RE: Hambledon Mining30 May 2012 13:16
[HMB] Contd...
and although gold production is modest it is expected to climb steadily throughout 2012. Looking ahead the board plan that the rate of gold production from the underground mine will be targeted to hit 100,000 ounces a year by 2017. Meanwhile, the open pit is planned to continue production at a minimum 22,000 ounces a year until 3Q 2014; but during this period its cash flow will provide a lot of the capital expenditure necessary to develop the underground mine. Overall, this means production from Sekisovskoye could rise annually from 21,000 ounces in 2011 to 26,000 ounces in 2012 and 45,000 ounces in 2014 on the way to hitting the 100,000 mark in 2017.
Sekisovskoye is well located, being just 40 kilometres away from the regional capital, and has an easy metallurgy along with an experienced local management. However, the mine has historically suffered from high operating costs. Certainly the arrival of Tim Daffen as CEO in 2010 brought in a man with the expertise to not only bring the new underground mine into production but also to reduce operating costs. Tim saw that too much gold was going to the tailings and that production was being hampered by power shortages, a lack of spares and key elements in the mill being of poor quality. Furthermore, operating in temperatures sometimes as low as minus 40ºC, the operation needed further protection against the elements to remain efficient. In March 2011, £9.1 million was raised at 4p to fund this raft of measures which were set to reduce the operating cost by $120 an ounce down to $800 an ounce from surface mining. Further improvements in recoveries to 95% are targeted over the coming years which, when coupled with the full production underground, could led to operating costs per ounce being brought down to the $700-800 range.
Valuation
The team at Hambledon are specialists in Kazakhstan. After so many years in the country, the management has first-hand experience of dealing with all the requirements and authorisations necessary to bring a mine into production. The board has sensibly played to their strengths in seeking to acquire Akmola Gold which wholly owns the Tellur and Stepok precious metals projects in central Kazakhstan. If this deal finally goes ahead, the Company will gain a combined resources of 440,000 ounces of gold plus silver. Tellur is a high grade underground gold mine which has the scope to become a 20,000 ounce per annum gold mine in 2014, while the ore could be trucked to Sekisovskoye for treatment in the company's existing plant. Stepok is an earlier stage project where a substantial drilling programme is planned ahead of a feasibility study. The resource here is equivalent to 300,000 ounces of gold to justify a one million tonne a year operation producing 30,000 ounces of gold and 40,000 ounces of silver annually, but the team believes there may be scope for 60,000 ounces gold per annum. Moving ahead with more than one mining operation would bring a diversification of risk and clearly demonstrate to investors that Hambledon has real growth prospects and may propel production not just to 100,000 ounces but far higher in the medium to long term.
Sekisovskoye is a project where the existing operation has only just scratched the surface of a tremendous resource which is now being beginning to be mined on a larger scale by underground methods. Our analysis suggests a Net Present Value of $117.2 million (£73.2 million) for the Sekisovskoye which equates to 7.5p per share based on the current issued share capital of 979.2 million shares. It has to be pointed out that Akmola Gold with its Tellur and Stepok precious metals projects is a prize worth fighting for which could add additional production over future years; but at this stage it has been left out of the analysis. The shares as a Speculative Buy at 1.68p with a target price of 7.5p.
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