Sovereign Gold Company Limited (ASX:SOC): Risk vs Reward
I had a very agreeable meeting with Sovereign Gold Company’s MD, Mr Michael Leu, yesterday. My first impression is that Michael’s geological team is probably one of the best in the country. This is something I consider very important – but then I am a geologist. We had a wide ranging discussion, with a particular focus on the Mt Adrah, Hobbs Pipe 1 discovery (best result to date – 478 metres @1.2g/t gold). Read my first review of this discovery here.
The nature of this deposit is such that there is little doubt that the entire pipe will be mineralised at a comparable grade to the existing holes. Sovereign will be able to define a significant resource within Pipe 1. There are several adjacent pipes that are also likely to be mineralised.
However, my fundamental question is whether this deposit can be commercialised. I have outlined the key risks, as I see them and have discussed with Michael, below:
1. Can the gold be economically extracted from the host rock?
The gold is refractory, which makes gold production more expensive. However, it also means that the company has the option of producing and selling a gold-rich sulphide concentrate. Michael thinks that a concentrate could grade around 30g/t gold. Production of a concentrate would reduce environmental costs and substantially reduce capital costs for development.
2. Is the deposit big enough in the horizontal plane to justify development?
This is generally referred to as tonnes per vertical metre (“TPVM”). I think TPVM will be OK, but an engineering study, currently underway, will be required to determine the minimum, economic TPVM.
3. Can the rock be economically processed (crushed and ground) to allow sulphide liberation, and hence concentrate production?
Test work is required to determine this, but it appears doable.
4. Is the deposit amenable to block caving, or an equivalent low cost underground mining method?
Only some geological settings are amenable to block caving, but Pipe 1 looks like it will fit the bill.
5. Will the capital cost of development (“capex”) be too high to justify development?
With block caving, time consuming and expensive development is required before mining can begin. However, there is always the possibility of starting a small open cut to help defray development costs. Of course, the project could also be joint ventured or sold.
This is by no means a complete listing of risks, only those that I think are significant at this stage of development. None of the five risks listed above seem insurmountable, but much more work is required to resolve these issues.
I don’t think the Company will have any trouble defining a meaningful resource, the risk is not in the success of future drilling, but in other factors that will determine whether the deposit/s can be commercialised.
The Pipe 1 discovery has been compared with RIO’s Northparkes mine (288mt @ 0.57%Cu & 0.26g/t Au – gold equivalent of about 1.2g/t at the time of writing) and NCM’s Cadia mine complex (Cadia East – 2,300mt @ 0.44g/t Au, 0.28% Cu – gold equivalent of about 0.9g/t at the time of writing).
I think any comparison is a bit of a stretch, but it does show that comparable grades and rock types can be economically mined to produce a saleable concentrate.
So there you have it. Choose your own risk/reward profile.
Market Capital holds securities in Sovereign Gold Company Limited as at the date of publication of this article.
Market Capital has not been paid a fee by Sovereign Gold Company Limited as at the date of publication of this article.