YTC RESOURCES LIMITED
Underground Mine Potential from 2011
Following the successful acquisition of the high-grade Hera Gold Project, YTC Resources Limited (“YTC”, “Company”) has commenced a Definitive Feasibility Study (DFS) with a view to commencing production via an underground development from March 2011. Based on our high level modelling, the operation has the potential to generate an average annual free cash flow of ~$30m from the production of ~40koz of gold per annum, with minor base metal production. Approximately 26% of the revenue comes from these base metal credits. We estimate average cash operating costs of ~A$430/oz over the life of the mine, though these will depend on the prevailing by-product prices and exchange rates at the time.
The Company has a range of treatment options, including toll treatment of the ore at the nearby Endeavour plant, or building a standalone plant on site. Metallurgical test work completed as part of the DFS indicate that high gold gravity recoveries of +70% are achievable at coarse grinds and flotation tests on the gravity tails show high recoveries of base metals. This means that a potential standalone plant will have a relatively low energy requirements resulting in lower operating and capital costs. The decision on the final project design is expected by June 2010.
The Hera Gold Project has good potential for an expanding resource base and mine life. Once the DFS is completed and the Company commits to a decision to mine, we believe the Company will be significantly re-rated. We rate YTC Resources Limited as a Speculative Buy.
Significant Resource and Exploration Upside
The Company has initiated a major exploration programme designed to expand its existing resource base. A program of resource drilling, designed to infill areas of wider spaced drill coverage has either confirmed the margins of the grade shell or upgraded the deposit size. The Hera deposit consists of multiple mineralised lenses. The Main Lens provides the majority of the ore feed and remains open in a northerly plunge direction. The Company is expected to release a resource update by the end of March quarter 2010. YTC’s development plan, focusing on the Main Lens only has an initial base case mine life of 6 years. A further 9 lenses at Hera offer potential expansion opportunities. A newly discovered Copper Lens located to the west of the Main Lens provides further encourage to an extension to mine life.
Gravity geophysics has been employed to identify potential ‘Cobar-style’ sulphide ore deposits under cover. Results from the first survey block, which covered the immediate Hera area, identified the Hera deposit as a discrete gravity anomaly and also defined a similar intensity feature, referred to as the Zeus prospect, immediately to the south. The first two holes into the Zeus prospect did not hit significant mineralisation. However, the holes did display the type of alteration and weak mineralisation often associated with the fringes of this style of deposit and the Company is planning follow up holes for early 2010.
Pre-DFS Mining Scenario
The Company has already undertaken an initial mining study for Hera, focussing on the Main Lens only. The study has yielded a Base Case mining inventory of 1.14Mt @ 6.7g/t Au, 0.2% Cu, 2.27% Pb, 2.45% Zn & 14.9g/t Ag. This Base Case involves mining the ore by conventional underground bench stoping methods and trucking the ore some 150km to CBH’s Endeavour plant for processing.
The plant would produce a zinc concentrate, a lead concentrate and a copper concentrate, as well as gold doré. Gold would be produced from a gravity circuit, which would need to be installed at the Endeavour plant, with additional gold reporting to the lead and copper concentrates and silver reporting to the lead concentrate. YTC has indicated that conceptual annual metals production would be in the order of ~40koz gold , 6.7kt zinc metal in concentrate, 77koz silver in concentrate, 3.8kt lead in concentrate and 330kg copper in concentrate.
YTC is also considering the potential to use the low capital and operating cost ‘Python’ style processing onsite, due to the coarse grained gold -sulphide nature of the deposit. However, the initial focus will be on toll treating the ore at Endeavour, with the DFS to possibly investigate the suitability of the Python processing system. If the ore was treated at Endeavour, it is likely that YTC would fund the construction of a gravity separation circuit at Endeavour to recover the coarse gold and silver.
Definitive Feasiblity Study
The Company has commenced the DFS for Hera, appointing third party consultants GR Engineering Services (GRES) as Lead Manager, and continuing resource infill/extensional drilling. The resource drilling to date has been successful in confirming the margins of the grade-shell or upgrading the resource through the intersection of higher grade ore. The Main Lens, which currently provides the majority of the ore feed, remains open in a northerly plunge direction and the Company has also reported the discovery of a new copper- gold lens on the western margin of the Main Lens. The previously undiscovered lens returned intersections including 24m @ 1.02%Cu, 0.21g/t Au, 15g/t Ag and 0.9% Pb from 267m. The Company is expected to release a resource update by the end of the March quarter 2010.
The detailed metallurgical test work program and the optimisation of the Hera process options has been completed. The test work indicate that high gold gravity recoveries of +70% are achievable at coarse grinds and flotation tests on the gravity tails show high recoveries of base metals. This implies that a potential standalone plant will have a relatively low energy requirements resulting in lower operating and capital costs. The decision on the final project design is expected by June 2010.
Exploration
The Company has completed a program of ground gravity geophysics covering the prospective Hebe to Nymagee mineralisation corridor, encompassing the Hera deposit. Gravity has been deployed to identify potential ‘Cobar-style’ sulphide ore deposits under cover. Initial processing of the gravity geophysics clearly highlights a number of untested gravity high responses which require further investigation.
Results over the Hera area, delineated the Hera deposit as a discrete gravity anomaly and also defined a similar intensity feature to the south referred to as the Zeus target.
The Zeus gravity target is 1.5km along strike of the Hera deposit. Initial drill testing of the anomaly has been completed. The first two holes into Zeus did not hit significant mineralisation. However, the holes did display the type of alteration and weak mineralisation often associated with the fringes of this style of deposit and the Company is planning follow up holes in March 2010. The 4.5km strike between Hera and the Nymagee deposit is also considered to be highly prospective with relatively limited historic exploration with most of the previous drilling being relatively shallow.
Nymagee Joint Venture
YTC has an 80% interest in the Nymagee Joint Venture (JV) with China Minmetals Corporation (“CMC”) holding the other 20%. The JV area contains the historical Nymagee copper mine which was mined between 1880 and 1917 down to a depth of 250m, producing 422kt of ore at a grade of 5.8% Cu.
The deposit has only seen limited modern exploration. However, drilling has defined a southern plunging copper shoot which appears open down plunge. The Company has identified an untested gravity anomaly to the immediate north of the historical workings which is only 5kms from the Hera deposit. Exploration to investigate this gravity anomaly is proposed for 2010.
Valuation
We have undertaken a preliminary valuation for YTC, primarily based around the development of the Hera deposit. For the valuation of Hera, we have generated a high level discounted cash flow (“DCF”) model. We have assumed that the project will be under construction during 2H 2010, starting production in early 2011.
Throughput rate is assumed to be 200kt per annum over 5.75 years. Using YTC’s base case mining inventory grades (6.7g/t Au, 0.2% Cu, 2.27% Pb, 2.45% Zn & 14.9g/t Ag) yields annual production of ~39koz of gold , 4,000t of lead metal, 3,900t of zinc metal, 280t of copper metal and 76koz of silver. Using our commodity price assumptions, this production generates average annual revenue of $62m. Approximately 74% of revenue comes from gold sales, with lead and zinc adding 9% and 12% respectively. Copper and silver each contribute 2% of revenue. Unit operating costs are estimated at $165/t, which includes mining, milling and administration. Incorporating royalties, Hera generates pre-tax average annual cashflow of ~$30m. Average cash operating costs after byproduct credits is ~$430/oz of gold .
We estimate that the capital cost for the plant and the underground development of $30m. We have ongoing capital costs of $4m per annum and have included the $20m estimated for the DFS into the DCF. Using a 10% discount rate, this scenario yields a DCF valuation for Hera of $44m. We note that this value increases to $105m just prior to the commencement of production.
We have also incorporated a conservative exploration value for the remaining lodes as well as exploration upside of $25m, we believe this value is conservative and can see a number of these lodes being added to the mining inventory. Incorporating cash, the Hera DCF value, and exploration potential, values YTC at ~$80m ( or ~49cps). Given the current market capitalisation of ~$34m we believe YTC is significantly undervalued and we rate the Company as a Speculative Buy.
Risks
The key risk for YTC is development risk, the potential for the mine development of Hera to be delayed and run over budget. Cost escalation during construction could potentially lead to financial risk but this has been mitigated somewhat by the Company’s current strong cash position. Other risks are similar to those facing most potential mining companies including adverse movements in commodity prices and exchange rates, skills shortages and the risks to the Company cash flow from only having a single operation.
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