Thursday, February 19, 2009

All gold resource ounces are not the same

Cerro Casale: Mucho altitude, mucho prettiness

So on with the show, mineheads. From time to time , normally via mail (but sometimes it's addressed on blog), the subject of in situ gold ounces comes up chez Otto. This is fresh in my memory because a couple of days ago I had an exchange with one reader who questioned the amount of in situ gold ounces held by Troy Resources (TRY.to) compared to its share price valuation and my recommendation and price call (this person had bought the NOBS report and follow-up questions, which is always good to see).

Now this is a big subject, but the general statement that "all gold resource ounces are not the same" is something that holds up in all discussions on the subject. As an example, let's look at this report on Kinross and CEO Tye Burt's Conference Call today, specifically about the Cerro Casale gold project in Chile.

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"........In the previous resource and reserve estimate, the reserves stood at 23-million ounces of gold and six-billion pounds of copper. However, based on "re-engineering and optimisation decisions", the proven and probable gold reserves have been reduced by 800 000 oz, Burt said. The updated reserves were calculated at a $725/oz gold price and $2/lb copper price. "Obviously that is above today's spot copper price, but I would say, based on the prefeasibility work that we have done with Barrick, and the current technical view, that it does have positive economics at those numbers," he said. Optimisation work under way for the full feasibility study would also likely improve the economics, "and of course we are looking at ways that we can lock in some of the commodity prices", Burt said....."
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So, history and technicalities of Cerro Casale aside, note that Tye Burt is saying that there's 23 million ounces of gold there but they're having to re-do, re-think and get all smart and busy on the engineering just to make the project feasible with gold at $725/oz and cu at $2/lb. That's twenty-three million ounces, folks! If you have to get the smartest mining engineers in the world together and bang their heads together for years on end until finally they work out a way they might....MIGHT... be able to build a profitable mine there's a lesson to be learned by us mortals, no? An ounce of gold up there clearly isn't the same as an ounce of gold in one of those Mexican heap-leachers.

To repeat and be totally boring: Does that sound easy mining like, say, Yanacocha to you? Does that sound like a low cash cost per ounce project? Does that sound like low capex in the pipeline? Nope, me neither. That's because all gold resource ounces are not the same.

To return to the heights of Chile for one more paragraph, that's my problem with places like ADM.v at Volcan and that dreaded XRC.v thing called Caspiche. For example, pumpers of ADM.v will tell you "it has 10m oz, dude". Sometimes they'll even tell you something more accurate and tell you it has under 5m of recoverable ounces so far outlined. But what they won't tell you is the enormous engineering, logistical and price barriers between Miner X and the possibility of getting those ounces (mostly very deep, too) out of the ground and into a bank vault in Switzerland. And when I say "they", that most definitely includes some of the better-known newsletter writers and also people sitting in offices in Canada with CFA after their name that write touchyfeely client reports promoting these companies.

Finally, believe it or not but this isn't just my little pet peeve; due to the nature of the game I speak to geologists on a regular basis and one highly respected professional in the field who knows the Chilean heights very well has told me on more than one occasion that in his opinion Cerro Casale will never be a mine. He's not bearing a grudge or with skin in the game or similar; he just says it as a rockdude wearing his hardhat.

OK, rant over. Thank you for bearing with me.