#XTR – Xtract's Bushranger’s - First Class Exploration and Model

 #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