Straits Resources

Reducing costs & raising stable production - A year of refining unprecedented success for Straits Resources

Heading into the 2013 financial year with two fully capitalised copper and gold mines home to significant operating margins and aggressive exploration will see due plaudits awarded to Perth-headquartered multinational producer Straits Resources Ltd (ASX: SRQ) (“Straits”). It will signal the end of a year spent finessing capital programmes under a new offtake structure, reducing cash costs and conducting expansion plans while maintaining positive operating cashflow and stable production—and judging by the results of regional exploration in December, the miner is off to a flying start.

High grade assays posted from a new VMS (volcanic massive sulphide) discovery at the Avoca Tank prospect at Straits’ wholly owned 25,000 tonnes per annum Tritton copper mine near Nyngan, New South Wales (NSW), marked a significant first result from the exploration planned through which, having favourably renegotiated its offtake effective January 1, Straits will unveil the project’s true value. Elsewhere at the Mount Muro gold project in Kalimantan Province, Indonesia, production is forecast to ramp up strongly this year towards 100,000 ounces gold equivalent in 2013 concurrent to more stable production and resource definition.

“We’ll increase profitability and reduce costs on the way,” chief executive Milan Jerkovic summates.

“At Tritton, we’re pleased with both the stability of production and the reducing costs we’ve already achieved.”

Describing both of these projects and the great leverage Straits has to exploration outcomes some eight months ago, Jerkovic told IRJ that the company was in a stage of “implementation and optimisation.” Today, with Tritton’s stable production, the recent discovery at Avoca Tank and exploration upside—and Mount Muro’s  reserve increases in the previous 12 months ahead of its 2012 production ramp-up—Straits has implemented, optimised and readied for reduced costs and resource and production growth in FY 2013.

Production, offtake & discovery at Tritton

Plans to sustain 25,000 tonnes annualised copper in concentrate production over a quarterly basis resulted in Tritton delivering stable rates above and beyond expectations over the last two quarters of 2011. Cash costs of US$2.09 per pound in the December quarter filed in line with Straits’ mid-term US$1.80 per pound target and the plans that the company has to reach it. To this end, Jerkovic says, the restructuring of the project’s offtake agreement has been of utmost significance.

“Essentially, it takes our treatment and refining charges from about 35 per cent of the prevailing copper price to about seven per cent of the copper price from January 1 this calendar year. That has an impact of $5 million in additional cashflow per month at the operation,” he explains.

“On top of that, we’re looking for productivity improvement through people and equipment over the next six months of approximately 20 per cent. That improvement will help us reduce our costs further and also allow us to utilise equipment and mine more to fill the mill.”

This combination of increased volume and increased productivity will drive cash costs steadily down towards the mid-term target. It has also put Straits in the ideal position to carry out the regional exploration from which the Avoca Tank discovery has materialised, and to address its 30 per cent idle mill capacity by upping mill feed from the current rate of 1.4 million tonnes annualised (about 25,000 tonnes copper production) to its 1.8 million tonnes nameplate capacity.

“We only really started exploring outside of the Tritton mine itself in September 2011 because in order to change the offtake, we have had to concentrate our drilling on reserve definition in the immediate mine site over the last couple of years,” says corporate affairs manager David Greenwood.

“There are a number of anomalies that we’ve wanted to test for some time—geophysical anomalies coupled with surface expressions of mineralisation, be it oxide or sulphide. Historical drilling at depth in these targets is virtually non-existent, so we’ve begun testing these.”

Located approximately two kilometres north from the Girilamborne North mining area, the Avoca Tank prospect underwent shallow RC drilling targeting oxide mineralisation in the 1990s. While a small oxide resource was identified, the prospect’s sulphide potential is outstanding. Providing an exploration update on December 2, Straits reported that the VMS discovery was evolving into an exciting find.

“Avoca Tank is only drilled to about 250 metres vertical depth with 12 holes, and the main ore zone of the Tritton mine only starts at 250 metres vertical depth. The plunge of the Tritton ore body is over 2 kilometres long, and is therefore very pervasive in the third dimension.,” Jerkovic says.

“The north-east area also has great potential for the discovery of new resources. In the northern areas where we’re mining ore at very shallow depths geologically, so the opportunity to follow this down deeper and to allow for growth there is quite significant.”

The opportunities for additional new discoveries beginning with Avoca Tank, coupled with the potential for production increases utilising spare mill capacity and plans to reduce cash costs led by the newly honed favourable offtake structure, continue to prove that the Tritton mine is destined for increased production at reduced costs.

Ramping up & expanding Mount Muro

Describing how plans to ramp up production at Mount Muro gold mine will likely hit their stride around June this year once the pre-stripping capital programme is completed , Jerkovic says that by the time we reach the 2012 financial year-end, the project ought to be producing at an annualised rate of around 100,000 gold equivalent ounces per year. Straits plans to then maintain that output as a minimum during the financial year ahead.

“At that point our focus will shift towards two particular things: Stability of production and keeping costs down. Our initial target is US$900 an ounce, but as we increase production we’ll hope to pull it back by around another couple of hundred dollars,” Jerkovic says.

“Secondly, in order to optimise our installed infrastructure we’ll be trying to get our mill throughput from 1.1 million tonnes annualised which we’re doing in this stage, to the full capacity of 1.7 million tonnes.”

This will be achieved by defining resource envelopes along the main visible near-mine structures which Straits is presently drilling down to around 500 metres, before then identifying which can be fed into the mill first, elevating the project’s cost structure and up front capital in an optimisation programme similar to that seen at Tritton.

Straits in summation

Gold’s bull market is tipped to gain exponentially for the twelfth year running in 2012, and forecasts peg copper-hungry China for demand growth of at least six per cent. Stable production, reduced operating costs, resource growth and security of supply—the cardinal strengths of any successful producer—remain in sharp focus, putting multinational cost-focused operators like Straits in an inestimably strong position.

Having moved to divest non-core assets while retaining both flagship producing mines, embarked on aggressive exploration, sought to raise production and resources—all-the-while striving to reduce costs—the company continues to finesse its capital, operational and corporate setting, backed by positive market conditions. Into the 2013 financial year, the team will be armed with two wholly owned, fully capitalised copper and gold mines, and if exploration conducted to date and the result from Avoca Tank give any bearing, the company’s valuable opportunities for resource, production and cost profile success remain uncapped.

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