics.
Most of the property’s August 2011 Measured and Indicated resources were upgraded to a total of 19.3 million ounces of gold, 4.62 billion pounds (2.1 million tonnes) of copper, and 41.5 million ounces of silver in Proven and Probable Reserves with this January 2012 PFS. Results are shown below in Table 25.2 from this technical report:
Caspiche’s mineral resources and reserves are constrained within a Lerchs-Grossman pit shell using metal prices of $1,150 per ounce gold, $20 per ounce silver, and $2.50 per pound copper. Over a 19 year mine life about 150,000 tonnes per day of sulfide ore would be processed by the concentrator plus up to 72,000 tonnes per day of oxide and Mc Neill rock placed on the heaps for leaching. Total mining and milling costs are estimated be about $10.40 per tonne for concentrating and $0.68 per tonne for leaching. With an overall strip ratio of 3.11 the average operating costs are $606 per gold equivalent ounce. The costs of gold production drop to $18 per ounce when accounting for the copper and silver by-product credits.
Average annual production of about 696,000 ounces of gold, 244 million pounds of copper, and 844,000 ounces of silver will make this one of the largest gold mines in the world. Capital Expenditures of $4.8 billion could generate $27.4 billion of Revenue for an NPV(5%) of $2.8 billion and an IRR of 11.5%, with a payback time of 7 years. Sensitivity analysis shows this project has even more robust economics near to today’s higher metal prices.
The PFS includes a state of the art In-Pit Crushing and Conveying (IPCC) system to optimize material haulage costs. This will greatly improve the project’s overall economics. Cost savings will also come from using the pit’s waste dump to form the backbone of their tailings dam, and this would also provide greater protection from any earthquakes.
In June 2011 Exeter’s engineering consultants completed a Prefeasibility Study for a stand-alone oxide heap leach operation that is now being updated and optimized to become a bankable Feasibility Study by the end of 2012. Phase one mining using only the heap leach, or hydrometallurgical process at a much lower Capital Expenditure and operating cost than conventional milling of sulfide ores would enable the mine operator to quickly generate cash flow. Meanwhile, longer term engineering and infrastructure construction will be needed for processing the deeper sulfide minerals with a flotation mill, and the final copper-gold concentrate will likely be shipped to market from the port near Copiapo.
Exeter’s June 2011 PFS for just the oxide zone shows the initial heap leach operation in this +100 meter thick zone could produce up to 210,000 ounces of gold and 365,000 ounces of silver per year over a 5 year life with an initial $335.6 million Cap Ex. This Oxide Project has Proven and Probable Reserves of 1.35 million ounces of gold and 5.36 million ounces of silver within 101.7 million tonnes of ore, and would process 62,000 tonnes of ore per day at a 0.26 strip ratio. With a net operating cost of $524 per ounce of gold this could generate $1.2 billion in revenues for a NPV(5%) of $329.5 million with an IRR of 34.4% and a 3.2 year payback.
The January 2012 Caspiche PFS demonstrates heap leachable Reserves of 2.8 million ounces of gold and 10.1 million ounces of silver in both the oxide and Mc Neill zones, which will be used to update the previous oxide study. Adding this Mc Neill zone should help the overall economics for a stand-alone heap leach operation in the upcoming Feasibility Study that is expected to be complete around the end of 2012.
The entire Caspiche project’s January 2010 PFS demonstrates that the super pit could ramp up to a total of about 700,000 ounces a year with sulfide minerals, at a total $4.8 billion Cap Ex. Because of this economic flexibility and scale-ability of the enormous Caspiche’s deposit, Exeter is an attractive acquisition target for both mid-tier and mega-major sized mining companies.
Valuation Comparison with neighboring Cerro Casale
In March 2010 Kinross sold half of their previous 50% interest (25%) of the adjacent at Cerro Casale project to their JV partner Barrick for $474.3 million. This deposit’s February 2010 NI 43-101 report has Proven and Probable Reserves of 23.2 million ounces of gold, and remains the same according to the major’s 75% interest in their Q4 2011 Report. Therefore, Barrick bought 5.79 million ounces of Cerro Casale Reserves for approximately $82 per ounce of gold (plus their own exploration costs).
As shown earlier, Exeter has an Enterprise value of about $198.4 million when trading around $3.02 per share. Since Caspiche has 19.3 million ounces of gold Reserves the company is therefore currently on sale for about $10.27 per ounce of gold in the ground. Also, according to their June 2011 heap leach PFS, Caspiche’s 1.35 million ounce oxide zone alone has a NPV(5%) around $330 million, so this deposit’s additional 17 million ounces of gold in sulfide ore Reserves are substantially discounted. Consequently, in today’s volatile market Exeter provides an excellent opportunity to invest in the development of a very large gold Reserve at a very low price.
Exeter’s Caspiche drill roads and pads below the plane’s wing and Kinross’ Mina Maricunga (Refugio) pit with leach pad above the wing. Photo by Author.
Summary
Exeter Resource Corporation is an outstanding junior exploration company with accomplished management and plenty of cash to continue developing their enormous Caspiche discovery. The company’s January 2012 Prefeasibility Study demonstrates their porphyry project has tremendous underlying value that is currently also undervalued by today’s market. The upcoming Feasibility Study for the first phase of open pit mining with heap leaching of the oxide and Mac Neill zones will further advance this turn-key project towards near term production. Caspiche is one of the world’s largest undeveloped gold and copper deposits and their 19.3 million ounces of gold in Proven and Probable Reserves are significantly discounted compared to Barrick’s recent acquisition nearby at Cerro Casale. Because the major mining companies are looking to replace reserves and increase production we anticipate a large mining company should eventually pay a premium over today’s prices for this giant acquisition target that is ideally located in Chile’s Maricunga mining district.
Simon Russell is a mining and geological engineer with 10 years of experience. His background includes hydrology and environmental engineering, exploration geology, underground contract mining, mine engineering and project management, and mine investment analysis. Mr. Russell has worked for many different types of mineral projects internationally and across the western United States for investors, consulting firms, and both major and junior resource companies.
