Phoenix Gold (ASX:PXG) could potentially receive a further $17.5 million in cash over two years after Norton Gold Fields (ASX:NGF) exercised its option to enter into a mine and treat ore agreement for Castle Hill Stage 1 project near Kalgoorlie, Western Australia.
With Norton's decision, Castle Hill Stage 1 has the potential to generate three streams of cash flow for Phoenix.
Both companies will now proceed to finalising terms of a formal Licence to Mine and Ore Sale Agreement with mining of the project to commence within three months of execution of the formal agreement.
Upfront capital development of Stage 1 will be funded by Norton, which will conduct mining, haulage, milling and rehabilitation.
Phoenix will receive 50% of the resultant cash surplus once the project becomes cash flow positive.
"We are pleased that our ongoing discussions with Norton have culminated in this agreement to mine and treat ore from Castle Hill Stage 1," managing director Jon Price said.
"The development of Castle Hill Stage 1 with Norton potentially adds a further $17.5 million to cash at bank over two years."
The company is working with Norton on reviewing the feasibility study to ensure optimal results. Mining is expected to commence in the March Quarter 2015.
Phoenix has recently raised A$16.8 million through an entitlement offer and institutional placement, allowing it to fully fund staged development and transition to sustainable gold producer.
In the March Quarter, Phoenix delivered to Norton separate Feasibility Studies on the Mick Adam and Wadi projects that form part of Castle Hill Stage 1.
The project is located 55 kilometres northwest of Kalgoorlie-Boulder on existing roads with minimal on site infrastructure required to service the mine and workforce.
Phoenix and Norton will now proceed to finalising terms of a formal Licence to Mine and Ore Sale Agreement with mining of the project to commence within three months of execution of the formal agreement, subject to mine fleet availability.
In addition, under the terms of agreement:
- All upfront capital development is funded by Norton;
- Mining, haulage , milling and rehabilitation is conducted and funded by Norton; and
- Phoenix receives 50% of the cash surplus of the project.
Discussions have been ongoing with Norton including the formation of a technical working group to draft a formal Licence to Mine and Ore Sale Agreement and agree to key terms and conditions.
Based on the costs and fleet selection information supplied to Norton pursuant to the agreement, and assuming Norton mines both projects as per the designs detailed in the Feasibility Studies, the combined total ore mined is 2.33 million tonnes at 2.03 grams per tonne gold with recovered ounces of 142,800 ounces delivering a cash surplus, to be shared 50:50, of circa A$35 million at A$1,400/oz.
The Definitive Feasibility Study completed in February, led Phoenix to adopt a three pronged staged development approach with prudent capital management that allows the company to retain optionality into the future.
Mining a series of staged open pits with treatment at the Greenfields Mill, working with Norton Gold Fields on the license to mine for the Castle Hill Stage 1 development and unlocking the value of mined lower grade ore using heap leaching technology has the potential to generate three streams of cash flow.
Excluding the Norton projects, staged mine development will commence in H2 2014 and deliver 600,000 - 800,000 tonnes of ore annually for haulage and treatment at FMR Investments' Greenfields processing plant in Coolgardie, which is close to Phoenix's projects.
Mining at Kintore West (Castle Hill Stage 2) is commencing with contractors and milling at Greenfields to start in early October.
Ore will be sourced from shallow smaller scale open cut mines in close proximity to the mill.
This will produce between 40,000 and 50,000 ounces of gold per annum from the December 2014 quarter.
Phoenix had previously noted that mining and milling of its smaller scale projects could deliver a 25-30% operating margin over a 2 year period at $1350/oz gold price.
The company is also acquiring for just $2 million, a heap leach plant in Western Australia from St Ives Gold Mining Company, that allows it to unlock the low grade ore from Castle Hill.
This could produce 25,000 to 30,000 ounces of gold per annum for Capex of $25 million.
Castle Hill has Ore Reserves of over 280,000 ounces of heap leach gold in addition to 878,180 ounces of mill feed ore.
Overall Resources stand at 2.9 million ounces of mill feed ore and 896,000 ounces of heap leach gold.
Current cash reserves and cash flow from operations will fund exploration, purchase and dismantling of the heap leach plant.
Exploration is planned at both the Kundana North project area and Castle Hill early in 2015.
All upfront capital development for the Mick Adam and Wadi projects at Castle Hill Stage 1 will be funded by Norton.
Mining, haulage, milling and rehabilitation will all be conducted and funded by Norton while Phoenix receives 50% of the cash surplus of the project.
This could add an additional $17.5 million in cash at bank over two years.
In this market, cash is king and the mine and treat ore agreement with Norton certainly gives Phoenix the royal treatment.
It has cash of $13.8 million including $4.5 million from a shortfall placement announced on 16 July and a market cap. of circa $43 million.
Share price milestones ahead include:
- Signing a Licence to Mine and Ore Sale Agreement with Norton Gold Fields;
- Start of mining;
- Gold production in the December 2014 quarter; and
- Completing the acquisition of the heap leach gold plant.
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