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The Golden Pineapple - Exploration or Production Projects

When I read the news on Gascoyne Resources Limited (ASX: GCY) in the West Australian, I remember all my discussions with investors during my previous life as the managing director of an exploration company — trying to convince potential investors why they should invest their money into an expenditure company as opposed to a production company.  I tried to tell that history shows that those who believed an abandoned mine would now be profitable was actually buying not a lemon but a Golden Pineapple fit for places where the sun doesn’t shine.

When I listed Siburan Resources Limited (ASX:  SBU) in 2010, this was the ongoing conversation until I stepped off the Board in 2017.  It was very hard over those years to promote the virtues of investing in a sound exploration strategy involving finding resources and corporate strategic plans was a better option.

Is the Production story always better?

Many moons ago, I had concluded that any production asset that is not producing is not a good story.  Promoters love telling investors what they want to hear, and I have noticed that when they present a “production” story, they seem always to raise the appropriate funds.  I remember looking at the Aphrodite Gold Mine in 2009 (Now owned by Bardoc Gold Limited (ASX:  BDC) and I passed on it because I noticed that out of the so-called 900K+ of resource, only a fraction was in the Indicated level.  I also figured that they were refractory.

It was an old mine that is now not producing.  I felt that this was not an asset for me to use for my IPO. Later on, I find out that they had raised all the 10M that the IPO wanted and had oversubscription. Meanwhile, I was still looking for funds to fill my IPO. Within two years of the IPO, the company had used up the 10M and was effectively a shell, and the mine never developed.  We raised just over 3M and was still cashed up.

image of a golden pineapple on a beach. Samso Insights
Investors in Gascoyne Resource could be forgiven for not wanting this Golden Pineapple in their fruit salad. (Photo by Xiang Gao on Unsplash)

Investors forget that the margin for a working mine is the same when the gold price is at USD 1000 or USD1800.  CAPEX and OPEX increase and decrease in line with the rising or falling gold price.  Hence, if it did not work before, it will not work now.  The exception is if there was a technological change or a resource/ grade change due to more EXPLORATION drilling.  Simple as it may be, but that is the simple equation.

If I were to give examples where this is true, this would be a very long article.  So let’s touch on some of the recent similar stories.

Gascoyne Resources Limited (ASX: GCY)

Gascoyne Resources made news this week going into administration after just raising AUD 24M from unsuspecting investors.  Looking through the announcements, I calculated a capital raise of around AUD 200M, including debt over 2-3 years, I think. I remember looking at Gascoyne in early 2016 when the gold price was hanging precariously around the USD$1000 mark.  There were a lot of companies with excellent resources struggling looking for funding.

At that time, I thought that they had several issues with the grade, size of the resource and their location.  I was on the lookout for projects that could help with some cash.  After I spoke to the management team, I felt that the project was going to have more issues than becoming a saviour project.

Figure 1: Gascoyne Project Location Plan (source: Gascoyne Resources Limited). Samso Insights
Figure 1: Gascoyne Project Location Plan (source: Gascoyne Resources Limited)

Turn the story forward to 2019, and I am amazed that all (I am assuming that they would have done their Due Diligence.) of the money raised, has gone down the drain.  I know that the gold price in AUD is excellent, but when you have a project that did not work in lower pricing when others are doing well must surely give you some alarm bells.

It is sad to see so much money in projects such as Gascoyne are now lost. The fascinating part about projects such as Gascoyne is that the millions of ounces that are being promoted at Dalgaranga and Glenburgh are not from one hole in the ground.  I have mentioned this before, digging one hole to get 1M ounce is different from digging numerous pits to get them.  Investors should really understand this.

Now that the whole project has fallen on its “bottom” or come a cropper, one should ask all these experts that spin numbers so well, the mining engineers that tells you that they know everything and you (the investor with the money) just needs to listen, what happened?  The sad fact is that in all these cases, the finger pointing is as fast and as numerous as you would expect.

Dacian Gold Limited (ASX: DCN)

Yesterday, I read that the West Australian mentioned that Dacian Gold might be announcing another production downgrade for its Mt Morgan gold project near Laverton.  Dacian was the darling as they discovered more and more ounces a few years ago.  When they were drilling and getting the good news out, the share price was doing well. As soon as they started mining, things are not travelling so well any more.

The point I want to make is that if you had invested in the early stage and left when they had the discovery, you would have made money.  All the “smart money” that comes in when they have the mine plan, the JORC resource, the Feasibility Studies, they would not be too happy for now.  A mothball gold project does not really appreciate.

I am not saying that Dacian is going broke.  In fact, of the three companies that I have mentioned Dacian should not be used in the same sentence. Dacian management is quality.  The deposit is quality.  The downgrade that was announced was unfortunate but they are still mining good ounces.  But the drop in share price highlights the sensitivity to a highly complex web of mining.

Eastern Goldfields Incident (Now Ora Banda Mining)

The Eastern Goldfields saga was a tale of the same conditions.  It is a hard project, and they have a large package with so many commitments. You got to make sure you raise enough to cover the worst case scenario.  I have recently written an Insight on this topic – The Davyhurst Project – Ora Banda Mining Limited – my thoughts on this is well versed there and they have not changed.  This package also comes with a large minimum commitment to the Mines Department.  The resources in the pits were left there for a reason and probably should be left there unless you can find more underneath to warrant a change in the volumetrics.

As usual, the storytellers will sell that there is a resource and now the price is so good, as a Malaysian would say – sure can make money la.  How many times has this model been used?  The sad part is that this model gets all the money.  I used to say that in exploration, you could lose 10M but in one of these stories, 200M is a common number. Focus Minerals



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