Kingsrose Gets Set For Years Of Expansion At Its Indonesian Gold Operations By Our Man in Oz, in Indonesia
Very few mining companies have matched the pace at which Kingsrose Mining has gone from stock exchange listing to maiden dividend - the first payout is expected in the next few months, which is well inside the company’s fifth anniversary as an ASX-listed stock. But that high-speed financial record is just the start, given what Kingsrose seems likely to achieve over the next few years as it accelerates every aspect of its operations on the Indonesian island of Sumatra.
Production and profits are being driven by the addition of a second mine on the company’s relatively small tenement. Exploration on 17 high quality targets is highly likely to find additional sources of ore, and previously private conversations with government officials should ensure that additional land is made available for future growth outside the boundaries of the existing 100 square kilometre contract of work.
Some of those facts about Kingsrose are known. But the opportunity to move beyond existing borders is news, and while nothing is being said officially there seems to be a broad agreement that Kingsrose has had such a positive influence on the lives of local villagers that they would be more upset than shareholders if the expansion green light was not given. The challenge for investors is calculating what it means for a business which does not fit most conventional geological or financial models, and probably never will - because of the nature of the gold-rich veins being mined, and the nature of the people doing the mining.
Before considering the unknowns, which make Kingsrose one of the more interesting gold miners on any stock exchange, it’s worth examining some of the facts. And these Minesite’s Man in Oz was privileged to see first-hand last week as part of an investor and analyst tour of the company’s Indonesian operations. And a comment from Kingsrose director, and very hands-on miner, Bill Phillips encapsulated the first impression. “We mine ounces, not tonnes”, he said. The company’s underground operations are totally focussed on non-mechanised, narrow-vein mining, using hand-held drills and rock-moving equipment which would have found a place in a mine of a hundred years ago.
But, that focus on extracting ore, leaving behind walls of barren host rock, means that Kingsrose is both highly profitable and working in harmony with the local villagers who, in turn, are providing 99.6 per cent of the labour. That precise percentage can be calculated because of the 1,000 people on the company’s payroll, four are classed as internationals. Working with the local community, rather than parachuting in teams of foreign workers gives the operations of Kingsrose a very Indonesian flavour, which is precisely as it should be, for a company with growth ambitions in an Asian country.
Just how much growth there will be will be determined by exploration success. As it currently stands, Kingsrose is on track to achieve steady-state production of 140,000 tonnes of ore at 11 grams a tonne per year, and more after adding silver credits. That amounts to around 45,000 ounces of gold annually, produced at a low cash cost of between US$150 and US$200 an ounce. After financing charges and royalties, the total cost of production is running at between US$399 and US$449 per ounce, and could drop lower if production is expanded to the next target of 200,000 tonnes of ore a year for 64,000 ounces. At that rate, cash costs fall to US$133 per ounce, and the all-in cost to between US$338 and US$388 per ounce. And even without considering the expansion case, existing operations mean that Kingsrose is spinning off around US$60 million a year in free cash.
The maiden dividend, which one analyst on the site visit suggested could be around A10 cents a share, will be easily absorbed by the current cash flow. It’s the money left over which is worth following because Kingsrose’s operations as they currently stand should really only be seen as a starter project. At the moment the company has one solidly performing, narrow-vein mine called Way Linggo which, like all narrow-veined mines, is virtually impossible to drill-out to fit the requirements of the Joint Ore Reserves Committee (JORC). So, rather than waste time and effort chasing the underground veins with surface drill rigs, the Kingsrose crews simply chase the veins and mine them, and with so much success that they are already developing access to ore that lies outside the existing resource borders. If a vein can be seen, it is mined.
That policy of “see it, mine it” has also been applied at the second Kingsrose mine, Talang Santo, which is located seven kilometres to the north of Way Linggo tucked into a corner of the company’s tenement. First ore from the new mine will be trucked to the Way Linggo processing plant in the next few weeks. That will enable the company to hit its steady-state production target. But the real interest in Talang Santo is its potential size, which could be substantially bigger than Way Linggo
Even the current Talang Santo mine plan envisages a bigger operation than Way Linggo. What’s more, the mineralised structure does not end at the border of the Kingsrose tenement, presenting a tempting “cross border” exploration target which, it seems, is already being tested. In most other jurisdictions, drilling outside tenement boundaries is a definite no-no. But Indonesia is different. Not only is the ground to the west unallocated, but the law specifies that an existing miner has the first right to ground across the border if it is to expand operations. And with that knowledge in mind, the map of Kingsrose’s tenement becomes extremely interesting because there is more than one exploration target that ends abruptly at a man-made line on a map.
Of the 17 exploration targets being pursued, Talang Santo is the first to attract cross border attention. Due south of Talang is the much bigger Semung Lunik target, while at the southern end are the Banyu Wangi and Semung Kecil South targets. Those names will mean little to non-Kingsrose staff, but they are interesting because while they start inside the existing boundaries their footprint is much bigger, and provide a glimpse of the long-term future of the company’s operations. After all, if an investor where to follow strict JORC-code reporting guidelines that future appears to amount to just a handful of years, but a quick look at the tenement map confirms that that is clearly not the case.
It will be some time before Kingsrose seeks to officially stretch its borders. There is more than enough opportunity inside the existing 100 square kilometre block. For a measured expansion to take place the company needs more exploration data, but in the meantime it is easy for a casual observer to see the company operating a series of narrow-vein, high-grade, gold mines for many years, and perhaps many decades. The ongoing US$14 million 12 month exploration programme is likely to provide a pointer to future mine development sites.
