#XTR – Xtract's Bushranger’s - First Class Exploration and Model
Xtract have released their initial findings from the open
pit study, this has been backed up by a 30 min presentation from Vox Markets.
The study published today has used the existing JORC which
was created before XTR took ownership of the licenses. It’s impossible to over-estimate
the importance of the information given in the presentation. But it does
require an understanding and an ability to see just how profitable the project
might be.
At first glance the report gives a number of loss-making
scenario’s given various variables of NPV, Cut Off, Copper Price and Mill capacity.
There is a single positive scenario with the following
variables. NPV8, Cut Off .15%, Copper Price $5 lb and Mill capacity of 20M pounds
a year. This gives an NPV8 figure of A$267m, with a LOM (length of mine) of 9 years.
At first glance the figures look bad. We have a breakeven
copper price, at an NPV8 (8% discount rate) of around $4.65 lb.
Wow, there is no way I would invest in such a company, might well be the
initial response.
However as with most AIM companies, if its shiny and cheap; it’s
often fools gold. If it’s presented professionally, warts and all; it’s
probably worth looking at in more depth.
So lets have a quick initial look at the variables.
NPV 8 is this reasonable? Yes is the simple answer. It represents
the cost of capital. In a higher interest rate world pre 2010 NPV’s of 10% or
even 12% were used. Nowadays NPV’s as low as 5% are routinely used by mining
companies, although this is a little low in my opinion. An NPV of 8% is
probably about right and has been used by the world’s major mining companies in
the past 12 months.
Mill Rate: The Mill rate or process rate, is simply dictated
by how much processing power the project will have. The higher the mill rate,
the higher the initial capex, and the shorter it takes to process the material. It’s
a simple economic balancing act.
Cut Off: People might think that a .15% copper cut off is
bad because its so low. It’s certainly true that a low grade mine is rarer as
it requires much higher tonnage. However, a low grade mine is a massive benefit.
With a low economic cut off, it would indicate that any future exploration only
needs to be above .15% to add to the profitability of the project. If additional
exploration finds grades of .3%, then the extra tonnage would contain a huge
amount of extra profit.
Copper Price: The current copper price is $4.6 lb (taken at
27/07/21). The copper price has risen considerably over the last 12 months,
rising from $3 lb in just the last 12 months. So for bushranger to remain
profitable we need the copper price to stay at this price for the next 9 years.
To generate a positive net return we need the price to be above this level.
Again, on the face of it, this seems like a tall order.
IRR: Connected to all the variables above is the IRR
(internal rate of rate). The report doesn’t mention what the IRR is, however,
it can be estimated given the figures quotes. Given a price of $5 lb the IRR is
around 20% (it would take 5 years to get the money back you put in to build it).
Personal I would never invest in a project with an IRR as low as 20%. I don’t
think it would ever get built. If the breakeven copper price can be dropped to
$3.6 lb and the copper price stays at $5, then the IRR jumps massively to 50%
with an increased NPV to around A$1.3bn.
If the above figures were used in a fully explored PFS, I
can honestly say I would run a marathon to escape investing in such a company.
But and it’s a big BUT, this isn’t a finished project. It’s a starting point.
It is very, very, rare for a company to produce preliminary figures like this before
exploration. Companies don’t do it because the figures will certainly be bad.
There is also not normally enough information to allow any meaningful study to
take place. If you dig deeper into the figures, we can see that if you raise
the tonnage in the mined area, increase the LOM, find mineralisation as far
above .15% as possible you end up with, a lower break even copper price,
increased NPV and higher IRR. You end up with a project which is incredibly
desirable and highly profitable. It is for this reason that XTR brought the
project and have already performed its initial phase 1 drill campaign at the
start of the year, none of this has been included in the study.
So, let’s examine the proposed pit.
(Image taken from the VoxMarkets presentation)
The Pit design is approx. 600m deep, it encompasses nearly
all of the existing JORC. It covers two small grazing areas and a few square km’s
of planted, commercial woodland. The mineralisation is modelled, dipping from
the SE to the NW from surface to pit depth at 600m.
(image taken from the VOXMarkets presentation)
The picture above shows the existing holes in blue, which
have been used to create the JORC and so the basis of the existing model. The
red dots represent the new drills from the just started second phase drill
campaign. There is plenty of scope to add additional mineralisation, particularly to the north and NW (which will
be drilled). As an aside we can see that the first two drill pads, each have
two holes, so they will have drilled very quickly.
(Taken from the VoxMarkets presentation)
The IP survey, when superimposed over the open pit, reinforces
the extensions to the north and north-west. As well as this there looks to be a
potential high grade intrusion branch to the east – the area in the red box,
which has been missed by existing drilling, which will be drilled to hopefully
provide further mineralisation within the open pit.
The phase 1 drilling has already added considerable
mineralisation with a .2% cut off, above
the modelled .15%. Phase 2 drilling will add much more. All of the
mineralisation will be free, as the material will need to be extracted regardless
as it lies within the open pit design, it will directly increase the NPV and
bring the copper breakeven price down. It is therefore a reasonable conclusion
that the added material, higher grade mineralisation and further refining of the
design and capex requirements will bring the copper price break even down to around
$3.6 lb, with an NPV of 1.3bn with copper prices at between $4.6 and $5.
This alone would be a fantastic achievement, creating a
profitable and desirable mine, however, the expectation is that considerably
more mineralisation exists outside the open pit design.
As the above side view of the open pit shows, there is considerable
mineralisation outside the open pit, for initial capex and operational reasons.
Once the pit has been built and with the processing equipment still in place.
There are expansion possibilities with easy and limited underground mining,
adding a potential NPV of around A$1bn to a further post open pit phase.
The largest expansion comes from the areas to the SE of the
open pit, the model output above shows the a potential new mineralisation area
by looking at the recent IP mapping. It represents a 100-150% increase to the
already modelled open pit. If this does represent mineralisation above a .15%
cut off, then it would mean a further 9-14 years for the LOM and a potential A$1.5bn
to 2.5bn NPV. With the mineralisation being near surface and the processing
capability in place the profit margin would be substantial and the copper break
even cost as low as $2 lb.
The red dots show that XTR will be putting some exploratory
holes into this potential new resource area over this current drill campaign.
Conclusions: XTR have been brave showing warts and all for their
starting position. It has shown where the exploration gains need to come from
to add the most value. It determines the potential for the project. It allows the
company to maximise its exploration drilling so that, each and every drill has
a demonstrable impact on the NPV and profitability of the project and license
area.
If you’ve been following my blogs, you will see that I’ve
never really had any doubt with regards to the potential of the project. The
figures below are mostly mine based on my understandings and information received.
I hope they show the potential of the project. Majors will really like
the ability to mine here for 30+ years. They will like the simplicity of the
project, its location and low risk theme. If XTR can get the break even copper
price down, which as has been shown is likely, they will be interested. As an
XTR share investor I can look forward to every drill knowing it will add
significant value.
|
Copper breakeven price US$ lb |
IRR |
Potential NPV A$ at $5 lb |
LOM |
|||
|
Current Pre XTR scenario |
4.6 |
20% |
260m |
9 years |
||
|
Further mineralisation Open Pit |
3.6 |
50% |
1300m |
5 years |
||
|
Underground Mining Ext |
3 |
35% |
1000m |
5 years |
||
|
Secondary Targets (SE) |
2 |
60% |
1500-2500m |
9-14 years |
||
