TRY 0.00% 3.0¢ troy resources limited

Troy - the new mine plan

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    Why is the new mine plan so important? Because it could explain a lot of what happened in the past. Here is my understanding of what happened so far.

    First of all Troy starts open pit mining with a plan like that:

    LOM scenario, good grade control (4.5 g/t ore -> 4 g/t at mill), strip ratio 6 waste to block model
    28700 oz * 1250 * 1.33 = A$47.7m (4 g/t 240k ore at mill, 214k ore from block model)
    -site 4m
    -moved material 3.6 * 1.28m = 4.6m
    -processed material 26.5 * 0.24m = 6.4m
    -sustaining capital 2.3m
    -royalty 3.8m
    -debt 4m
    -hedges 2.5m
    -exploration 2m
    -corporate + other 2.2m
    =+15.9m
    AISC 663

    That plan would happen for 12 quarters / LOM 3 years and provide 344400 ounces.

    Now Troy starts mining in 2015 and what they are finding is quite different. "Positive" reconciliations. 14,720t @ 4.25g/t expected. 2011 oz. But what they got was 4503 oz. +124% ounces, more than double the reserves. Hurray. Although: 55,364t @ 2.53g/t, WAY more ore, grade somewhat less. The additional ore not in the reserve model has a grade of 1.91 g/t. This example is from Smarts 2 and published by Troy in the AGM 2015 presentation.

    But wait a minute, Troy will have MUCH more ore, MUCH more ounces - in theory. The mill cannot treat more ore. We get +124% ounces but need to treat +276% ore at the mill at a cost of A$26.5 per tonne. So our costs will climb to roughly double. But so are our produced ounces. Costs per ounce stay the same and we still have +120% ounces.

    Not so fast. Our calculation shows 36% of costs are fixed. And we will take much longer to produce ounces. The output per month has even declined. That means because we have to stay longer at the camp our fixed costs will rise to a much higher figure.

    Let's calculate the scenario using +124% ounces, +276% ore, -40% grade.
    65668 oz * 1250 * 1.33 = A$109.2m (2.44 g/t 900k tonnes)
    -site 4m
    -moved material 3.6 * 1.28m = 4.6m
    -processed material 26.5 * 0.9m = 23.85m
    -sustaining capital 2.3m
    -royalty 8.7m
    -debt 4m
    -hedges 2.5m
    -exploration 2m
    -corporate + other 2.2m
    =55m
    AISC 545

    Great! But wait a minute, what's wrong? Well (besides the somewhat off strip ratio and the fact the fleet would be a limiting factor too), the mill cannot process 900k tonnes per quarter. Only 240k ounces. That means we would have to limit ore to 26.7% but would extend LOM from 12 quarters to 45 quarters.

    So next calculation:
    17511 oz * 1250 * 1.33 = A$29.1m (2.44 g/t 240k tonnes)
    -site 4m
    -moved material 3.6 * 1.28m = 4.6m
    -processed material 26.5 * 0.24m = 6.4m
    -sustaining capital 2.3m
    -royalty 2.3m
    -debt 4m
    -hedges 2.5m
    -exploration 2m
    -corporate + other 2.2m
    =-1.2m
    AISC 1021

    There we have it, the "positive" reconciliations lead to more overall ounces, but less ounces per time. Higher costs per ounce due to high fixed costs.

    Let us strip out debt/hedging costs and exploration.
    1. Original plan
    28700 oz * 1250 * 1.33 = A$47.7m (4 g/t 240k ore at mill, 214k ore from block model)
    -site 4m
    -moved material 3.6 * 1.28m = 4.6m
    -processed material 26.5 * 0.24m = 6.4m
    -sustaining capital 2.3m
    -royalty 3.8m
    -corporate + other 2.2m
    =+24.4m for 12 quarters = A$293 overall before debt repayments and hedge losses
    AISC 663

    2. Plan after "positive" reconciliations
    17511 oz * 1250 * 1.33 = A$29.1m (2.44 g/t 240k tonnes)
    -site 4m
    -moved material 3.6 * 1.28m = 4.6m
    -processed material 26.5 * 0.24m = 6.4m
    -sustaining capital 2.3m
    -royalty 2.3m
    -corporate + other 2.2m
    =+7.3m for 45 quarters = A$328.5m overall before debt repayments and hedge losses
    AISC 1021

    So we see the positive reconciliation still have a net positive effect. But as the market thinks: Boy, this company only has LOM of 3 years, better don't pay a high p/e for it. And: Boy, they predicted AISC 663 and have above 1000, this company is worse than I thought, better pay even less.
    Investec thinks: LOM is only 3 years, we better get back our loan within a year before they close the mine in 2-3 years. They need hedges too.

    And that's why we have negative cash flow. Remember our calculation above was for the remainder of the LOM, initial figures had higher strip ratios and even higher costs and so AISC for the first year would have been calculated even higher, not so different from the figures Troy reported.

    Conclusion (remember the positive reconciliations data is from Smarts 2 upper benches only, reality will differ!!!):
    1. Troy has far more ounces that reported and even the mine plan included which was already 50% above "reserves"
    2. Karouni has a long reserve life, most probably above 10 years and a higher p/e seems warranted
    3. Troy needs to cut fixed costs, very very important
    4. Troy so far was fleet and mill constrained. The higher stripping ratios at the start and on top of that the minor mishaps but with large effects due to the change in mine schedule and even higfher strip ratios meant losses.
    5. In the future Karouni will be mill constrained. A larger mill may be needed and be a remedy for the high fixed costs.
    6. Repaying debt from a 10 year project - so it is turning out - within 1 to 2 years is madness.

    This mine is indeed very very different from what was promised.

    To me it is clear the market is not grasping the situation Troy is in. A good mine with higher costs in the first part of LOM, out-of-whack debt repayment schedule. The market is giving zero credit for the most probably way larger than reported minable ore "reserves" - most likely double to triple of what was reported AND for Goldstar - strike length nearly Hicks + Smarts AND further exploration potential.

    If I had to put a figure on Troy shares I would estimate LOM AISC costs to be near $1000 and production at 70k ounces for 10 years. Net earnings (tax credits apply) A$23m, at p/e 10 A$230m or 50 cents per share. And that is still without the exploration success at Goldstar and further exploration potential. But given that Troy is essentially mining without JORC reserves maybe the market should not pay for that.

    It is likely that the new mine plan will now show the true potential this asset has. But it will be a start.
    Karouni needs a 50% mill upgrade... So plan going forward has to be cut fixed costs, mine higher grade pockets of Smarts 1 + 3 asap, use the proceeds to expand the mill by 50% and continue exploration. Capital will be tight during that phase. Would be a shame if they sold new shares 80-90% below value.
 
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