February 23, 2010Adamus Resources Expects To Be In Production At...

February 23, 2010

Adamus Resources Expects To Be In Production At The Nzema Gold Project In Ghana During The First Quarter Of 2011
By Charles Wyatt



Hedging hasn??t disappeared from the armoury of bankers when arranging the funding for development of projects, but one certainly hears less about it. Maybe both lender and borrower have conspired in this, as with the benefit of hindsight, neither look very clever if the gold price continues to rise as it has over the last 8 years. The bankers, as usual, appear greedy for demanding that a mining company is stuck with selling its product at lower than market price for a number of years, while the mining company has to defend itself against complaints from shareholders who reckon profits are being eroded. Mark Bojanjac, chief executive of ASX-listed Adamus Resources, takes a very pragmatic view as he discusses the hedging programme demanded by Macquarie Bank as one of the terms for providing funding for the company??s Southern Ashanti gold project, now called Nzema, in Ghana. ??If we didn??t accept the hedging programme, we would not get the money and the project would not be developed. Simple as that??, he says.
Mark knows all about these things, as he is a chartered accountant and, among the other achievements on his CV, can say that he brought Mongolia??s first gold mine into production. Ghana is a much easier country in which to operate, though. Nzema sits on the southern extension of the prolific Ashanti gold belt, only 40 kilometres south of the Boguso deposit, which hosts resources of 3.3 million ounces of gold and the bigger Prestea deposit, which boasts 10.7 million ounces. Its contiguous tenements cover 665 square kilometres which can be reached by sealed road from the port of Takoradi, which is 80 kilometres away. The tenements are also close to the mining centre of Tarkwa. A good address, so it??s not surprising that it took time for Adamus to build up its land position. The company??s first acquisition was Salman, back in 2003. This was followed by the Anwia concession in 2004, Anwia South in 2006, while Kanyankaw was tacked on last year. A bankable feasibility study was carried out in 2007, but this was superceded by an optimised study in 2009 after the inevitable delays when the company had to limit its activities during the horrors of the end of 2008.

Once Mark had this study in his hand last summer it did not take him long to decide to go mining. Market conditions were right, and the drilling that had been carried out in 2008 had enlarged the resource/reserve base to the extent that there were 16.54 million tonnes grading 2.01 grammes per tonne to give 1.068 million ounces in reserves, of which the majority was in the proven category. In addition there were more ounces in resources, and a whole lot more exploration still to be carried out on a number of targets. Ten years life, then, and more to come, at 100,000 ounces per year, which is a neat size for a gold project. As part of the optimisation process, costs were obtained for a larger process plant, the metallurgy was reviewed and updated, and the planned open pits were redesigned to accommodate the improved project economics. Adamus may have taken a bit of flack for not coming into production earlier, but as things turned out it will have a more efficient operation.

The salient facts are that at a conservative gold price of US$900 per ounce, the net operating cash flow for years one and two is projected as US$100 million. The internal rate of return will be 28 per cent, based on capex amounting to around US$105 million. That amounts to payback after a construction and commissioning period expected to last for 20 months. Following a tendering process Macquarie has came up with a US$76 million financing package, encouraged by Adamus?? good financial health, following on from a placement which raised A$40 million last August. And it is this financing package, which demands a certain amount of hedging, to which Mark Bojanjac has agreed.

Adamus has now locked in the forward sale of 290,000 ounces of gold at a price of US$1,075 per ounce, and these ounces will have to be delivered during the first 5.5 years of production. If production remains at 100,000 ounces a year this deal means that just over half will be priced at US$1,075 per ounce, and the rest at the spot price, which could be higher or lower. Mark Bojanjac reckons it still allows the company a fair amount of flexibility as Adamus could deliver all production into the hedge and get rid of it within three years if the gold price looks like rising, or alternatively keep deliveries at around the 53,000 ounce mark if the spot price is lower. The point he makes is that operating costs in the crucial first two years are only US$400 per ounce, which makes for a very healthy margin when compared with the forward selling price. Production is now likely to start in the first quarter of 2011, thanks to the earlier placement, as Adamus has already been preparing the site and building its own operations there for some months. Lycopodium Engineers is now starting plant construction.

The announcement that the hedging contracts are locked in made much of the fact that these contracts only represented 27 per cent of the current reserves at the project. This is largely irrelevant, as it is production that counts and the identification of further mineable ore reserves within trucking distance of the mill could mean that production will be increased at minimal cost. And it is this that is clearly at the back of Mark??s mind when he says that his objective will be to pay back borrowings well within time as this will give him renewed flexibility. Apart from promotion of inferred resources, currently 362,000 ounces, to reserves, the company can also turn to the Bokrobo project for additional ounces, given its initial resource estimate of 115,000 ounces at an average grade of 3.86 grammes per tonne.

So there??s more to come here, plus the additional benefit of blending the higher grade ore into the production schedule. There is still depth potential at Salman and Anwia, and Kanyankaw has returned 88 metres at 1.16 grammes per tonne from initial surface sampling, while four other known prospects have immediate potential. A bright and profitable future beckons and investors can be assured that Mark Bojanjac will be very conservative with his forecasts, and then make every effort to ensure they are beaten.