OXR oxiana limited

corporate file interview

  1. 4,756 Posts.
    Date of Report
    23-May-2003

    Open Briefing. Oxiana Resources. MD on Sepon Gold Outlook

    Record of interview :
    corporatefile.com.au
    Oxiana Resources recently announced that it had raised over A$60 million through the issue of 115 million ordinary shares at a price of A$0.54 per share. It will also raise further funds through a Share Purchase Plan at A$0.54 per share. Where will you apply these funds and can you give more detail on the split of funds allocated to exploration?


    Managing Director Owen Hegarty
    The first use of the funds will be to boost the current oxide gold exploration program at Sepon. Once this effort has identified sufficient new resources, we’ll begin a formal investigation into a production expansion. This will require a reserve calculation, mining and metallurgical studies then engineering and costing work.


    The second use of the funds will be to finalise the residual deferred payments totalling approximately US$10 million to Rio Tinto for the original acquisition of Sepon as well as buying back a long-term royalty. All up, this will cost approximately A$17 million, although the recent rise in the A$ may reduce this amount.


    The balance of the funds will be used as necessary for the upcoming Khanong Copper Project and generally improving our working capital. This will strengthen our balance sheet and put the company in a more flexible position with regard to funding options.


    corporatefile.com.au
    It’s generally accepted that Oxiana has strong growth prospects. In the March 2003 quarter you generated over US$9 million in operating cash flow. Why wouldn’t you wait a little before doing the placement when the share price might be higher, thereby reducing dilution for shareholders holding the stock before the placement?


    Managing Director Owen Hegarty
    The world is a rapidly changing place and there are no guarantees that the markets would be as willing to support such a raising in the future. We’ve seen gold fluctuate by as much as US$10 overnight, equity markets move substantially in a day’s trade and the A$ has moved 6 cents in five months. With such uncertainties, we believed it prudent to ensure we had the funding readily available for the gold expansion studies and to allow a smooth transition into the main construction phase for the copper. The benefits of these to shareholders will, we believe, be multiples of any dilution through the recent placement.


    corporatefile.com.au
    You stated earlier that agreement in principle had been reached with Rio Tinto to bring forward Oxiana’s final purchase instalments for the Sepon Project. What are the advantages of bringing forward this payment?


    Managing Director Owen Hegarty
    The primary benefit is the release of security currently held by Rio Tinto over the assets. This will allow Oxiana to pledge that security to the banking group for the copper project. The transaction essentially represents the discounted value of the remaining deferred payments and the royalty so it’s effectively neutral. It also simplifies the Rio Tinto relationship to a straightforward JV and clawback on any mega discoveries outside the existing mineralised zones.



    corporatefile.com.au
    What demand was there for the placement and what was the mix between local and overseas institutions?


    Managing Director Owen Hegarty
    The placement was oversubscribed, with the majority going to Australian institutions and the balance to institutions in Europe and the US. The Shareholder Purchase Plan will give our retail investors the opportunity to participate on the same basis as the institutions. The stock has consistently traded above the placement price since.


    corporatefile.com.au
    For the March 2003 quarter, Oxiana recently announced that the Sepon Gold Project had produced 41,656 ounces of gold at a cash cost of US$124 per ounce. How did that compare with your expectations and what adjustments will you make to your production and cash cost forecasts for the full year?


    Managing Director Owen Hegarty
    The production and cost numbers were somewhat better than our forecasts, remembering that the forecasts were based on the bankable feasibility study (BFS), which was completed about 18 months ago.


    The main factor in beating our forecasts was a higher head grade than predicted in the geological model, which is proving to be quite conservative. The geological model was largely based on BFS drilling. We now have far more data, having since carried out grade control and development drilling and our ability to predict grades is improving. Although we’re confident of beating our full year forecast of 140,000 ounces at a cash cost of less than US$150 per ounce, we’d prefer to have the June quarter under our belt before giving an updated public forecast.


    corporatefile.com.au
    Can you give more detail on how the ramp-up schedule, milling rates, capital expenditure, recoveries and costs on a per tonne basis tracked against your feasibility expectations?


    Managing Director Owen Hegarty
    The ramp-up was on schedule. The plant was commissioned and hit nameplate capacity of 1.25 million tonnes per annum on time and is now running at steady state as we’d expected.


    There are a few minor bills to come through so we’re waiting to sign off on the final capital number. However, the indications are that we’ll come in slightly under the US$45 million budget.


    Recoveries during the quarter were 92 percent. We’re forecasting recoveries to average between 88 and 92 percent over the year with the planned treatment of transition material as the year progresses.


    Unit costs are in line with what we expected and are virtually at steady state. The mining is all done by contractors, and the mill and rest of the process is relatively well understood and stable, so it’s not an operation that should see the cost per tonne bounce around too much.


    corporatefile.com.au
    What does this sort of performance mean for cash generation? Can you give an indication of your operating cash flow before exploration and capital expenditure?


    Managing Director Owen Hegarty
    Although we didn’t publish cash flow numbers in the March 2003 quarterly, an approximate figure can easily be calculated. We received $US349 per ounce for the gold we sold. So, subtracting the cash cost of US$124 per ounce, including the Lao government royalty, gives a cash operating margin of US$225 per ounce. This implies operating cash generation, before exploration and capital expenditure, of about US$9 million for the quarter, based on production of 41,656 ounces (100 percent).


    We’ve previously indicated to the market that the Sepon Gold Project would generate operating cash flow of around US$20 million per annum. At this stage, indications are that we’ll exceed that forecast for this year, although given we’re unhedged, movements in the gold price will have a large bearing on the final cash flow number.


    corporatefile.com.au
    Over the last few months, you’ve released strong drilling results from oxide prospects close to the plant including Luang, Vang Ngang and Phavat. When do you expect to release an updated resource and reserve statement?


    Managing Director Owen Hegarty
    The fact that we’re now doing development drilling for Luang and Vang Ngang means they’re now in the hands of the mining team rather than the exploration team. Our immediate aim is to delineate a reserve and resource on the deposits. Once we have a reserve, the pits can be included in the mining schedule.


    We also recently announced that we’d intersected wide thicknesses of near surface, high grade oxide gold mineralisation in development drilling across the Discovery Colluvial Gold Deposit. These results include 10 metres at 14.5g/t Au, 16 metres at 10.9g/t Au and 11 metres at 18.2g/t Au.


    We said in our recent release to ASX that while the results support a continuation of the trend towards higher gold grades seen to date, further detailed evaluation work is required to determine the impact on current resource/reserve estimates for the deposit. Development drilling will be ongoing at the Discovery, Discovery West, Namkok (East and West) and Nalou deposits over the coming months and exploration drilling to delineate new resources is continuing throughout the Sepon mineral district.


    By mid year we should have done most of the work required to calculate a new resource and reserve and our intention is to release these results soon after. This will include all the work we’re doing on grade reconciliation, infill drilling and extension drilling on the current resources and reserves. That will tie in well with our plan to release to the market new forecasts for gold production and costs soon after completing the June quarter.


    corporatefile.com.au
    How well are the gold plant and the mining operation performing from a technical viewpoint? Are you well equipped to cope with the wet season?


    Managing Director Owen Hegarty
    We don’t have any major issues on the mining or processing side. The CIL is a simple circuit and the mining is all done by contractors and benefits from having a low strip ratio.


    We believe we’re well equipped to cope with the upcoming wet season. Last year’s construction was during the wet season so we already have recent wet weather experience. The roads have been completely sealed with an all-weather compacted surface since then. We now have pits on both sides of the Nam Kok River. Our ROM pad can hold three months of ore stockpiles, which is around 300,000 tonnes, a large part of which is already on the pad. We also mine a proportion of harder material, which should be more suitable to process during periods of heavy rain. Our budgets allow for the odd day when we won’t be able to mine, which means three months ROM pad storage is probably conservative.


    corporatefile.com.au
    Earlier this year you raised an expansion of the gold project as a possibility. What’s your current thinking and that begs the question whether you would increase the size of the copper project, given the increasing cash generating potential of the gold project?


    Managing Director Owen Hegarty
    We’ve spoken in general terms about expanding the gold project, simply because every time we’ve drilled a new hole we’ve found something interesting. I anticipate that we’ll have some expansion studies underway during the September quarter and hopefully we’ll be able to talk to the market by the end of this year about dimensions. The studies will give us a better indication of what expansion possibilities exist, what potential mill size the reserve would support and so on. Detailed engineering and design studies should then be underway in early 2004.


    I don’t think a decision on a gold expansion will impact the scope of the copper project. At this stage we’ve settled on a copper project producing 60,000 tonnes of copper metal per annum. We’re arranging funding on that basis, although there’s clearly a lot more copper at Sepon than has been outlined at Khanong, as shown by the results so far at the Thengkham project.


    corporatefile.com.au
    During the recent optimisation study on the Sepon Copper Project you identified some technical and operating improvements. Are these likely to lead to significant capital or operating cost savings?


    Managing Director Owen Hegarty
    We’ve only just received the results so we’ll be better placed to comment later in the year. There’ll be some minor improvements to both capital and operating costs but I think the parameters we released in the copper BFS are pretty accurate. The engineering study has increased our confidence in those numbers.


    corporatefile.com.au
    You’ve previously stated that funding for the Sepon Copper Project would be a combination of cash flow from the gold project, bank debt and subordinated debt. How will the strong cash flow from the gold project alter the mix? What are current plans, particularly after the recent placement?


    Managing Director Owen Hegarty
    It’s probably too early to be definitive as we’ve only recently appointed ANZ to coordinate the funding. The only thing we can say at the moment is that the strong cash flow from the gold project may reduce the levels of debt but we’re not sure by how much.


    We’re working to finalise the funding package. We’ve signed a Memorandum of Understanding with Outokumpu regarding its participation in the copper project in a number of areas. These include providing a lump sum turn-key package to supply the SX/EW plant. We’re also negotiating a copper offtake agreement. We’ve received a variety of proposals from major lenders, particularly from Europe where much of the equipment is expected to be sourced.


    corporatefile.com.au
    Oxiana holds a 50 percent interest in Eastern Mediterranean Minerals, which has restarted exploration drilling in Cyprus. Why would an emerging company like Oxiana maintain operations outside its core Sepon project? Can you outline your goals and potential in Cyprus?


    Managing Director Owen Hegarty
    Cyprus is probably one of the more exciting but modestly developed copper provinces in the world. It contains some spectacular grades in some of the old operations. Mining on Cyprus was interrupted when the island was politically split in two and as a result has never really had a chance to mature even though the geology indicates it has the opportunity to do so.


    Before Oxiana acquired Sepon, its primary minerals base was in Cyprus. We originally owned a larger proportion of the SX/EW copper business there than we do now. We’ve built up significant exploration tenements in the southern part of the island, where we also hold mining permits.


    Our current exploration expenditure is modest, so we’re moving forward slowly to get a better idea of its potential.


    corporatefile.com.au
    From a corporate perspective, with the growth of the company, are you seeing more opportunities come past your desk?


    Managing Director Owen Hegarty
    Yes, that is fair to say. A few questions have been asked about corporate expansion. If a prospect as good or better than Sepon comes our way and our hard-headed board and management can be convinced that it will add to shareholder value, then we’ll look at it. In the meantime we’ll concentrate on what we’re doing at Sepon.


    corporatefile.com.au
    With the first quarter now under your belt, what are the coming milestones for the company?


    Managing Director Owen Hegarty
    We see the current quarter as consolidating our excellent first quarter and starting to put some shape around an expanded oxide gold resource and reserve. To that end, we expect to release further development drilling results soon on the Vang Ngang, Luang and Phavat near mine prospects, plus some in-fill results from the Discovery deposit. We would also expect to have further news as copper funding negotiations progress.


    We’re growing the company. It’s a very exciting time for all of our shareholders. There’ll be plenty of news flow as we gather in the milestones.


    corporatefile.com.au
    Thank you Owen





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    I don't hold OXR

 
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