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Gunson Resources' Could Be On The Road To POSCO With New Study Results

Gunson Resources (ASX: GUN) has received positive results from an Optimisation Study at the Coburn Zircon Project in Western Australia, which has enhanced the project's economics.

The boost in economics include that by expanding annual ore production by 34% and finished product output by 22%, unit costs have been reduced by an average of 14%. The combined effects of optimisation and higher ore throughput reduce the mine life from 23 to 19 years.

Financial returns, compared with those released in September 2012 and using the same underlying assumptions, show an increase in the NPV of 56% to $330 million and the IRR of 39% to 31.2%.

Most importantly the Gunson board believes that the results of the Optimisation Study will meet the POSCO SPV commercial condition outlined in letters received from both POSCO and the Korean resources investment fund last December.

POSCO SPV to earn in by funding $28 million and then its 40% share of capex.

Financial improvement breakdown

The outcomes from the study were significant, and for an additional $10 million capital cost to $202 million, the pre-tax 8% discount rate net present value based on the same underlying assumptions as those from September last year, delivered an increase from $211 million to $330 million.

The pre-tax internal rate of return jumped from 22.4% to 31.2%, while the life of mine revenue to cost ratio also improved from 1.45 to 1.6.

Final negotiations to be completed in March 2013

Gunson said that the POSCO and the Korean resource investment fund have indicated that they will make a prompt decision on the revised Coburn budget, which will enable final negotiations on the Coburn Joint Venture financing Agreement to be completed in March 2013.

In December 2012 the POSCO SPV confirmed in writing that they had advanced their investment decision to the point where the proposed Joint Venture Agreement had been substantially agreed and would be executed subject only to normal internal approvals and the following commercial condition being satisfied by 28 February 2013.

The one commercial condition is final resolution of the project operating budget and the board believes that the results of the Optimisation Study will meet the POSCO SPV condition.

STUDY BREAKDOWN

Strategy and Major Outputs

The strategy of the Optimisation Study was to decrease Project unit costs and increase the revenue to cost ratio to a level where the Project financial returns met a POSCO SPV minimum after tax internal rate of return hurdle.

Collaboration with a small number of key contractors and equipment suppliers was a key element of this strategy.

The main outputs from the Study were:

- Changes to the in-pit mining and overburden removal sequences, decreasing the volumes of materials to be rehandled, with resulting increases in productivity;

- Changes in (a) above allowed mining to commence closer to the Mineral Separation Plant (NYSE:MSP), deferring some initial capital expenditure; and

- The benefits of increasing the output of heavy mineral concentrate (NYSE:HMC) from the mine to match the feed requirements of the MSP were justified despite a small increase in capital.

The strategy required a higher mining rate and minimal additional capital expenditure
compared to previous studies.

Expanded Mining Rate

As the design capacity of the MSP is 30 tonnes per hour (tph) of HMC and the existing average HMC production was 25 tph, there was scope to increase the production rate of HMC by 25%, with no additional capital expenditure on the MSP.

The study determined the ore mining rate should be expanded to 3,000 tph from the previous 2,300 tph. The increase is beyond the capability of the two Dozer Mining Units (DMU) previously budgeted, requiring an additional DMU to be added to the mining fleet. The third unit will operate in a separate part of the same pit as the other two DMUs.

Total annual average ore production will increase to 23.4 million tonnes per annum (tpa), from the previous 17.5 million tpa. An additional 29 million tonnes of mineralised overburden has been reclassified from overburden to ore in the revised mining plan, reducing the average life of mine heavy mineral (HM) feed grade from 1.26% to 1.19% HM and the open pit strip ratio from 0.6 to 0.5 tonnes of overburden for each tonne of ore.

As the cost of mining overburden is 50% higher than ore due to the longer bulldozer push distance required, this had a positive effect on mining costs.

The expanded mining rate under the re-optimised operating plan reduces the mine life by approximately 17%, from 23 to 19 years and thus, the previous practice of listing average annual operating cost comparisons over the mine life has been replaced with unit cost comparisons.

Analysis

Gunson said in November 2012 that further work was in progress to increase the project financial returns for the Coburn Zircon Project, with the company certainly delivering.

The outcomes from the study were significant, and for an additional $10 million capital cost to $202 million, the pre-tax 8% discount rate net present value based on the same underlying assumptions as those from September last year, delivered an increase from $211 million to $330 million.

The pre-tax internal rate of return jumped from 22.4% to 31.2%, while the life of mine revenue to cost ratio also improved from 1.45 to 1.6.

With these new numbers, the Gunson board believes they will meet the POSCO SPV commercial condition outlined in letters received from both POSCO and the Korean resources investment fund last December.

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