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Dundee shifts focus on its Bulgaria gold Krumovgrad mine after sale of Armenia asset

Dundee Precious metals holds an interesting mining project, called Krumovgrad. It is the second mining project located in Bulgaria (after Chelopech). Krumovgrad holds 807 thousand of gold, classified as reserves. It is estimated that this property should be delivering 85,700 ounces of gold per year.

On March 2, 2016, Dundee Precious Metals announced that it had entered into a definitive agreement with Polymetal International for the sale of its interest in the Kapan Mine, located in Armenia.

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Apart from mining assets, it holds a chemical plant, called smelter, located in Namibia. For some investors, it can be a plus because the company is diversified. However, for the others, it can be a minus – for example, precious and base metals investors (Dundee produces gold, silver, copper and zinc) may omit Dundee because it is exposed to the risks they do not understand. On the other hand, there is some logic in such a business model – a smelter processes concentrates coming from Chelopech, Dundee’s flagship mine.

Apart from this, a little bit strange diversification, the company operates in three jurisdictions: Bulgaria, Armenia and Namibia.

rior to today’s announcement, Dundee had two operating mines: Chelopech in Bulgaria and Kapan in Armenia.

Chelopech is much bigger than Kapan. The mine produces two products: copper and pyrite concentrates. The copper concentrate is produced from the fresh ore, mined and processed on a spot while the pyrite concentrate is processed from the old tailings (waste). To process the pyrite concentrate, Dundee had to build a new pyrite recovery circuit. This new circuit, commissioned in the first quarter of 2014, made it possible to increase the annual gold production by more than 54 thousand ounces (in 2015 Chelopech delivered 169,725 ounces of gold, of which 54,774 ounces came from the pyrite circuit).

According to the last estimates, Chelopech holds 22.83 million tons of ore, grading 3.14 grams of gold per ton of ore, classified as mineral reserves (around 2.3 million ounces of gold). So the mineral base is quite big at Chelopech. Assuming that the company is going to produce 150 thousand ounces of gold per year there is enough gold to operate for 15 years.

In 2015 the gold, coming from the fresh ore, was produced at cash cost of $36.46 per ton of ore processed (this cost includes mining costs as well). In my opinion, it was quite a low cost. Taking into account that each ton of ore processed contained metals of market value of $107.71 (assuming gold price of $1,200 per ounce, copper price of $2.0 per pound and silver price of $15 per ounce), it means that Dundee was making $71.25 in cash on each ton of ore processed.

That is why I think that the Chelopech mine is a decent operation – there is a lot of gold at this property and this gold, sold even at today’s relatively low metal prices, generates a lot of cash for the company ($146.2 million in 2015).

The second mine, Kapan, was always just a fraction of Chelopech. In 2015, it delivered 24,850 ounces of gold at cash cost of $77.42 per ton of ore processed. Taking the same price assumptions as in the case of Chelopech, the company was making $48.17 in cash on each ton of ore processed (67.6% of cash made at Chelopech). It also means that Kapan generated cash of $19.8 million from mining operations (just 13.5% of cash delivered by Chelopech).

What is more, since 2009 production costs at Kapan have been in a steady increase, while at Chelopech, these costs have been going down (from $61.0 in 2009 to $36.5 in 2015 per ton of ore processed).

In the company’s books, Kapan was valued at $41 million (at the end of 2015). In 2014 and 2015, Dundee recognized Kapan-related impairment charges in total amount of $112.7 million. Adding to this figure the current carrying value makes $153.7 million – it is gross value of Kapan. According to the last announcement, Dundee sold Kapan for the equivalent of $25 million plus a 2% net smelter royalty on future Kapan production. Trying to find the royalty value I will assume that at today’s prices net smelter return is $700 thousand a year (2% of net revenue of $34,998 thousand, reported by Kapan in 2015). Then, assuming the company’s cost of capital of 7.1%, the value of the royalty is $9.86 million ($700 thousand divided by 7.1%).

Summing up, Kapan was sold for the total consideration of $34.86 million, of which:

  1. $25.0 million is attributable to cash and Polymetal shares
  2. $9.86 million is attributable to the royalty

At closing, the transaction should increase Dundee cash reserves by $25 million in cash; additionally $9.6 million will be accounted for as future revenue in the company’s balance sheet. Finally, at closing, Dundee will report a loss of around $6 million (Kapan carrying value of $41 million less the consideration of $34.86 million). Of course, if the company makes different assumptions related to the royalty value assessment (than those presented above), these figures may change.

The sale of Kapan was the right decision. Dundee was encountering a number of problems at this property, as, for example, rising production costs or poor financial reports delivered between 2012 and 2015. What is more, in 2014, the company prepared the Technical Report that confirmed “the favorable technical results for a potential underground expansion to one million tons per annum.” However, the company would have to spend $30.1 million in initial capital to start underground mining at Kapan (plus $165 million in sustaining capital).

The Kapan sale should increase the company’s cash at hand by $25 million (if Polymetal shares are sold). This cash may be used to reduce the current debt from $147 million to $122 million. Additionally, each year the company will be paid around $700 thousand in cash as royalty income.

Finally, from now on Dundee’s management may focus on developing the Chelopech mine and Tsumeb smelter.

Last but not least, the company holds an interesting mining project, called Krumovgrad. It is the second mining project located in Bulgaria (after Chelopech). Krumovgrad holds 807 thousand of gold, classified as reserves. It is estimated that this property should be delivering 85,700 ounces of gold per year.


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