In business schools, students are taught about the growth a startup company should expect as it executes its business plan. The same sort of growth can be expected for a mining company. The typical growth in a miner can be illustrated by this chart, which was further clarified in a previous article.
This article focuses in upon Great Basin Gold (NYSEMKT:GBG), a miner with two mines, Hollister in Nevada and Burnstone in South Africa, coming into full production. If you readers follow me, you will recall that this was one of my favorite stocks, since I have written so much about this company. (Previous articles can be accessed both on Seeking Alpha and my blog, Goombarh's Edge.)
GBG Production Start-Up and Stock Price Falters
Great Basin Gold in August 2010 was at about point number 7 in the above graph, during the production start-up phase of its South African nameplate Burnstone mine. A chart following shows the price action of GBG since that time follows:
GBG's stock price rose with anticipation with the start-up of the Burnstone mine as the scheduled mining activities were executed, such as the land-line power connection and the mill break-in. Unknown to everyone was a geological fault lurking that would serve to delay the mining plan at Burnstone. GBG gave disappointing production results at the beginning of 2011, and the share price began to falter.
The first glimpse that the investing public had of what was happening at Burnstone was given in the 2011 second quarter report's Management Discussion during the summer of 2011. Here is the crucial except from that release:
South African Operations
Operational efficiencies at Burnstone improved significantly, with mechanized ore development increasing by 33% quarter on quarter to 1,550 meters in addition to 1,872 meters of waste development completed during the quarter. The increase in ore development allowed for an increase of 36% in the square meters stoped quarter on quarter.
Despite the relatively close drill spacing in the current mining area, the exact position and orientation of geological faults could not be identified earlier, as most of these are of a graben nature. Additional infill and delineation drilling, as well as extensive mapping and interpretation of the structural information from the over 10 kilometers of underground development, now provides management with more detailed data to incorporate these faulting into the mine plan. An additional 66% waste development was completed during the 6 months ended June 30, 2011 in response to the geological faulting encountered compared with the original planned meters.
To paraphrase the above discussion, GBG is reporting that the block of their deposit that they were intending to mine was displaced with a geological fault. GBG had to go back to perform some extensive delineation and infill drilling to find out where next to mine the Kimberley Reef, as the part that they intended to mine of the old riverbed, simply was not there. The displacement of the B2 block is shown in the GBG diagram following:
Then there was further delay to build the passages and pathways to mine the next block area. This geology faulting delayed the ramp-up process to production of Burnstone by one year.
Burnstone Reserves and Resources
In the process of recovery from the bad card that the geologic gods had dealt GBG, it has increased its gold reserves and resources significantly with its drilling. From GBG's October 13, 2011 press release, GBG now has a total Measured and Indicated Resources of approximately 12.6 million ounces of gold, and Inferred Resources of approximately 10.1 million ounces of gold at the Burnstone mine. A plan view of the Burnstone resources is following:
To backstop the company, while the production was delayed, GBG have executed a $150 million USD credit facility.
GBG's Hollister is a Bonanza Mine
Meanwhile, at GBG's Nevada Hollister mine, this high grade underground mine has been keeping the company going with ongoing production with trial mining. This was reported on October 24, 2011 in this following excerpt:
The Nevada operations produced 26,045 Au eqv ounces1 from trial mining activities during the quarter (Q2 2011: 26,757 Au eqv ounces). During the quarter, ore tonnes mined from the Hollister project increased 5% to 26,474 (Q2 2011: 25,297 tonnes) and tonnes processed at the Esmeralda mill increased by 34% from 22,237 to 29,869.
This trial mining is in name only, as effectively Hollister is in full production, outputting about 100,000 ounces of gold-equivalents per year. Further in this news, GBG has set up to mine the blanket zone with a spiral ramp as detailed following:
Primary waste development was again focused on the Blanket Zone ("BZ") spiral ramp, the BZ Alimak raise, and the 5400 BZ I-Drift. During the quarter, the BZ Ramp achieved 1,136 feet (344 meters) of advance; 204 feet (62 meters) of development remained at quarter end to complete the ramp. The 5400 I-drift, which originates from the BZ Alimak raise, was advanced 169 feet (51 meters) to the east during the quarter, with 161 feet (49 meters) remaining to reach the +1 opt Au grade shells modelled from surface and underground drilling for the 3000N 1W area.
The +1 ounces per ton gold grade shells referred to above is an understatement and should be actually very rich. Previously reported on January 19, 2011, the Blanket Zone ore contains an average of 15 gold ounces per ton as detailed following.
At the Hollister Project, initial trial mining in the newly discovered Blanket Zone yielded 500 tons at a grade of 15 Au eqv oz/ton (510 g/t), containing an estimated 7,500 Au eqv oz. A short 15-foot section of the 180-foot length of the high grade stope has been trial mined for 50 feet vertically to establish the vertical extent of the Blanket Zone in this area.
There is a remarkable high of 2560 ounces of gold per ton in this deposit area. The author has written about this GBG's bonanza find here. Further, GBG has found that the block trial mining appears to be an accurate indicator of the gold grades.
GBG's Share Price Now Poised to Move
The slowdown in GBG's Burnstone mine production due to the missing ore block caused GBG's stock price to severely crash. The stock price chart has shown a bottom in December 2011 and is now inching back upwards.
The Burnstone mine is quite viable, but merely delayed. A $150 million loan is in reserve for the company until production cash flows. GBG's Hollister mine is in production and the bonanza grade Blanket Zone will certainly help, as Burnstone will also kick in during 2012.
With the supposition that a company's value grows as the mining production brings in cash flow, GBG's stock price should positively appreciate. Alert investors may be able to profit from this transition of GBG from a development miner into a production miner as the market re-rates this stock.
Disclosure: I am long GBG.
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