Rambler Metals & Mining Share Discussion Threads

[snowydays] 19/4/2012 12:41

But what prices have you assumed in the figures above?

You have not put figures in for $3.10/lb copper, but I suspect that if you were to work out how long it would take to repay the debts built up at that level you would find that it takes most of the mine life. That's why the costs work out at about $3.1/lb over the life of the mine.

[chipperfrd] 19/4/2012 12:31

With gold at $1200/oz and copper at $3.1/lb the project does not turn CF+ until 2019 (according to my model) and the working capital requirements via debt draw down would be considerable.

However, in that scenario, I suggest that RMM would scale back considerably ... as would most gold & copper producers.

[chipperfrd] 19/4/2012 12:22

snowydays

I have modelled every discrete year over the LoM and have applied CAPEX (as per my earlier post) in the first 6 years as stated in the PEA.

On the basis that they will have ongoing cash flow from 2012 to set against CAPEX requirements and that they should only need to draw down sufficient debt to cover initial working capital requirements, I do not foresee a particularly large interest burden on a year-by-year basis.

These things are notoriously difficult to judge at such an early stage, but going by the straight figures I estimate the following in cash flow terms.

2012 CF ~ $25m
2013 CF ~ -$23m (cash ~ $2m)
2014 CF ~ -$11m (cash ~ -$9m)
2015 CF ~ -$12m (cash ~ -$21m) incl interest ~ $742k
2016 CF ~ $15m (cash ~ -$6m) incl interest ~ $1.7m
2017 CF ~ $16m (cash ~ $10m) incl interest ~ $501k
2018 CF ~ $12m (cash ~ $22m)

after that, CF increases significantly (c. $41m pa) throughout the remainder of LoM.

In reality I would expect debt draw downs to be larger than implied by the above so interest charges would also be higher in the earlier years. But given the large sums involved for such a project I do not consider they are significant.
Chip

[king suarez] 19/4/2012 12:03

Chip - I believe proceeds from the CuEq lbs are usually included in the overall cost of production? (i.e deducted from the cost per lb copper produced)

Also struggling to see how $3.10/lb can be the average cost for the whole mine life - will take another look, tonight possibly.

[snowydays] 19/4/2012 11:42

Chip, when you tried summing the OPEX and CAPEX did you take account of the fact that the CAPEX is front end loaded, i.e. that if it was paid off over the LOM there would be substantial interest payments?

You did not put your model here if I recall. I would be interested in what happens if you rework your model using lower metal values, i.e. $3.1/lb for copper and say $1,200/oz gold.

I suspect that if you put in these lower figures and then assumed that outstanding CAPEX attracted an interest rate of say 8% until it is paid off you would find that the mine only breaks even over 20 years.

[king suarez] 19/4/2012 11:38

Guys, thanks a great deal for your posts. I confess this is my first attempt at analysis of a mining company (not been long investing) and I do not fully understand some of the terminology still.

I will digest this info and respond more fully later, when I have time.

I don't fully understand Snowys comment about interest cost on the Capex over the life of the mine - surely that depends whether or not it's debt financed? Or are you just comparing the opportunity cost of having put that Capex money into another investment. Worth noting that the higher the capex, the higher the depreciation charge, thus Rambler end up paying less tax on profits.

I appreciate the discussion. Thanks chaps.

Do you know if the price/cost is based on lbs of copper concentrate or "actual copper". I'll have to investigate the difference - showing my naievity!

[chipperfrd] 19/4/2012 11:32

I imagine the C1/C2 costs issue will gain some clarity as they move the LFW proposal through to BFS.

I have tried to work out how the (supposedly) $3.1/lb C2 cost was arrived at but have not reached a clear conclusion.

I have tried summing the total of OPEX + CAPEX for each year over the LoM and arrived at $1.477B.

If this is then divided by the projected production of 626m lbs Cu, the overall cost per Cu lb is $2.36

I then repeated the above but added in my estimate of $9m pa of sustaining CAPEX plus another $4.5m pa for TC/RC costs arriving from concentrate transport and refining. The LoM total then becomes $1.716B and the cost per Cu lb ~ $2.74.

... and I have not included the CuEq lbs that would need to be added if gold and silver recovered was also put in the mix as this would clearly reduce the figure even more.

[chipperfrd] 19/4/2012 11:10

King Suarez

re grade:
I have modelled the LFW zone at 1.43% Cu and recovery at 97%
This works out at c. 35mlbs of copper in concentrate per annum (c.16kt Cu in 55kt of concentrate).
In addition there are another 13kt of Cu produced in the existing mill over the first 3 years.

My total comes to 626m lbs of Cu produced over the 20 year LoM which agrees with the PEA. So I am reasonably happy with the 1.43% grade in my initial model.

[snowydays] 19/4/2012 11:09

Your Majesty, I don't like to be rude, but may I gently suggest that you were not paying attention when they taught basic arithmetic at your school.

1) Total capex is quoted as $231m in the PEA - how do you get $172m + (3 x $45m) + $14m per annum over 21 years = $231m? No where does it state $172m is exclusive of the first 3 years at $45m p.a?

The $14m is not per annum it is over the life of the mine and is the expenditure on dealing with the tailings. The PEA gave CAPEX as $231m

$172m + $45m + $14m = $231m.

Yes the report does state that the $45m is distinct from the $172m.

2) The average grade of the resource area IN TOTAL may be 1-1.5% cu, which will determine the overall quantity of mineable ore. HOWEVER, you will find most miners actually process ore at a grade much higher than the average total resource grade.

Huh? True miners can pick and choose to some extent. They might choose to mine high grade reserves foirst, just as Rambler mined high grade gold reserves from the 1806 zone to get some initial productiomn before the main show starts. But youy cannot simply magically increase the grades over the life of mine. If you only mine higher grades then the extent of the resource os greatly reduced. The PEA envisages a cut off of 1% copper and an average grade from the LFZ of 1.43%.

Furthermore, RMM have stated their aim to produce 65,000 tonnes of copper annually.

No, they have said they are aiming to produce 65,000 tons of copper concentrate pa, not copper.

3) Furthermore, see the following quote:

"During the life of mine, after milling and recovery, approximately 980k
tonnes of copper concentrate (616M lbs of copper) will be produced with
193k ounces of gold and 851k ounces of silver"

980k tonnes = 2.16bn lbs? (2,205 lbs in a tonne)
616M lbs out of 2.15bn lbs mined = implied grade of 3.5% copper (not counting the gold or silver)

This question makes no sense whatsoever! 616M out of 2.15B is about 28% not 3.5% and it is the proportion of copper in the copper concentrate. It has no relevance to the implied grade of the ore.

4) Furthermore, if $3.10 per lb is the average cost over the 21 year mine life, please explain this (ignoring gold/silver credits):

616M lbs produced at a cost of $1.97/lb = $1.21 bn
616M lbs produced at a cost of $3.10/lb = $1.91 bn

This would imply the "initial capex" was $700m, not the $231m quoted.

Because we must discount the future income. If we use the correct discout rate, probably around 6% then that $700m paid over the life of the mine is equal to the £231m CAPEX paid mostly in the first 6 years. The point is that if we pay off the CAPEX over the life of the mine there will also be interest costs. A bit like paying off a mortgage over 20 years. You may end up paying the building society several times the cost of the original loan.

Now, let me turn the question on it's head. I invite you to explain how costs of $3.1/lb will pay off CAPEX in 6 years. For simplicity we can say that $1 of the $3.1/lb is for CAPEX, therefore ignoring interest payments and discount rates we need to produce 231m lbs of copper to account for all the CAPEX in 6 years. Bear in mind that for the first year we are mining just 630tpd and the next two years just 1,000tpd.


EDIT: KS, sorry, I wrote the above before I saw your post about item 3 being wrong.

[chipperfrd] 19/4/2012 10:59

King Suarez

re CAPEX:
it's $172m over first 6 years (ie $28.66m per year for 6 years)
plus
$45m spread over first 3 years (ie $15m per year for 3 years)
plus
$14m spread over LoM (ie $700k per year for 20 years)

eg.
Year 1-3 ~ $44.366m per year in total
Year 4-6 ~ $29.366m per year
Year 7-20 ~ $700k per year

Total = $231m

[king suarez] 19/4/2012 10:33

Please ignore point 3 above, it's wrong. The rest is open for discussion!

[king suarez] 19/4/2012 10:10

Snowy (anyone else)

Few questions/comments, if I may:

1) Total capex is quoted as $231m in the PEA - how do you get $172m + (3 x $45m) + $14m per annum over 21 years = $231m? No where does it state $172m is exclusive of the first 3 years at $45m p.a?

2) The average grade of the resource area IN TOTAL may be 1-1.5% cu, which will determine the overall quantity of mineable ore. HOWEVER, you will find most miners actually process ore at a grade much higher than the average total resource grade. A resource model will include areas of non-economical rock because a resource model will not perfectly fit the actual deposit in real life. If management are familiar with the geology they can target the higher grade ore zones for processing, rather than just "chucking" in any ore at random at a grade of 1-1.5%, on average. Certain areas of the overall resource will most likely not be mined as they will contain little/no ore at all, hence the average grade is lower than that actually used for processing.

Here are two examples of other miners (I am sure there are more:

Arian Silver - resource grade quoted as 110g/t silver - mining ore at 200g/t silver

Anglo Asian Mining - resource grade quoted as 1.35g/t gold on average - have consistantly been mining at an average of over 3g/t gold.

Furthermore, RMM have stated their aim to produce 65,000 tonnes of copper annually. Using the new mill at 3,500 tonnes/day, assuming 340 days per year annual production, would need an average grade just over 5% copper for this to be achieveable.

3) Furthermore, see the following quote:

"During the life of mine, after milling and recovery, approximately 980k
tonnes of copper concentrate (616M lbs of copper) will be produced with
193k ounces of gold and 851k ounces of silver"

980k tonnes = 2.16bn lbs? (2,205 lbs in a tonne)
616M lbs out of 2.15bn lbs mined = implied grade of 3.5% copper (not counting the gold or silver)

4) Furthermore, if $3.10 per lb is the average cost over the 21 year mine life, please explain this (ignoring gold/silver credits):

616M lbs produced at a cost of $1.97/lb = $1.21 bn
616M lbs produced at a cost of $3.10/lb = $1.91 bn

This would imply the "initial capex" was $700m, not the $231m quoted.

I stand by my assertion.

Regards,
KS

[wolterix] 19/4/2012 02:03

cheer up snowydays

(if that's possible, given your avatar name)

[snowydays] 19/4/2012 00:51

There is a problem with your figures Majesty. The grade from the LFZ is not 4% copper or anything close. It is 1% to 1.5%.

The PEA does not state 3 years at 45m the 14m pa thereafter. It says that there will be $172m over the first six years plus $45m over the first three years plus $14m over the life of the mine.

The $3.1 cost per pound is for the entire life of the mine.

[king suarez] 18/4/2012 22:52

All,

I've been looking at the PEA and Peter Mercer interview in more detail and been running some figures through a spreadsheet. I just can't see any way that $3.10/lb can be the forecast cost of production for the LFZ over the entire 21 mine life.

I'm now almost certain that Peter Mercer, in his interview, meant that the initial capex spent over the first 6 years of production of the LFZ (which would start in 3 to 4 years time?) would drive the cost of production up to $3.10/lb for those years in which the initial capex is spent ONLY, after which the cost of production would drop to $1.97/lb.

The reason I say this is because from year 4 onwards, the estimated production at 3,500 tonnes per day, at a grade of 4% and at a cost of $4,500 per tonne opex (or $2.05/lb - guestimate) would equal c$220M per annum. For the average cost of production to reach $3.10/lb at that level of production works out to be an ADDITIONAL $110m per annum, and for the 21 year mine life = $2bn! - ridiculous!

Obviously the initial capex is nothing like that amount. If I take $45m p.a startup capex given in the PEA, at production of 1,000 tonnes per day (current mill capacity) on top of the normal $4,500 estimated opex cost per tonne, then it comes to c$3.5lb cost per tonne total. After the first 3 years of $45m capex, the PEA states $14m per annum thereafter.

Production goes from 630 tonnes per day up-to 3,500 tonnes per day over the first 6 years, so $3.10/lb average over those years seems "about right" to me.

Sorry if this is a bit of a confusing ramble, but I found it a useful exercise, and I have now convinced myself.

Goodnight :)

[snowydays] 18/4/2012 10:39

I would rather Rambler just left the LFZ project on the back burner for now and concentrated on expanding the resource from the upper zone. They have stated that they can increase throughput to 1,000tpd just by increasing efficiency.

If they should decide to proceed with the LFZ project then perhaps they should consider derisking the project with derivatives. The easiest way would be to simply sell part of the future production in the futures market. A more interesting way would be to use the equivalent of options.

It should be possible to reach an agreement at no cost whereby we buy protective put options at $3.10/lb so that we are protected if the copper price falls significantly. These should be fairly cheap "out of the money" options. We could pay for them by selling at the money call options. If we were to sell call options at $3.60 (the current copper price)for about a quarter of future production that should raise enough money to buy put options at $3.10 for the whole of anticipated production. By doing so we are fully protected against a large fall in the copper price (to unprofitable levels) but we still have significant unhedged production to profit from any increase in the copper price.

If readers here are familiar with Avocet mining they will know that Avocet arranged a similar collar regarding future gold productiopn. They lost out as the gold price rose, but it did give them some protection and allowed them to go ahead with a project with little risk.

[king suarez] 18/4/2012 09:29

Hi Chip et al,

I'm sure your model is more complex/accurate than mine, seeing as it took me about 2 minutes to do my NPV in Excel last night!

If I put more of the Capex upfront, the NPV would be higher, obviously, conversely if I slowly ramped up the production numbers (as is anticipated per the PEA) rather than assuming 50k lbs/p.a for 20 yrs, then the NPV would be lower due to smaller initial cash flows.

I'm sure we both get to a similar result in the end. I hope Rambler can re-model the LFZ to increase the NPV, either by reducing the CAPEX or by improving efficiencies in someway.

Essentially, ANY positive NPV project is worth undertaking in theory, an NPV of +$250m implies that the discounted future project cash flows are worth $250m to the company TODAY. That's not "profit", the profit will be much larger. IF the project NPV was "cast iron" perfectly calculated, with no risks it would increase Ramlbers market cap by the same amount. Of course, in reality it won't reflect the full NPV immediately.

Anways, good to have the discussion, keep it coming. Apologies if I have "ramble(r)d" a bit ;)

[elban] 18/4/2012 08:14

Chip,

I didn't do any such calc - I took the number from the quote in the Peter Mercer interview:
"The break-even price at Ming Mine is between $1.10 and $1.20. With the footwall zone, the breakeven come to be $1.97. If you take the initial capital investment into consideration, then this goes up to $3.10."

I assume that the $3.1 refers only to the footwall.
I took this to mean that assuming zero inflation, if the copper price was $3.1 - then they would simply get all their money back by the time the mine closed. In which case mining the footwall would just have baan a complete waste of time.

[killing_time] 18/4/2012 08:06

snowydays,

I worked my figures by loading the initial capital investment onto the front end ( first 6 years ) then after that i was using $1.94 per pound, but as you have pointed out you cannot get away from the fact that the costs for the mine life are $3.10 per pound. I now need to go over these figures again because at $3.10 per pound and where the price of copper is at the moment this feels a little uncomfortable, thanks KT.

[chipperfrd] 18/4/2012 01:20

King Suarez,

I think I may be seeing what you guys are doing.

In effect, you are inserting the CAPEX into the LoM cashflows by distributing it over the entire LoM via the costs/lb. Fair enough, but it does distort things somewhat.

My approach has been to build a reasonably complete earnings model with all the CAPEX front loaded over the first 6 years with the residual closure costs, etc, spread over the full LoM.

But this is in addition to the costs/lb quoted in the PEA + TC/RC costs for handling and refining the concentrate + sustaining CAPEX + Interest + D&A + Tax.

I have then arrived at the bottom-line net cash flows (both pre & post tax) for the entire LoM and have used the summation of all those DCFs in order to arrive at the NPV of the expanded project. It is the 4th year of those net cash flows which turn positive and to which I was referring in my earlier post.

Obviously, if you are applying the initial CAPEX via the OP costs the net result is basically the same except for the fact that cash outflow early in the LoM has a greater impact on the NPV/IRR than the same cash spread over the full LoM so I prefer to see the impact of 'lumpy' cash flows early in the project cycle.

Just a different way of arriving at roughly the same result. They refer to this way of including CAPEX as 'C2' costs. Sorry if I was being a bit thick :-(
Chip

[king suarez] 17/4/2012 23:10

Yes, I'm interested to see what happens with the Maritime Resources tie in also.

[elban] 17/4/2012 22:25

I have to admit that I always thought that the footwall wall to be of marginal value unless copper prices increased.

I don't think that the mine plan (as presently presented) will represent what actually happens. There are just too many variables.

I still think that RMM is undervalued and I like the management - but do not believe that the value of the mine is as clear as people portray.

In fact, I could well envisage them very profitably doing something other than mining the footwall until copper prices improve.

[king suarez] 17/4/2012 20:46

Sorry guys, I actually keyed in a forumla wrong (long day!). My profit per pound production had ($3.5-3/1) instead of ($3.5-3.1). I now get an NPV of $256m - spooky!?

[king suarez] 17/4/2012 20:40

Interesting discussion. I have emailed the company for further clarification. Will post a response if received.

Either it is:

A) Cost is $3.10 per pound for the whole 20+ yr life of mine, or
B) Cost is $3.10 per pound during the period of initial start-up capital expenditure, then $1.97 for each year after until the end of the life of mine?

To be honest, I'm not sure!

Ok.. so I just ran some basic numbers. Using 5% discount rate (as per the PEA RNS) and assuming 50,000lbs copper produced each year (evenly) for 20 years (total 1bn lbs produced for ease as per Snowys post) using $3.5lb copper price (per PEA), and $3.10lb copper cost per assumption A, I got an NPV of $320m.

This is pretty simplistic, BUT not a million miles away from the $250m stated by the company. My guess is A is correct. I think the NPV would be significantly higher using $1.97 for most of the life of mine.

KS

[chipperfrd] 17/4/2012 20:08

snowydays,

We will have to agree to disagree as I do not intend to belabour the earlier points I was trying to make. Trying to estimate an investment proposition out to 2032 is already difficult enough and NPV calculations usually work out at a considerable discount to reality over time - and 20-year NPV's even more so.

It all comes down to opinion. You are welcome to yours and I will stick to mine until something comes along to cause me to revise it in either direction.
Chip