Following a transformative year, Australian mine developer Southern Cross Goldfields expects its flagship Marda project to begin producing low-cost gold ounces in as little as a year’s time.
The year 2013 was a very big year for the two Australian mining companies Southern Cross Goldfields Ltd (ASX: SXG; “SCG”) and Polymetals Mining (formerly ASX: PLY). The latter and eldest of the two operated as a private, unlisted company for 25 of its 27 years, developing successive projects one at a time and delivering good returns to its shareholders. Making its IPO on the ASX two years ago was Polymetals’ first step towards growth; merging with junior company SCG last year was its second.
Polymetals brought a number of Australia-based projects to the merger, including the exploration-stage Turner River and Sandstone projects and near-term production Mt Boppy project. SCG contributed the near-term production Marda Gold Project, located 200km north of Southern Cross in Western Australia. The resulting merged company takes the ‘Southern Cross Goldfields’ name but is run by Polymetals’ Board of Directors, effectively making the merger a reverse takeover.
Frank Terranova, previously Managing Director of Polymetals and now of SCG, explains that Marda is now its flagship and most bankable project, and Mt Boppy the second-most bankable. “Everything else is being put up for sale – not in a fire sale, but if we can get the right price for those with which to progress Marda, we will,” he says.
“We have always taken the view that emerging companies cannot simply collect assets without progressing them in a timely manner: rather you get in, make your money and move the asset on. We did that successfully at Polymetals and want SCG to continue along that path.”
SCG will hold on to Mt Boppy under care and maintenance for the foreseeable future, he adds, so that the project is ready to be “re-enlivened” should the opportunity arise.
A Feasibility Study review released on 10 December 2013 confirms robust economics for the Marda Gold Project based on current Reserves. Besides its advanced stage, Marda’s main attraction is its low cost of production in comparison with otherwise similar projects.
“Marda has low-cost ounces: the cash cost is A$794 per ounce and the all-in sustaining cost A$1,007 per ounce, which from an Australian perspective is very cheap,” says Terranova. The cost of establishing the project is a comparatively low A$24 million; the internal rate of return (IRR) 90% and the net present value (NPV) A$41m at a gold price of A$1,350 per ounce.
One might assume that now, while the gold price is low and the cost of Australian mining high, is the worst time to start a gold mine; but Terranova disagrees.
“This is the perfect time for us because, from our perspective, if you can make money with the gold price at its current level, which this project can do – it can actually make money at even lower levels – then its sustainability is virtually guaranteed,” he says.
“Because if the price continues to drop, there will be many projects closing up shop while we keep going. Our company has a track record of managing its costs, so we’re very confident that we can at least contain those costs and deliver that project’s forecast financial outcome.”
Marda’s latest Feasibility Study sets gold production at 167,000oz over four years, but the high prospectivity of the region – another of the project’s attractions – leads Terranova to believe a Reserve upgrade is likely.
“There are multi-million ounce gold provinces to the north and south of us, and before SCG came along and consolidated it, no one company had controlled all of the middle ground – it used to be owned by every man and his dog,” he explains.
“Our geologists are very excited about the fact there’s already 160,000oz of Reserves, and we’re confident that with a bit more exploration that total will grow substantially and quickly. Our processing plant, too, will be strategically located. Despite the abundance of gold in the area, there has never been an operating plant in the vicinity – meaning there is a large catchment area for other mining companies with gold they need to process. We will be well placed to process not only our own gold, but that of others too. In a mature jurisdiction, this is a brilliant greenfield opportunity.”
Another of Marda’s advantages is its proximity to agricultural farming areas, from which SCG hopes to procure “a consistent and well-priced pool of labour,” says Terranova.
The Marda Project is quite far from the coast and any cities, but he doesn’t see this as a problem.
“I’m used to working in places that are genuinely remote, such as Papua New Guinea or the Solomon Islands. Here, we’re about three or four hours’ drive, or a short flight, from Kalgoorlie; a bit longer, and you’re in Perth. So although the Marda Project may appear remote, the reality is that we’re well supported locally in terms of suppliers, and everything we need can be delivered the same day.”
On the horizon
The Marda Project is missing only one permit, which SCG expects to receive in this year’s first quarter. It expects to select a funding package within the first half, after which the mine and plant’s construction will begin. “Ideally, most of 2014 will be the construction and commissioning of the plant – but that is predicated on securing a suitably structured funding package, which is what we’re really working on at the moment,” says Terranova.
SCG intends to use the cash flow generated by Marda to grow the company further: through developing an existing project such as Mt Boppy, or by going out and acquiring new projects. Conscious of the drawbacks of being a single-asset company, Terranova is keen to expand and diversify SCG as soon as the opportunity arises.
“Recent history has shown us that single-asset companies always face an excessive level of scrutiny, so in due course, and upon successful development of the Marda Project, I think that diversifying our cash flows through other projects is very important,” he remarks. “So growth, and delivering value to shareholders along the way, are our priorities.”
Terranova believes the Marda Project – “one of the most attractive projects in Australia at the moment,” he says – provides the ideal first step towards achieving those goals.
He’s also optimistic about the future – on account of not only SCG, but other miners too.
“I think there are opportunities in the market for companies to grow, even in difficult times,” he remarks, “and the successful merger between Polymetals and SCG is testament to that.”