Location Curraghinalt Gold project; Northern Ireland
This article was first published on criticalinvestor.eu, a platform for junior mining investors.
Dalradian Resources (OTCPK:DRLDF) experienced some setbacks in the last few months. This was caused by three reasons: initially the gold price consolidating from $1300/oz to $1210/oz, and right before that negative commentary by a renowned mining analyst on continuity of mineralization, and mining dilution, and very recently fears on Brexit fall-out. As I always viewed this project as one of the best worldwide, because of its high grade and top notch economics, management, shareholder base, financials and jurisdiction, and it looks to have bottomed after both events, I was triggered to have a closer look, to determine if this stock could still provide an interesting investment opportunity for other investors.
Dalradian's high grade flagship Curraghinalt gold deposit, part of the Tyrone project, is located in Northern Ireland, Europe, which is next to very mining friendly country Ireland as this last one ranks no less than 1th out of 109 countries/jurisdictions on the latest Fraser Institute Mining Survey 2015 (no data on Northern Ireland available but permitting procedures are as thorough and this country has seen its fair share of mining before too, so I still assume it to be pretty mining friendly, despite the Brexit).
Geographical map; Northern Ireland
The company completed an updated resource estimate on May 5, 2016, and is planning to release a Feasibility Study (FS) at the beginning of Q4, 2016. As a reminder, on October 30, 2014, the company released an updated Preliminary Economic Assessment (PEA) with spectacular economics.
The Dalradian share price suffered lately because of negative market commentary on continuity of mineralization, mining dilution and politics, and in my opinion not all three subjects of concern are sufficiently legit for this, as I will try to explain in this article.
The company has a US ticker (DRLDF.US) and a London listing (DALR.LON), but is trading in larger volumes (30 day average volume of 650k) on its mainboard the TSX, so I would recommend trading by its Canadian listing DNA.TO.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
Dalradian Resources is a gold development and exploration company which is developing its 100% owned flagship Curraghinalt gold deposit in Northern Ireland. This project contains one of the largest and highest grade undeveloped gold deposits (4.4M oz gold at about 9.2g/t gold on average) in Europe:
Location Curraghinalt gold deposit
The company is currently working on its Feasibility Study (FS), which it plans to complete later this year. This study will hopefully be a worthy successor of its updated Preliminary Economic Assessment (PEA), released on October 30, 2014. The numbers were already very convincing back then, and still are, generating for example an after-tax NPV8 of $504M and an after-tax IRR of 36.2%, based on a price of gold of $1200/oz (today's price of gold is $1320/oz).
The all-star management of Dalradian Resources is a rare collection of talent that you would normally expect at a much larger company, and consists in part of the team that founded, developed and sold Aurelian Resources to Kinross (CEO Patrick Anderson, CFO Keith McKay (also former CFO of Continental, Andina) and directors Thomas Obradovich (also CEO Barkerville Gold) and Jonathan Rubinstein). The list goes on with senior execs like COO Eric Tremblay (former general manager of the Canadian Malartic mine) and directors like Sean Roosen (founder and CEO of Osisko Gold Royalties, Osisko Mining), Roland Gagel (CFO TMAC) and Hall of Famer Grenville Thomas, who discovered the Diavik diamond mine, and was the founder and former Chairman, President and director of Aber Resources (now Dominion Diamond). After the high grade jungle adventure in risky Ecuador, Anderson and friends must have decided Northern Ireland was a better place to work.
Dalradian's treasury is estimated to contain approximately C$31M, and no debt. The company managed to raise C$40M in a bought deal financing in October last year at a premium to market prices, by a powerful syndicate of underwriters led by Cormark Securities, including the likes of BMO, Dundee, Canaccord and RBC, testament to the fund raising capabilities of this company.
As of June 30, 2016, Dalradian Resources has a share price of C$0.98 and a market cap of C$212.66M, with 217M shares outstanding (299M fully diluted):
Click to enlargeShare price over 1 year period
Dalradian Resources has 2.9% insider holdings, and several large institutional shareholders like Rosseau Asset Management, Sprott, Toqueville, RBC, Front Street Capital and Front Street Investment Management. The free float is about 50%, which is always a good sign for institutional/large shareholder conviction in the company and its project, as they always do very extensive due diligence and are usually long time shareholders. The company is followed by 10 analysts, so coverage is excellent.
Dalradian Resources is developing its 100% owned Northern Ireland project in County Tyrone and County Londonderry, Northern Ireland, comprising 84,000 hectares. The project was formerly owned by Tournigan Energy, which decided to focus solely on uranium at the time, and sold the property in 2009 to SA Resources, the predecessor of Dalradian Resources. The project has excellent infrastructure, power and labour nearby.
The flagship Curraghinalt gold deposit, part of this project, is one of the largest undeveloped gold deposits in Western Europe, and is a high grade orogenic gold deposit, characterized by a series of west-northwest trending, moderately to steeply dipping, stacked quartz-carbonate-sulphide veins, and arrays of narrow and short extension veinlets. In short it's an underground, hard rock vein type deposit, which often guarantees a complex geology which deserves more attention during resource definition and designing a mine plan.
The company believes the current deposit is part of a mineralized trend which is 12 kilometers long, indicated by several gold anomalies, samples and step out drill holes on trend:
Curraghinalt deposit outline
A NI 43-101 compliant mineral resource estimate made by top notch firm SRK (although their work on Rubicon's Phoenix project wasn't convincing) was published on containing 2.09M oz gold @11.61g/t in the Measured & Indicated category and 2.3M oz gold @7.13g/t in the Inferred category. The resource estimate has developed itself like this over the years:
The grade sensitivity analysis of the 2016 NI43-101 shows a remarkably consistent high grade tonnage:
Even at a 9 or 10g/t cut-off a very interesting project could be possible, depending on the locations of the higher grade vein parts of course. If high grading the deposit results in small pieces of veins scattered all over the deposit, it will be hard to mine them efficiently. Therefore I will stick to the 5g/t cut-off as I assume Dalradian has looked into this as well, and picked the highest possible cut-off grade.
On first sight, it looks like there is nothing wrong with the 2016 NI43-101, the grade holds up, the M&I ounces increase nicely. There isn't actually much wrong after all, but preferably the resource should have been larger by now, as I will explain below.
The continuity issue
The 2014 PEA was based on a total life of mine production of 2.9M oz gold, including mostly Inferred resources. As Dalradian is skipping the Pre Feasibility Study (PFS) and is fast-tracking towards a Feasibility Study (FS), which is due in Q4, 2016 as mentioned, the 2016 Measured and Indicated (M&I) ounces are simply it, as the company completed its infill drill programs for 2016. For a FS, resources need to be converted into reserves, and only Measured and Indicated (= economic) resources are eligible for this, and Inferred (= non economic) resources are not.
As a consequence, Dalradian can only use an undiluted 2.09M oz gold M&I in order to convert them into reserves for the FS, which in turn will have an impact on economics, especially on the life of mine (LOM) and Net Present Value (NPV). However, this is not to say that the Inferred potential can't be infill drilled underground and therefore cheaper, during production, and because of this possibly prolonging LOM significantly. This will be discussed later on.
A renowned newsletter writer analyzed the infill drill results, and discovered that a significant number of assays weren't reported, because they were not economic. Therefore he feared that the upcoming updated resource could disappoint, wouldn't contain enough ounces to justify much more upside potential, and recommended a selling advise. He was spot on with regard to a disappointing number of M&I resources, but I do think the current resource could still provide a very profitable project, which I will explain later on.
Drilling to date totals 131,643m (586 drill holes) and metallurgical tests indicate gold recoveries of even over 99% are possible, which is extremely high. In the updated 2014 PEA a conservative 92% recovery was used, but management choose not to show all cards yet, studying on integrating the metallurgical testresults into the upcoming FS.
This is depending on the complete understanding of the complex geology of the deposit, once this has been solved I expect higher recovery (in the range of 95%) and as a result probably even better economics.
Because of the results of a lot of samples, step out drilling and historical data, the company believes there is large upside exploration potential. The veins can be interpreted as long and very thin lenses, some of them going on for miles:
Curraghinalt gold deposit: Cross-section B-B'
According to management, the known complex structure of gold bearing quartz-carbonate veins could very well be open at depth and on strike, indicating upside potential. The vein swarm has been traced along strike for approximately 1,950 meters, across strike for approximately 800 meters and down dip for over 1,000 meters by prospecting, trenching, and drilling. Sixteen modeled veins (main veins or D-veins) are included in the current resource estimate. The deposit is very complex, as it contains a lot of faults as well, actually 3 different types of faults (blue and green):
Quite a bit of drilling has been performed in order to define the deposit:
Location drillholes Curraghinalt gold deposit
Dalradian Resources focuses on an underground mine, to limit environmental impact and risks as much as possible. This is of course a wise decision in terms of risk management, but it must have been a difficult decision as the deposit extends to surface in such a way that a more profitable starter pit plus underground operation could have been possible. According to management, the best way to mine this vein type deposit, is to use long hole stoping, combined with transverse long hole stoping with some cut and fill.
The dilution issue
As the veins are very thin (on average less than one meter average thickness), there is some doubt among respected analysts/newsletter writers if the deposit can be mined effectively.
An average of just 0.73m is indeed pretty thin, although the true thickness of the veins can vary between 0 and 4m. The resource block model used by SRK uses 0.5-metre composites to account for those narrow veins. Other 3D renderings by SRK look like this:
Curraghinalt; modeled quartz veins
An analyst stated with regard to Dalradian, that you would need at least 2m wide veins to mine commercially, as mining equipment needs at least 2m to maneuver, so the average grade for Curraghinalt would effectively be halved or even worse. This isn't always the case fortunately. As I already described in an article about Continental Gold, Primero shows at the San Dimas mine that veins can be successfully mined commercially at a minimum width of only 0.8 m.
For interested readers here is the information about this mining method again, taken from the San Dimas technical report which can be found on SEDAR:
"16.3.3 Mining Methods & Stope Design
The predominant mining methods at San Dimas are mechanized cut-and-fill and longhole mining. Longhole mining was introduced in 2012 and is becoming increasingly important.
Cut-and-fill mining is carried out using drill jumbos or jacklegs and load-haul-dump machines. Minimum mining widths of 2.5 m and 0.8 m for jumbo and jackleg mining respectively may be attainable.
Left to right: load-haul-dump machine, drill jumbo, jackleg (CI, images by Google)
For reserve estimation, Primero has used respective values of 3.0 m and 1.0 m as these are more representative of current mining practices. Waste rock is used as fill material and provides both wall support and a working base from which to take subsequent cuts after the initial sill cut ( CI: sill cut is a horizontal cut which creates the first working floor, it basically is the first tunnel in a block (3D volume that needs to be mined out)).
Figure 16.6 is a representative long-section schematic showing the cut pattern followed after establishing accesses such as those depicted in Figure 16.4 above. Typically, an initial 3.5 m-high sill cut is taken followed by a second 3.0 m cut. Waste rock is then used to fill the void to about 1.0 m from the back so as to form the working floor for the next cut. The next 3.0 m cut is then breasted down on top of the fill. When this ore is mucked out (CI: removed), filling occurs again to within about 1.0 m of the back. The process is repeated until within about 4.0 m of the next sill cut. Sills beneath waste fill are mined using uppers. The general mining recovery factor is about 95%, and that for sill mining is about 75%.
Figure 16.4 Cut-and-Fill Long Section Schematic
Figure 16.5 is a photograph showing a typical stope cut with a paint-line marked on the footwall. This indicates the depth to which the stope is to be filled and also serves as a reference line to prevent over-dig in subsequent mucking.
Figure 16.5 Cut-and-Fill Stope Cut
Longhole mining consists of drilling production holes in the pillar between two mineralized drifts. A minimum mining width of 1.0m is envisaged for the method. A drop raise or an inverse raise is drilled and blasted at the extremity of the mining block. The length of the block is determined relative to the geotechnical condition of the exposed walls. Stopes can be mined either with up-holes or down-holes, with respective maximum heights of 12 m and 15 m. The longhole mining method offers increased productivity, lower unit operating costs, and reduced waste dilution in veins of consistent geometry.
Figure 16.6 Longhole Uphole Stope Section
A typical section of an uphole longhole stope is shown in Figure 16.6. Twelve metre long upholes are drilled from the lower drift. In this example, the blast holes are stopped 4 m from breakthrough into the upper drift to maintain a sill pillar. Where possible, holes are drilled along the contact of the vein and typical overbeak on the hangingwall and footwall is approximately 0.3 m. San Dimas has regularly mined veins less than 1m in width with success using this method. However, for reserve estimation, a minimum mining width of 1.5 m was used, plus 0.3 m overbeak on each wall. This was done to account for irregularity of the vein over the height of the stope. A stope optimization exercise was conducted on several veins using the "Mineable Stope Optimizer" module of CAE Studio 3 software. Using a minimum mining width of 1 m, overall tonnes and grades matched the reserves estimates within 5%."
So far this introduction to narrow vein mining. In analyzing junior mining stocks, you often have very little information to rely on, so any added insight could help.
Dalradian will probably use a minimum mining width of 1m, and maybe even 0.8m, to account for the average vein width of 0.73m. What this will mean is that every vein width below 0.8m will see dilution with waste. This applies to the majority of veins:
At a mining width of 1m, there appear to be at least load-haul-dump units (LHD's) available with a capacity of 1500lbs and a width of 0.86m. I'm not sure if Primero mined 0.8m veins on a large scale, and have no idea if Dalradian is planning to mine at 0.8m or wider. Looking at the mine feed in the 2014 PEA of 9.3g/t vs. the average 2014 NI43-101 M&I+Inf grade of ca. 10g/t, which would hardly mean 10% dilution, Dalradian apparently must have had some sort of mining method in mind with very little dilution. This seems to be the case again when they announced the updated 2016 NI43-101, as they presented an indicative resource, adjusted for diluted quantities and a minimum vein thickness of 1m:
This means the undiluted grade goes from 11.61 g/t to 10.4 g/t, and when extrapolating the PEA, this could imply a mill feed grade of about 9.2-9.4g/t. I am inclined to be a bit more conservative. At an average resource grade of 11.61g/t for M&I resources, 35% average dilution would bring the average mining width to 1m as well, but this results in a mill feed grade of 8.6g/t in my book, and I will use this number for my estimates on a hypothetical 2016 FS in paragraph 5.
4. The Brexit issue
Besides resource issues, a political issue came up very recently and unexpectedly. The outcome on the British referendum on June 23, 2016, a 52-48% vote for leaving the European Union (EU), seemed pretty unlikely until about halfway the referendum. Polls showed a close race, but no one really expected a "leave" vote, or socalled "Brexit". A Brexit isn't just about control out of Brussels, the United Kingdom will be cut off from all sorts of grants, subsidies, trading benefits, free traveling, but all sorts of relationships between companies and governments in Europe will experience difficulties, too. Large banks like Goldman Sachs and JP Morgan are already indicating they might leave the London City, the second most influential financial centre of the world behind Wall Street. Where those companies could switch to geographically is unclear at the moment, due to infrastructure, language, legislation, salaries, etc.
People like Richard Branson and Ross McEwan, CEO of the Royal Bank of Scotland already warned for a recession as a consequence, and Branson claimed that his Virgin conglomerate already lost 30% of market capitalisation since the referendum, but this might be a bit harsh and even agenda-driven. I believe his Virgin Group is a private venture, so it's probably hard to verify. The stockmarkets recovered already too btw, as I will show below, so his direct losses will be limited in my view for now. The British pound lost 15 cents in a matter of an hour which was no less then 10%, the biggest drop in decades:
Lots of deals involving British investments already have been cancelled or delayed, and as all European stock exchanges lost a lot of value (as a matter of fact all stock exchanges worldwide endured losses estimated at as much as $2T), the Brexit sent shockwaves through the global economy as well. The Bank of England reacted immediately and stated it had $460B ready to support financial and monetary stability, and also the European Central Bank (ECB) made it clear it was on stand-by to provide necessary liquidity if needed, and is in close contact with other central banks. After the biggest shock subsided, it does seem that the London Stock Exchange is recovering:
And this recovery process seems to be widespread if we for example look to the S&P500 chart, neutralizing all Brexit losses today:
The price of gold has risen to new highs for this year, as the Brexit turmoil adds to global insecurity and reinforces gold as a safe haven asset (lots of fund managers are buying into gold assets lately for example, with notable names like Soros and Druckenmiller making headlines):
Could this Brexit be just a blip on the radar? It is too early to say yet, but it does seem to reinforce the case for gold for sure.
When we focus on Northern Ireland, location of the Curraghinalt project and part of the United Kingdom, there are a few things that are important. The country receives a few billion pounds annually in European grants which is a lot for a 50B pound economy, which would evaporate. The majority of voters in Northern Ireland didn't want a Brexit at all, so there are already initiatives being discussed of a referendum about independence of England, just like Scotland which also voted in favor of staying in the EU.
There is also the case of the border between Ireland (still a EU member) and Northern Ireland, which isn't a physical border at the moment, but will need the same border protection/defense like the other outside borders of the European Union, a socalled hard border. There are insiders in the local situation, who are already anticipating a reactivation of all sorts of IRA style violence and terrorism if things like this would happen. I consider this an extreme, as Northern Irish people are very happy with the current peaceful situation, but I can't rule it out either. At the moment a lot of Irish and Northern Irish people are working across this hardly existent border, but this could become much more difficult, with lots of checkpoints, checks, delays when traveling etc.
A lot will depend on how the UK will be able to negotiate trading terms with the EU when leaving it as a member, and how things like Irish borders are being defined, among a host of things. This entire process of leaving the EU is estimated to take two years, and as such it could take two full years before Dalradian gets a clear picture on the Northern Irish situation. This could generate far reaching ramifications. Right now Northern Ireland has low corporate taxes, those might be raised to cover a lack of tax revenues after an economic recession and no support from the EU. When a politically unstable situation could occur, it's likely that the Curraghinalt project will face delays in permitting. On the other hand, with foreign investments possibly fleeing the country soon, an actual foreign investment like Dalradian is aiming at could be beneficiary, as it is helping the local economy.
The bottom line is that the stockmarkets already recovered, the British Pound is still down, but nothing is crystal clear yet, and it will take at least two years before everything is definitive. There could already be lots of signals in the meantime of course, indicating that the situation will develop in a certain direction, therefore increasing/decreasing risks, but at the moment we don't know, and can only monitor the situation closely.
I consider political uncertainty the dominant issue for Dalradian, as project economics probably will not show any weakness when the FS comes out, as I will show in the next paragraph.
5. Hypothetical Feasibility Study
Although the upcoming FS will likely have to deal with a significantly lower number of ounces as mentioned , this doesn't have to be a problem as I will explain. The latest numbers came from the 2014 PEA, and are summarized in this table:
These numbers are already excellent and world class, but a number of things must be adjusted or can be improved as I will discuss below.
To give you an idea about peer economics, The Buritica project of Continental Gold, which is widely considered to be one of the best vein type, undeveloped gold projects globally, solely regarding project economics (as permitting is a different story), has an after-tax IRR of 31.2% @$1200/oz gold.
A number of assumptions have to be made in order to construct the case for a hypothetical Feasibility Study (FS).
- first of all the number of mineable ounces will be reduced significantly as mentioned, as only 2.09Moz Au in theory is mineable. My estimate for total production will be 1.8Moz Au
- the average mill feed grade will be much lower, as I want to account for sufficient dilution. As mentioned earlier, I prefer to use 8.6g/t
- average recovery will be 95% per metallurgic test results
- life of mine is estimated at 11 years
- annual gold production is 1.8M / 11y = 164,000 oz
- throughput is calculated at 1800tpd
- initial capex / tpd is estimated at a conservative $145,000/t, as capex has come down since 2014, and the US Dollar has appreciated a lot versus the British Pound, and my estimate is that at least 35-40% of capex can be denominated in Pounds.
- capex is calculated at 1800 * $145,000 = $261M
- sustaining capital is estimated at $200M as I'm taking into account possible measures to limit effects for the environment/surroundings, extensive reclamation costs etc.
- all-in sustaining costs (AISC) are estimated at $540/oz, to reflect possibly higher cash cost and sustaining costs but also for example lower fuel costs and better exchange rates
These assumptions result in the following table, including the discounted cash flow results for the net present value and internal rate of return (IRR):
My DCF table to generate the after-tax NPV5 looks like this:
And the after-tax IRR calculation looks like this:
An after-tax NPV5 of $472M and IRR of 32.4% @$1200/oz is still world class and indicate a very robust project. A sensitivity analysis implies a current after-tax NPV5 of over $600M and IRR of about 40%:
There can always be discussion whether or not a 5% discount is appropriate, but a 8% discount still generates an after-tax NPV8 of $372M @$1200/oz which is still very decent regarding capex and the current market cap.
Keep in mind that the Inferred resource is still very much present. All it needs is more infill drilling. The company could have done this now, spending a lot of money and time in order to expand M&I and eventually reserves before production, but a much cheaper way is to do this during production, with cheaper underground drill programs when arriving at the right locations after mining and developing underground workings.
To give an indication of possible upside, I modeled an 18 year LOM mineplan with the same annual production and parameters, which resulted in an estimated total production of 2.95M oz gold, an after-tax NPV5 of $777M and IRR of 34% @$1200/oz. As Dalradian had to do about 50,000m of infill drilling to increase M&I resources from 0.99Moz to 2.07Moz, one can imagine the amount of infill drilling (and budget and time) needed to bring M&I to let's say 3.3-3.5Moz.
With gold going up and the share structure still not excessive, it would have been a possibility to raise another C$25-30M earlier this year at a higher share price, put up a 6 rig drill program and drill it all out before year end, it would have added a lot more NPV, I would have liked the trade-off. But the future upside can't be denied, and most likely there is even much more upside as the deposit is open in most directions according to management.
It is very hard to put targets on Dalradian, especially with the current Brexit sentiments, but when looking at the estimated NPV5 of $600M which translates to C$780M (CAD:USD = 1:0.77), and the current market cap of C$212.66M, a market cap / NPV ratio of about 0.27 for a world class FS stage gold project in a good jurisdiction would seem low in my view in Q4 2016 when the FS comes out.
Regardless of the strategy being chosen, Dalradian still seems to be on track to develop a best-in-class gold project in the Western Hemisphere.
The second quarter of 2016 should have been very rewarding for Dalradian as it has been to most other gold developers, with the overall support of a healthy price of gold, but it wasn't. Most of this was caused by a disappointing updated resource estimate, but in my view the Curraghinalt deposit is still top notch in a commercial way, and there are more than enough ounces to remain attractive as an investment.
The other reason holding the stock down at the moment is the unexpected Brexit, of which the fall-out is very uncertain and has to be monitored closely for Northern Ireland. Looking at the speed of recovery of the stockmarkets, accompanied by strong gold sentiment, I'm slightly inclined to believe in a positive outcome although it's early days.
I hope you will find this article interesting and useful, and will have further interest in my upcoming articles on mining. To never miss a thing, please subscribe to my free newsletter on my website criticalinvestor.eu, and follow me on Seekingalpha.com, in order to get an email notice of my new articles soon after they are published.
The author is not a registered investment advisor, currently has a long position in this stock, and holds tradable warrants. All facts are to be checked by the reader. For more information go to dalradianresources.com and read the company's profile and official documents on sedar.com, also for important risk disclosures. This article is provided for information purposes only, and is not intended to be investment advice of any kind, and all readers are encouraged to do their own due diligence, and talk to their own licensed investment advisors prior to making any investment decisions.
Curraghinalt; project area
Disclosure: I am/we are long DRLDF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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