Hi Cashmeoutside, good question, your alias belies such astute observations haha
I saw the reference and understood it's implications from a technical perspective but hadn't considered it's implications from a financing perspective. Did a little digging around this morning and came up with some stuff that hopefully helps put things is perspective. Let me cut to the chase straight up with the reason I believe inclusion of Inferred Resources in the DFS 'production target' does not impact the ability to finance the mine on traditional terms. This is taken from the )ct 18 DFS report (bold my emphasis).
"The mine plan has been sequenced to ensure thatthe reliance on material contributed from Inferred Resources is minimised within the first 5 years and theCompany is satisfied that the proportion of Inferred Resources is not a determining factor for project viability.Nonetheless, the Company notes there is a low level of geological confidence associated with Inferred Resourcesand there is no certainty that further exploration work will result in the determination of Indicated Resources orthat the LOM Production Target insofar as it relates to the Inferred Resources will be realised."
Finance of a DFS relies on sufficient confidence in the mining Reserve and associated costs that the project is profitable enough to repay the finance debt. As you point out, some 8.5Mt of the DFS relies on the Reserve component, which is skewed towards the earlier mined open pit and higher confidence Indicated Resources. The mine schedule has the first ore processed through the mill after approx 1.5 years and DFS projects the Payback period is 3.6 years from day zero, meaning that the mine generates enough operating free cashflow to repay the capex and opex expenditure from the the first 2 years of mine production, with 3 more years of mine production currently relying on the mining Reserves not Inferred Resources. One assumes that if the mine can pay itself back in the first 2 out 5 years profitable production from Probable Reserves then financiers will be comfortable lending based on the Reserve component only of the project's DFS. Truth told financiers care not about long term 'Production Target' mine life so long as they are comfortable about getting repaid on time with low risk.
I'm not sure how unusual it is to rely Inferred Resources for approximately 1/3 of the total project's production. By JORC code mining Reserves simply cannot be defined from Inferred Resources because the confidence level is not deemed high enough and JORC want's to preserve veracity in the term Reserve as it is bandied around by companies. The level of confidence of a resource estimation relies on a number of factors, the two most important being geological confidence of the boundaries constraining the ore lodes and lenses within the resource model, and grade/thickness interpolation confidence of for each 'block' in the resource model (eg 2m x 2m x 2m blocks). The resource geologist needs to classify resource model blocks as Measured, Indicated or Inferred based on multiple criteria, any of which have a lower confidence level dictate the resource category to be that lower confidence level. ie The 'weakest link' variable if you like drags down all other more confident variables so that the resource category cannot be more confident than it's least confident variable.
The point I want to make is that the geologist who estimated the last resource for SS assigned Indicated or Inferred confidence levels based on multiple factors including geological and assay grade confidence. The last resource was released on March 21st 2018 following an infill drilling campaign to increase the resource confidence level, specifically for resources within the anticipated open pit. Ideally one would like sufficient drilling density that grade/thickness between drill holes could be estimated with a high enough degree of confidence to all the resource classified as Measured. Obviously there is a trade off between the cost of that much drilling verses the value added, especially for a poorly funded junior.
This is where I go out on a limb to defend the case of not heavily discounting the Inferred Resources based on their lower resource confidence classification and that they cannot be included in any JORC Reserve statement. IMO (bias as a shareholder duly disclosed), the strong geological confidence in the resource model provides a compelling case to not discount much of the Inferred Resource category just because drilling is not dense enough to provide Indicated Resource confidence in the grade/thickness/ore-type estimates for this material.
The above long-section shows the resource model outline relative to some of the drilling to help visualise drilling density and resource boundaries interpreted. SS is a Volcanic Hosted Massive Sulphide deposit (VMS) which are geologically very well understood and usually very well behaved from the perspective of continuity of geological boundaries, domains and ore types, especially if the deposit is well preserved and not badly faulted/folded about. It's the fact that the SS VMS deposit is so well preserved and behaved that I believe there is a very good probability of converting the Inferred Resources to Indicated/Measured and thus into Reserves at a later date when mining is underway and funds are abundant. Similar to how 60% of the Inferred Resource within the anticipated open pit were converted into Indicated resources from March 2018 resource upgrade based on recent additional infill drilling. The following are selected quotes taken from that SS Resource release, which conveys that confidence and the expectation that Inferred Resources will ultimately convert into Reserves with future infill drilling.
"A very high degree of confidence in the interpretation is based on detailed surfacemapping (out crop is almost 100% with little vegetation or alluvium cover) which clearlyshows the principal rock types, mineralisation distribution and structural (fault) features.Extensive company and academic studies over a 22-year period have characterized thismineralisation as a well preserved Volcanogenic Massive Sulphide (VMS) deposit. Drillinghas demonstrated the continuity of the surface feature at depth."
"Resource estimate related to ore type domains based on massive, sulphide, disseminatedsulphide and super gene zones for each lens and zone. These hard boundaries havestrong unequivocal geological support and were used to constrain both the informingassay data selection and grade interpolation".
Included in the variables that need to be considered in classifying a resource confidence level is the overlaying effect of weathering on the deposit, where material is either oxidised, supergene, transitional or fresh. Basically, despite the high degree of geological confidence in the location and continuity of the VMS deposit ore lodes, uncertainty regards the actual grade, thickness and ore type between drill hole data meant that lower levels of confidence were applied to much of the resource. Future drilling is likely to prove the geological model of the deposit accurate, although the grades and thickness of the ore lodes may go up or down from the current interpolation as more assay data becomes available. In the case of SS, IMO, it is not reasonable to remove or heavily discount the Inferred Resources from the DFS results simply because drilling density is too low to allow an Indicated classification.
In short, those Inferred Resources are real and have just as much chance or increasing in tonnes or grade as decreasing with future drilling, but are unlikely to not be there at all. Based on the high degree of geological understanding and confidence in the deposit, it seems pretty reasonable to include in the DFS that production derived from the Inferred Resources. Of course, each investor, financier, off-take partner etc need to come to their own conclusions about what is reasonable, probable and what sort of discount if any should be applied to the DFS and company valuation because of the lower level resource classification.
To finish up with some more confirmation bias, some selected quotes from Stewart McIntyre of Blue Oceans Equity (bold my emphasis), who is independent and well respected in the industry. In his report from Oct 2018 is well worth the read and can be downloaded from the VXR website. He considered the reasons SS hasn't been mined before and confidence in resource while reporting on the "compellingDefinitive Feasibility Study".
I hope this post helps, it was certainly worthwhile for me to consider this question of Reserves vs "Production Target" and test my investment thesis, and inherent confidence bias, from a deeper and more technical perspective.
Cheers.UNDERSTANDING THE HISTORY OF SULPHUR SPRINGS
Sulphur Springs is not a new project… in fact it was discovered more than a decade ago and has been through a number of hands and a number of mine optimisations. When doing due diligence on a project like this our starting position is one of caution and typically begins with questions like:
“What is wrong with the project?”
“If it’s such a great project why wasn’t it developed before now?”
“What’s changed?”
“What are the key risks?”
Given the history, wehave done extensive due diligence on the project, including a site visit and speakingto several of the former owners as well as talking to a number of industryexperts to fully understand the history and to reassess the Venturexopportunity with “open eyes”.
Ultimately the reasons Sulphur Springs was not developed previously came down to a combination of 4 main factors: Why wasn’t Sulphur Springs developed before now? Why wasn’t Sulphur Springs developed before now?
An unoptimised mineplan
There have been a number of iterations on the mine plan for Sulphur Springs over the years from a very large open pit (with a 14:1 strip ratio and prohibitively large pre-strip) to underground only options (which did not generate a sufficiently rapid payback). Ultimately, the optimal solution, as outlined in the DFS, was a combination of both – a much smaller open pit (with a 7.7:1 strip ratio and much smaller pre-strip) followed by an underground.
Misconceptions on Environmentalapprovals Environmental approvals
The tailings generated at Sulphur Springs are Potentially Acid Forming and the EPA requires the tailings dam to be lined – a very standard practice these days. One of the previous owners of the project had preliminary discussions with the EPA about potentially not lining the tailing dam due to the additional cost. As we understand it, the EPA was not particularly receptive. This lead to misconception that the EPA would not permit an open pit at Sulphur Springs – a misconception which has since been corrected. Sulphur Springs sits on a Mining Lease approved for underground mining and approval of an amendment to approve open pit mining is expected in Q4 CY18.
Metal prices and the A$exchange rate
One of the key factors which probably helped prevent development was historically weaker metal prices. With Cu prices of <US$2/lb, Zn prices of <US$1/lb and an A$/US$ of 90c and higher, the economics for Sulphur Springs were far less compelling, vs. prices today of ~US$2.87/lb Cu, ~US$1.21/lb Zn and a ~71c A$/US$.
Previous lack ofdrilling
Previous lack of drilling and metallurgical testwork testwork Earlier this year, Venturexcompleted a 14 hole infill drilling programme (RC collars, diamond tails)designed to better understand the various ore zones as well as to conduct muchmore detailed metallurgical testwork on the various ore types – a key deriskingstep for Sulphur Springs in our view.
