Probe Mines

Things to Watch – Probe PEA

Ah, it’s March, PDAC this weekend and PEA by end month. Hope you all had the morning coffee and the brain is ready to crunch numbers.

The Market has been very concerned lately, especially in our junior market, regarding new project financing, the “CAPEX” required and Rate of Return “IRR”. Concerns about large financings to bankroll new projects seems the pressing issue and as was discussed in Danny Deadlocks recent blog, attached, and what happened to Northland Resources recently.

http://www.stockhouse.com/opinion/ticker-trax/feb/8/capital-costs-killing-off-junior-exploration-stock

CAPEX

First, the CAPEX to build our mine. Most Analysts predict $400-500M for a 250Koz/yr operation. Location and location to Infrastructure should keep costs contained, along with the planned 15-20Ktpd operation, smaller than most by industry standards, as they target the higher grade core zones.

We’ll use the $400M in our scenario, along with a $2.00 SP, 82M F/D shares for a MCap $164M. We assume an all equity financing adding 200M shares for a total 284M F/D shares.

IRR

Now our Mine is financed and built, with Borden in production. Most analysts conceive a 250,000 oz/yr operation.

At $1600 Gold, we would have yearly revenues of $401.6M ($1200AU = $300M, $2000AU = $500M) Today a good return on a project is 20%, the IRR imo, should be after all costsare considered, including and not just production costs (costs of revenue), administration, depreciation, interest expenses and finally income taxes, which then leaves us net earnings.

Example IRR for Osisko Cdn Malartic

- Feasibility - The pre-tax internal rate of return (IRR) on a CAPEX to completion is estimated at 28.8%, and the pre-tax NPV (discounted 5%) is estimated at US$1,001 M.

- PEA - The results of the Preliminary Assessment indicate that the Canadian Malartic Gold Project is technically feasible and economically viable with an Internal rate of Return of 22.2% on a total investment of $760 M.

Throughout 2012 OSK was generating Revenues of $158M /qtr, and after expensing all costs, making a Net Income of $26M/qtr, or a Rate of Return of 16.4%. Much different than the PEA and Feasibility Studies projected, though note Feasibility was pre-Tax. (Cost Percentages: Production 54.6%; Admin 4.8%; Depreciation 9.3%; Int Exp 5%; and Income Taxes 11.9%)

The Borden PEA at $1600 AU and IRR of 20% would generate yearly Net Income of $80M from Total Revenue of $400M ($20M/qtr or $0.07/share on 284M F/D shares)

Total Costs to produce the 250 Koz/yr would be $320M or $1280/oz

(An IRR of 25% = $100M/yr, Total Costs $300M or $1200/oz)

My Vision

It’s now 2016, Dave and Co, have built our 20K tpd operation for a reduced $350M CAPEX, producing 250Koz/yr by targeting our higher grade core open pit thereby reducing costs, POG is now $2500/oz, and our Rate of Return is 25%. (I still believe the POG is going much higher after this near 2 year consolidation phase)

We Finance the Mine at $4.00/sh, only 87.5M shares needed, for a less diluted F/D share base total of 170M shares. 250 Koz x $2500 = Revenues of $625M /yr, Net Earnings at 25% IRR is $156.25M and EPS of $0.92

(Total Costs $468.75M or $1875/oz)??? Total Costs $1875??? At $1600 Gold, Total Costs were $1280/oz.

At $2500 Gold the IRR would be more like 40 – 45%, as only Income Taxes should rise affecting bottom-line Net Earnings.

We’ll take a 20 Market Multiple based on our Earnings ($156.25m) at IRR 25%, supporting a SP of $18.38 and a MCap of $3.125 Billion!

At IRR 40%...Net Earnings $250M, SP and MCap would rise 62.5% (IRR is proportional to POG)

The Market will want to see a low financeable “CAPEX” and high “Rate of Return” in the PEA.

Cheers, Mark