Article from Minesite website : .............. August 25, 2011
Norseman Takes A Leaf Out Of WMC?s Book As It Looks To Bring Production Back Towards 100,000 Ounces Of Gold Per Year
By Our Man in Oz
When a company?s share price rises by 78 per cent over 29 trading days it is reasonable to assume that something significant is happening. That appears to be the case with Norseman Gold, a London and ASX-listed miner which has been staging a strong rally after a horrible fall. Prudent investors will probably wait for more evidence that Norseman has shrugged off the reason for the slide from A$1.50 to A23 cents that occurred between last November and mid-July. But the less risk-averse will have noted the rebound to A41 cents this week and be looking closely at the operations of the company. And here they will find signs of the twin positives that all miners seek: rising production and falling costs, and all just in time to catch the record high gold price. Change couldn?t come soon enough for Norseman, which controls one of Australia?s most prolific, and historic, goldfields near the town of Norseman, about 180 kilometres south of the country?s gold capital, Kalgoorlie. In the March quarter costs blew out to an unsustainable A$1,492 an ounce (about US$1,566) triggering an exodus from the share register. Management apportioned blame to slow progress on mine development, and the corresponding under-utilisation of the processing plant. Gold production was stuck at less than 12,000 ounces per quarter, amounting to an uninspiring sub 50,000 ounces per year.
But in the latest quarter to June 30th, production perked up to 15,001 ounces and the cash cost fell to A$1,081, still high, but at least travelling in the right direction. Now, says Norseman chief executive, Barry Cahill, the aim is get costs down into to the A$700 to A$800 per ounce range, and annual output up to over the 100,000 ounces mark. But one thing Barry has learned over the past year is to never (ever) over-promise and under-deliver. ?I?ve been hammered before with forecasts, so you can imagine that I?m a bit gun-shy these days?, he told Minesite?s Man in Oz, speaking from his office in Norseman.
?We?ve still got a lot of work to do in a minefield which has complex geology and multiple ore sources?, Barry said. ?The challenge with Norseman has always pushing [mine face] development far enough ahead to ensure a steady flow of ore to the mill. There is also the need to get a blend of the high, medium and low-grade ore from the mines, to enable the mill operator to maximise processing efficiency.?
Barry said that when the Norseman mines were run as a division of the old Western Mining Corporation they delivered excellent profits, building on a history which started back in 1894. Since then the pits and shafts around the town have produced more than five million ounces of gold. ?WMC ran it well,? said Barry. ?They got in front. They opened up stoping blocks and had work in front of them. What?s happened since then is that the mines have become run down. Insufficient mine development, and insufficient capital. The low gold price in the 1990s was a factor, and WMC having its eye on other assets was an issue.?
The challenge for management at Norseman starts with the geology or, as Barry perplexingly describes the orebodies: ?geologically simple, but geologically complex?. The explanation, which you probably will not find in the JORC code, is that because the orebodies are nuggety, it is simply not good enough to rely on drilling to plan the way ahead. Barry refers to the Bendigo mine in Victoria to help him explain. ?Bendigo has a similar problem, with the difference being that the nugget size in Bendigo is larger, and much more random. Some of the orebodies here have finer gold which is spread more consistently. What happens is that when you get onto a high-grade patch, which could be very small or very large, the mines work well. The challenge is to develop far enough in front so you always have a high-grade patch in front in case the one that you?re in cuts out.?
That complex geology explains why Norseman has a modest official reserve of 420,000 ounces of gold inside an eye-catching resource of 3.4 million ounces. Elevating more of the resource, which stands at 22 million tonnes of ore at 4.7 grams per tonne, into reserves is a serious challenge. ?That?s always been the problem at Norseman,? Barry said. ?We?ve been mining where we have to mine. If we go into a patch which is high grade, but it?s smaller than we first thought we have to persist because we can?t rush off to the next block because it hasn?t been developed.?
Readers familiar with the nuggety gold conundrum will now be asking the obvious question: how will it be fixed? Barry?s answer is to get Norseman back to the original plan that the current management formed when it took control in late 2007: to develop more mines and get a more predictable flow of ore. ?We did all the hard work in 2008 refurbishing the mines and plant which meant that we had a bonzer year in 2009 and thought we were untouchable. That?s when the orebodies came into play. We hit a low grade patch at the Bullen mine and low-grade at Harlequin, and the mine development at the OK mine, our third mine, was slower than we expected, and we were also working on the pre-strip at the North Royal mine.?
But today, and the reason Barry?s confidence is rising, Norseman is steaming back towards a situation where it will have four mines feeding ore to the central mill. Even so, he?s very wary about forecasts. ?All that I?ll say is that we intend to produce more than 100,000 ounces of gold this year?, he said. ?Advisers tell us that we should provide a forecast, but that?s just not easy with nuggety orebodies. We?ve had a poor 12 months and investors simply say we?re not going to believe any forecast you put out.?
But what are the grounds for confidence now? ?I am confident because the North Royal has been in ore-strip, but it is getting to the top of the orebody,? Barry said. ?Once we get to some hard rock that will fill the treatment plant.? And that?s when the plant operator comes into the equation. ?Our treatment plant is limited by a number of factors?, Barry said. ?It loves hard rock, and can only take about 20 per cent oxide [softer], but once the grade goes above 10 or 12 grams per tonne the processing has to slow down or you lose gold to tails.?
Now for the really interesting bit from an investor?s perspective. What Barry and his team at Norseman are really doing is taking a trip back in time. The plan is to operate the Norseman Goldfield in the same way WMC did, very successfully, for decades. ?When you look back, this is exactly what WMC did?, Barry said. ?That?s how they got their ounces, how they stabilised the production. The metallurgist would send the trucks to North Royal, collect some North Royal yellow, the super high-grade ore, and then treat everything else with that material to hit his production targets.?
NGX Price at posting:
40.5¢ Sentiment: LT Buy Disclosure: Not Held