Sunday, January 15, 2017

Metanor Resources: Bachelor - A Failed Project

Metanor Resources (MTO.V) is a tiny gold  producer operating one mine, called Bachelor. The mine is located in the Quebec Province, Canada. Production at Bachelor started in late 2012 and till the end of 2016 the mine delivered around 160 thousand ounces of gold.

In my opinion, the Bachelor project is generally a failure. Look at the table below:

source: Simple Digressions

In 2011 the company submitted a Preliminary Economic Assessment on Bachelor. The main assumptions are in the column titled "PEA" and the actual results are presented in the column "actual". Although it looks like the Bachelor mine should continue its operations in the future, due to the fact that, according to the PEA, Bachelor was supposed to operate until the end of 2016, it is a good time to look at this mine from the long - term perspective.

As the table shows, the main factor standing behind the failure was a much lower head grade at which the company was processing the ore extracted from Bachelor. According to the PEA, the Bachelor was supposed to be a high - grade operation (grade of 7.4 grams per ton of ore). However, the actual grade was just 5.4 grams per ton of ore (27% below initial assumptions). What happened?

Let me cite the company:


"The mining method used at Bachelor is long hole stoping mining with sub-level. It is an efficient method with low extracting costs, but can generate important dilution if the structure is narrow as was completed in the A and B veins. In the pre-feasibility report published in April 2011, the overall planned dilution rate was 10%. In the A and B veins, the dilution rate was closer to 40% due to the narrow nature of the veins. This resulted in lower feed grade at the mill and had a negative impact on the cost of sales"
 source: Management Discussion, June 30, 2016 page 4 (SEDAR)

Although the citation refers to the A and B veins, the dilution problem relates to all veins at Bachelor. In my opinion, the Bachelor project is a typical case of a the underestimation of the mining at thin vein - gold deposit. For example, the main part of the deposit, called the Main Zone, had an average horizontal width of 2.8 metres (median at 2.1 metres). It is a very thin vein. As a result, to extract gold from such a narrow vein the company had to mine a lot of waste as well (higher dilution factor). In the PEA, the average dilution was set at 10% but in reality it was rather around 37% (refer to the table above and the row called "Grade"). Hence, a failed project and, instead of generating the operating cash flow of C$57.8M over the mine life, the project delivered just C$10.4M. What is more, this poor figure was delivered at much higher gold price than the company projected in 2011 (C$1,508 actually vs. C$1,271 per ounce of gold).  

What now? Well, first of all, the operating results improved in 2016, especially in 4Q 2016:

source: Simple Digressions

Look at the grade and the recovery ratio in 4Q 2016 - they were much higher than in the previous quarters of 2016.

As a result, the company produced 9,763 ounces of gold in 4Q 2016 (the highest amount in 2016). What is more, it sold 10,431 ounces of gold last quarter (also the highest amount in 2016). That is why I expect decent results delivered by the company in 4Q 2016 (revenue higher by 23%, compared to 3Q 2016 and lower operating costs).

However, the biggest problem remains unanswered. The company promised to publish the estimate of mineral resources / reserves at Bachelor until the end of 2016. Till today there is no estimate so it is hard to say what Bachelor is worth in the long - term...

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