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This is the case of a very promising gold junior, which could be close to overturning a considerable permitting roadblock into its favor. The name of this company is Astur Gold (OTC:ATRGF). The permitting process of its advanced flagship project Salave which is located in Spain, has been dragging on for many years because of social and environmental issues. Several other predecessors have tried in vain to succeed, however things appear to be different now.
The economic situation in Spain has become increasingly desperate for some years now, and considerable pressure is developing on local governments to create new jobs. The very experienced and capable management of the latest Salave owner, Astur Gold, started the entire permitting process from scratch again, and improved the project considerably. Changes included removing most of the processing steps with their toxic reagents, focusing on underground operations only, and limiting tailings and intensive communication/consulting with all possible stakeholders. This has already resulted in the achievement of several important milestones in the permitting process, but still wasn't enough to be granted the full mining permit in November 2012. The main hurdle proved to be the mill and tailings design as it was described in the Environmental Impact Assessment (EIA) for the provincial government of Asturias, although local government and population are already convinced of the benefits of the operation.
The company finally seems to have made all necessary changes to its mining plan, after many consultations, and seems to be able to get approval on the complete EIA this time. Therefore, the chances regarding a full mining permit for Astur Gold are improving, and a definitive decision on this EIA is expected in May this year. Of course, this decision could prove to be negative again, and the process could continue for quite some time, but a positive outcome is far from inconceivable in the near future. In this article, I will try to describe what happens in different cases, and why I do think Astur Gold is worth a speculative position.
The company is trading in larger volumes on its main exchange, the TSX Venture, so I would recommend trading by its Canadian listing AST.V.
2. Executive summary
Astur Gold is a junior mining company which is dedicated to developing its flagship Salave Gold Project in Asturias (northern Spain). Salave is one of the largest undeveloped gold deposits in Western Europe with a resource estimate of 2M oz @ 3.1g/t gold at a cut-off grade of 0.7g/t.
There are several catalysts for the Astur Gold share price. The first one is probably the Feasibility Study (FS), as I expect the necessary adjustments made by the management to work out positively; in particular, the much lower capex will increase profitability considerably. This FS is planned to be released in April 2014.
The next and by far the most important catalyst is the final verdict of the government of Asturias on the Environmental Impact Assessment. If this verdict is positive and a full mining permit granted, Astur Gold shares could gain a lot in value, as the project all of a sudden becomes highly derisked and ready for financing and construction. The final verdict is expected in May 2014 or sooner.
There are two big risks in my opinion. First of all obviously is the verdict on the EIA; the second is the upcoming necessary conversion of resources into reserves, needed for the FS. More on the assessment of these risks in section 9.
The upcoming FS could disappoint the investment community; however, when analyzing all adjustments the management has in mind for the mining plan, it appears the Salave project is based on strong fundamentals. The last risk for this project is the gold price. When the price of gold goes down to, for example, $1050 as Goldman Sachs (GS) envisions, the Salave project loses much of its profitability, but should remain viable in this case, as the fundamentals are very solid.
To determine the value of the company, calculations were performed for a hypothetical Feasibility Study (FS) on market capitalization to net asset value (NAV) for Salave. Taking into account a current share price of $0.33 (2/7/2014), based on 36.77M shares we get a target share price of $0.54, for a profit of 64%. In April 2014, shortly after a positive FS would be released, we see a remarkable target share price of $1.23, for a profit of 273% in May 2014, shortly after the mining permit would be granted.
Astur Gold, Drilling at Salave project
Astur Gold is a junior mining company which is in the difficult process of developing its 100% owned flagship Salave Gold Project in Asturias (northern Spain). Salave is one of the largest undeveloped gold deposits (2M oz gold) in Western Europe at a relatively high average grade (3.1g/t). The main issue of this project is the long awaited granting of the full mining permit by the government of Asturias, and the company is devoted to doing things right.
Location Salave project; overview current mining plan
The company is currently conducting a Feasibility Study (FS) on Salave based upon underground-only mining via open stope mining methods, bulk backfill with development muck and paste fill, and processing via conventional flotation to produce a gold-rich concentrate for shipment to an independent smelter. The FS is planned to be released in April 2014.
The management of Astur Gold is very seasoned with a lot of experience in mining (senior execs of Osisko, Entree Gold, Mercator, Silvermex), financing and environmental issues.
The company released its Preliminary Economic Assessment (PEA) on Salave on February 12, 2011. The applied price of gold ($1100/oz) was very conservative at that time, and it is still conservative today. The numbers were impressive on all scenarios, ranging from 5%NPV of $357M to $553M, and IRR from 30.0% to 47.7%.
Astur's treasury is estimated to contain approximately $2M, and the company currently has an estimated total of $6M LT debt as I expect it to have drawn approximately half of a $10M loan facility with RMB Resources.
As of February 7, 2014, Astur Gold has a share price of $0.33 and a market cap of $12.1M, with 36.77M shares outstanding:
Share price over 2-year period
The number of outstanding shares means a very tight share structure, which is obviously very good for existing shareholders, and in combination with a free float of about 45-50%, catalysts could cause a lot of price action. It is a testament to a conscious strategy and very disciplined spending by Astur Gold's management, and the ability to arrange a debt facility which is difficult for small juniors like this, especially nowadays.
4. Astur Gold Projects
A. The Salave Project
Astur Gold is developing its 100% owned Salave Gold Project in Asturias (northern Spain) comprising 3198 hectares. Salave is one of the largest undeveloped gold deposits in Western Europe with a NI 43-101 compliant mineral resource estimate containing 1,683,000 oz of gold in the Measured & Indicated category (2,155,000 tonnes grading 3.88 g/t Au Measured and 15,790,000 tonnes grading 2.79 g/t Au Indicated) with an additional 338,000 oz of gold in the Inferred category (3,770,000 tonnes grading 2.8 g/t Au). Drilling to date totals 67,508m in 440 holes (245 diamond drill holes) and metallurgical tests indicate gold recoveries over 90% are possible.
The region boasts excellent infrastructure and industrial skilled labor due to a long history of mining that will help support future mine development. Access to power, water, and roads is available on site.
Geological map Salave project
Astur Gold considered several different scenarios in its 2011 PEA and focused initially on an open pit mine. Through local limitations on open pit mining and considerable environmental opposition against this and conventional leaching methods which would need cyanide and/or arsenic, the company switched after several rounds of EIA consultations in favor of a fully underground operation and chose to use a simple flotation method to produce the gold concentrate, which in turn would be treated elsewhere into gold bars.
Salave: 2011 PEA mining plan
PEA Vertical section Salave deposit, including former open pit outline
Salave, PEA underground mining plan, ramps and blocks
Underground resource estimate
The underground resource estimate for the Salave project is listed below at a nominal cut-off grade of 2.0g/t. The resource cut-off grade of 2.0 g/t Au was chosen to capture mineralization that is potentially amenable to underground mining, sulfide concentration, and gold recovery using off-site processing:
Resource estimate Salave project; February 6, 2014
By using a higher cut-off grade of 2g/t the resource got quite a bit smaller (almost half the resource at a cut-off of 0.7g/t), but this was needed to optimize the mining plan to suit environmental considerations. For example, the plan focuses on higher grade underground ore now as open pit operation is no longer allowed. Furthermore, the management is targeting the highest-grade blocks first in a very detailed FS mine development plan to increase profitability.
B. Other projects
Astur Gold possesses two other properties, La Codosera in Spain, and Mokrsko in the Czech Republic. Both projects don't have a resource estimate, but both have seen detailed exploration including drilling and underground workings. Codosera is a large, but low grade (1-1.5g/t) project, and therefore the company is currently selling Codosera.
Mokrsko just received a no go regarding permitting, as the new government doesn't want to permit gold mining at all. Mokrsko has a historic estimate, obtained by Barrick, Placer and others in the nineties of about 2M oz @1,8g/t and 4.2M oz at a slightly lower grade. The best drill hole encountered was 300m @ 3.5g/t from the surface, and the project is considered to have lots of upside potential. The host rock is all mineralized and the surface needs only a very limited amount of stripping. Astur Gold has intentions to hold on to this property, and is shelving the project until a government comes into office which will permit gold mining in the Czech Republic.
Czech Republic; Mokrsko project
5. Permitting issues
The high grade Salave deposit, located in the province of Asturias, has a long history of mining companies trying to get the project permitted for mining. The last company trying in vain was Rio Narcea Mining (2005). Before the financial crisis struck in Spain, mining projects met a lot of resistance in Asturias; existing coal mines had to deal frequently with strikes and there were a lot of issues with tailings and spills. Lundin Mining (who acquired Rio Narcea in 2006) sold the project to Astur Gold during the financial crisis of 2009. This company came to Spain with the strategy in mind that people would recognize the importance of jobs again amidst the crisis. That, in turn, would probably soften sentiments regarding mining in politics and among inhabitants, and allow the company to look for the highest possible grade for best returns, and with a Canadian style environmental and community approach.
As is usual in mining, the mining company goes first for the most profitable scenario, to see if it can maximize returns. When governments, regulations, environmental advisors, local stakeholders, etc., don't approve it for whatever reason, other scenarios are designed to meet all criteria, and sometimes new criteria along the way. In case of Salave, Astur Gold started with an open pit scenario with conventional processing (milling, CIL). This wasn't really appreciated, and after this six different scenarios were described in their PEA, ranging from open pit to underground to combination, all with two different ways of recovering (POX and BOX, pressurized or biological oxidation). The tailings area had become considerably smaller, the processing plant had been located away from the mine as well.
In the meantime, the company approached the local community which had to deal with the mining project, the small village of Tapia (3900 inhabitants). After some time, Astur Gold had about 80% support of the Tapia inhabitants, and most politicians, as local coal mines were shutting down (the latest is scheduled to close this year) and unemployment rates kept rising. As of now, local support from the region is growing (now about 70%) and the company received about 11,000 resumes from inhabitants of this region, desperately looking for work. The Salave project will provide for 800 jobs during construction, and 250 jobs during commercial production, and the corporate taxes would double the income of Tapia. Local people are supporting the project, but a few persons united in a very small movement opposing all mining projects called APT (Alternative for Tapia) and led by the former mayor of Tapia, are aggressively protesting against any plan Astur Gold presents, or permit filed. The APT doesn't seem to have much impact as local support is emphatic, but a little NGO which files complaints to every industrial project in Asturias has been problematic.
As the Environmental Impact Assessment was filed for review, it turned out the NGO had a lot of complaints, which the government took very seriously. This resulted in just a partial approval of the mining permit (the underground mine including underground crushing plant, concrete plant, waste dumps, surface stockpiles, 2.7 km decline, etc., was approved, but unfortunately not the mill and tailings facility), so Astur Gold couldn't start with construction, and started changing plans. The mine plan became an underground operation, the ore wouldn't go through a full recovery process but just milling and flotation, and a concentrate would be shipped to outside smelters. The use of reagents like cyanide would be avoided, and any waste would be as clear as purified water. The tailings area became smaller again as the tailings would be dry, and most tailings would be processed by cut and fill methods. This new approach should also satisfy the other important institution regarding water management, the CHC, as the tailings will be dry stacked, and can't present a threat for water pollution anymore. When the NGO and the CHC both approve this latest EIA, it will be most likely the government will approve the mining permit as well.
Tapia; protest in favor of Salave project
6. Astur Gold's Preliminary Economic Assessment
The company released its very positive Preliminary Economic Assessment (PEA) on the Salave project on February 12, 2011. The PEA had to be amended recently as for example certain risks and descriptions regarding resources, tax structure and economic viability weren't addressed adequately. The study is based upon six different pre-tax scenarios:
OP stands for open pit, UG for underground, POX for pressure oxidation and BOX for biological oxidation. As Astur Gold is currently defining an underground scenario, corresponding PEA resource estimates generated:
As mentioned before, these figures are impressive, but as the mining plan experienced structural changes in order to be compliant with environmental demands, calculations will generate different results.
7. Calculations on Hypothetical Feasibility Study
Next up I will try to simulate the upcoming FS in order to be able to calculate future Net Present Values (NPV) and Internal Rate of Return (IRR). For this, I start with digging into the resource estimate, and construct a number of assumptions after interpreting the latest information.
The latest update on the NI43-101 provided for a smaller resource base at a slightly higher grade, at a cut-off grade of 2.0g/t:
Measured and Indicated resources: 0.944M oz Au @4.51g/t
Inferred resources: 0.106M oz Au @ 3.05g/t
The management has intentions to target higher grade zones first in the first years. Therefore the resources used for further calculation in this period are, at a cut-off grade of at least 5.0g/t:
Measured and Indicated resources: 0.454M oz Au @9.8g/t
Inferred resources: zero (including the 0.015M oz Au @ 6.89g/t isn't making a big difference for my calculations)
Remaining Measured and Indicated resources: 0.490M oz Au @2.33g/t
Remaining Inferred resources: 0.106M oz Au @ 3.05g/t
To understand what the company has to accomplish in order to be able to start with this higher grade part in the first years, let's have a look at some 3D renderings. The first one is a visualization of the deposit, note that the targeted higher grade zones are colored from yellow to purple (cut-off grade higher than 5.0g/t):
It will be clear the company has to design a complex and precise mining plan in order to extract this higher grade ore effectively, and by focusing on the higher grade ore in the beginning, will have higher sustaining capital in the first years as it has to develop most ramps and vent raises in this period. This is a rendering of the current design:
As the deposit doesn't extend very deep or steep, shafts aren't necessary and ramps will provide efficient access. I have made a number of assumptions in order to simulate the hypothetical FS:
1. I use 90% of resources eligible for extraction, and I am aiming at appr. 100,000 oz gold per annum in the first years for average production. Higher grade will be extracted first in order to maximize IRR.
2. The ore will not be processed as usual, but only by flotation, producing a concentrate. I assume an average grade for the concentrate of 150g/t for the higher grade resources, and 80g/t for the low grade resources. Concentration works better at low grade, for example 1 g/t can be concentrated to 35-50g/t.
3. Recovery from flotation only is estimated at 90%. This results in resources x 0.9 x 0.9 = M&I 0.36M oz high grade (9.8g/t) and M&I 0.396M oz + Inf. 0.085M oz low grade (2.33/3.05g/t). When modeling it was necessary not to have such a distinct difference between high and low grade, so I started with 8g/t, and ended with 3g/t.
4. The processing cost per ton concentrated ore is estimated at $300/ton, transportation costs to an overseas smelter are estimated at $100/ton including trucking the ore to the seaport of Avilles, 90km away from the Salave project. This results in $400/ton or $83/oz for the higher grade resources and $156/oz for the lower grade resources.
5. There is a complex royalty in place which belongs to Pat Sheridan, who is a major shareholder, and receives $5m when all permits are obtained, $5m on commencing production, $5m @ 200,000 oz gold produced, $5m @ 400,000 oz, $5m @ 800,0000 oz. After this a 5% royalty commences at 800,000 oz that can be brought down to 2.5% for $5m.
6. Mining cash cost without processing is estimated at a minimum of $400/oz for 8g/t grade ore, up to a maximum of $500 for 3g/t grade ore, depending on the average grade. The C1 cash cost including processing costs is min. $483/oz up to max. $656/oz, including G&A, royalty and sustaining capital results in an all in sustaining cost (AISC) of min. $624/oz up to max. $980/oz. The high end AISC is caused by the mine not operating at full capacity with maximum throughput in the last years, but still having to deal with more or less the same fixed costs for mill, plant, sustaining capital. A contractor could provide added flexibility in staff, mining fleet etc. Related to the PEA, usually more sustaining capital is needed for an underground operation compared to the former open pit scenario, but this increase will be offset in part as reagents, labor, operating consumables and especially power are excluded or lowered.
7. Initial capex including contingency was estimated in the PEA for underground scenarios at $152-174M. As this was February 2011, prices went up for two years with appr. 5-10% per annum, stayed at the same level for some time in 2013 and are coming down again. As the company had to exclude almost its entire processing plant from its mining plan, the reduction in capex is appr. $70M. A backfill plant is added in the new plans to process tailings, and is estimated at $6M. Possible underground location of mill and flotation to reduce noise and dust generates extra estimated costs of $14M. A large contingency of 30% was calculated back in 2011 because of the rising construction costs. As these costs are rapidly decreasing, I feel comfortable with a contingency of 20%. Total capex is estimated at $90M including a much smaller and cheaper tailings facility for dry stack tailings.
8. The life of mine (LOM) is estimated at 9 years, resulting in a base case scenario with a total gold production of 790,000 oz gold, which in turn just wouldn't commence the 5% royalty.
9. The resulting necessary maximum throughput per day is derived at 2000 tpd.
10. Two different discounts are applied, 6% and 8% for two different risk scenarios.
These figures for capex and cash cost result in the next NPV calculation for a FS variant base case scenario of a gold price of $1100/oz and a discount of 6%:
A decent after tax 6%NPV of $117M is achieved. This also results in an after tax IRR of 33%:
For a discount of 8% we get the following results:
The after tax 8%NPV results in $108M.
The sensitivity to a different gold price is calculated as well:
The Salave project appears to be very robust; even a gold price of $900/oz results in a positive after tax NPV. The conservative base case scenario generates an after tax IRR of 33% at a gold price of $1100, which is very healthy. Depending on the price of gold in the future the company could decide to explore further, and possibly build their own custom processing plant in an area free of permitting issues, funded by positive cash flow, for example in mining friendly Portugal. Astur Gold would have to pay in the current scenarios an estimated $83-156/oz for processing costs which results in a total of $66M-$123M for 790,000 oz gold. As a processing plant is estimated at $70M, a breakeven point can be calculated with the then present reserves and resources (R&R) and average grades. The present hypothetical FS base case is based on maximizing IRR and lowering capex financing risks, therefore causing a rise in opex after some years. When the company succeeds in building its own processing plant elsewhere, and expanding their resources, their case becomes even better.
Target share price
I will use a sum of parts valuation based on the NPV/marketcap ratio combined with the value of other assets.
Nowadays, for a developer such as Astur Gold with one of the highest grade gold deposits in Europe, which could be derisked in April (FS) but even more so in May, an 8%NPV of $108M is very conservatively multiplied with 0.25 in order to derive a hypothetical market cap for April 2014 after the FS is published. Normally a FS NPV is multiplied with 0.6-0.75, but since the EIA is a large risk in this case, I estimate the NPV multiplier much lower, roughly multiplied with the estimated chance of the EIA to be fully approved (40%, see paragraph 9).
This generates a potential market cap based on the base case scenario of 9 years and a price of gold @ $1100/oz of $108M x 0.25 = $27M. Based on 36.77M outstanding shares a target share price of $0.73 could be representative, just for the Salave asset.
The company has $2M in cash and $6M in debt, I expect the company to draw another $4M cash until the FS comes out. This results in a partial target share price without discount of $-8M / 36.77M = -$0.22.
The other properties don't represent much value as the Codosera project doesn't have great drill results and is low grade, and the Czech Mokrsko project can't be explored or developed because a new government which is against mining, came in charge very recently. A reasonable value for these properties seems $1M, or a partial target share price of $1M/36.77M = $0.03.
This will result in a possible target share price of $0.54 shortly after April 2014, based on the FS scenario with a gold price of $1100/oz and 36.77M shares. Based on the current (2/7/2014) share price of $0.33 this will generate a profit of 64%.
The Astur Gold story will become rather explosive when the FS is solid, and the EIA is approved by the government of Asturias, resulting in a full mining permit. As the Salave project is already considerably derisked by the FS, the 8%NPV of $108M can be multiplied now very conservatively with 0.5, for a potential share price of $108 x 0.5 = $54M / 36.77M = $1.47. Usually, a NPV of a project in FS stage can be multiplied with 0.6-0.75 as mentioned, but as Spain isn't Canada I prefer to be conservative.
Taking into account a bit less cash, bit more debt and the other properties, I arrive at a target share price shortly after an eventual granting of a full mining permit in May 2014 of $1.23 for a profit of 273%.
Drilling at Salave
9. Catalysts & Risks
There are several catalysts for the Astur Gold share price. The first one is probably the Feasibility Study (FS), as I expect the necessary adjustments made by the management to work out positively, especially the much lower capex will increase profitability considerably in my view. This FS is planned to be released in April 2014.
The next and by far most important catalyst is the final verdict of the government of Asturias on the Environmental Impact Assessment. If this verdict is positive and a full mining permit could be granted, it will be clear Astur Gold will gain a lot in value, as the project all of a sudden becomes highly derisked and ready for financing and construction.
The final verdict is expected in May 2014 or even sooner as the official period is 60-90 days since February 6, 2014, but since government decisions usually take a lot of time, especially considering complex and sensitive cases like this one, May seems appropriate.
There are two big risks in my opinion. First of all obviously the verdict on the EIA, which could follow different scenarios:
- the verdict is very negative; for example the new design has no chance to be approved whatsoever, or new criteria are added. I expect the share price to lose quite a bit of value, maybe as much as half of it in one trading session. An estimated chance of 30%
- the verdict is neutral, for example the EIA is approved except the government wants more information on trivial issues (not the kind of issues like the mill and tailings facilities but less important) which could be handled soon by the company and government. I expect the share price to range sideways to maybe even a slight uptick. An estimated chance of 30%
- the verdict is positive meaning the EIA is approved in full, and a full mining permit is granted. I expect the share price to go north aggressively, as happened the last time the company released an almost complete approval of the EIA, when the share price almost doubled that day. Shares would then come down soon afterwards when investors realized essential parts of the mining permit weren't approved yet. So to every interested investor in Astur Gold: when a news release comes concerning the EIA, read very carefully. An estimated chance of 40%
An interesting follow up detail is the recent law change in Spain: when anybody wants to appeal but loses, they have to pay the other party's legal fees. This will most likely prohibit the likes of APT or other individuals to appeal an eventual granted mining permit, and it shows already as the number of likewise lawsuits has decreased considerably in Spain. Besides this, when anybody or organisation wants to halt a mining project after the mining permit is granted, this party has to pay a 15-20% part of the capex to the mining company.
The second risk is the upcoming necessary conversion of resources into reserves, needed for the FS. Management told me they used very tight drill spacing, more than enough to move M&I resources to P&P reserves very easy. The incoming assay results are still coming in so all figures aren't complete yet, therefore the management chose not to upgrade resources in the last NI43-101. Should this eventually lead to delays, the effects of a postponed FS don't seem likely to have much of an impact on the share price, as these kind of things happen regularly in mining.
The upcoming FS could disappoint the investment community; however when analyzing all adjustments the management has in mind for the mining plan, it appears the Salave project is based on strong fundamentals. A limited risk for this project is the gold price. When it sinks to, for example the $1050/oz price projected by Goldman, the Salave project loses much of its profitability, but should remain viable as the fundamentals are very solid. I estimate the after tax IRR in this case still at a solid 27%, with a NPV of about $82M.
I expect the price of gold to range between $1100-$1400/oz from now on for most of 2014, as I don't see the stimulus coming to a complete end under Yellen, nor inflation setting in this year, nor other material events happening that could seriously impact the price of gold. Most big banks are negative on the price of gold, but this doesn't have to be the overall consensus as the Asian physical gold market is developing, and is not under control of Western Hemisphere banks and institutions.
The company is fast-tracking towards the release of a Feasibility Study, skipping obviously the Pre Feasibility Study phase as the management is convinced of the potential. The FS will probably show a state of the art mining plan, with a lot of attention for environmental issues, and probably will zoom in further on the higher grade portion of the Salave deposit. For a conservative base case scenario with a gold price of $1100/oz I have estimated an upside potential of at least 64% for a conservative target share price of $0.54 shortly after a positive FS would come out in April 2014.
A lot of eyes from the mining community are directed towards the final verdict on the EIA in May 2014, as this will have a large impact on their case and subsequent value. My expectation is the share price will experience a remarkable lift-off would the permit be granted. For a conservative base case scenario with a gold price of $1100/oz I have estimated an upside potential of at least 273% for a conservative target share price of $1.23 shortly after a full mining permit would be granted in May 2014. Therefore, a small position could be justified in my view in this high risk/high reward junior developer, but only if you can afford it. As always, do your own due diligence, and maybe the long wait could be over, so 2014 could finally turn out to be an excellent year for Astur Gold and its investors.