Leyshon Resources
Leyshon Resources has a proud history as one of Australia’s most financially successful gold mining companies having produced over 2.7 million ounces from its Mt Leyshon Gold Mine in Queensland and distributed over A$300 million dollars to its shareholders over its 15 year life. Today Leyshon has divested its Australian mining and exploration interests and is focused on the Zheng Guang project in Heilongjiang, northeast China. Zheng Guang has estimated the resource of 1.21 million ounces of gold, 94,000 tonnes of zinc and 3.72 million ounces of silver. The company forecasts annual revenues of 90 mln usd from the project at current metal prices, and EBITDA of 54 mln usd on cash operating costs of some 155 usd per ounce
Leyshon Resources is an ultra low-cost gold producer in the making
An investor putting Leyshon Resources under the microscope would be hard pressed to find anything other than one of AIM’s most impressive emerging gold producers. In a decade featuring higher gold prices and high inflation in the mining industry, reducing margins for many companies, Leyshon’s emergence as an up and coming, ultra low-cost gold producer is very significant.
It’s been a pretty awful year for small cap companies: liquidity has dried up, many companies have witnessed serious erosion in their market capitalisations as investors have moved to the sidelines, and raising fresh cash has been much more difficult, thanks to the credit squeeze. But it is at times like this that astute investors can pick up some absolute gems buried amongst the rubbish. In our humble view, Leyshon Resources is one of those gems because it has continued to deliver on its promises, and thanks to its flagship project being located in China, it will enter production at the bottom end of the cost curve, virtually ensuring delivery on its promise of a strong dividend policy following production.
In all honesty, shares in Leyshon haven’t performed too badly at all since our last article in February. Like all companies, they have seen a pull back, but support around the 20 pence level looks as solid as granite. Despite extreme volatility for many sectors of the market, Leyshon, by comparison, is remarkably calm, settling into a trading range of between 20 and 30 pence. Currently at 22.5 pence, investors would be forgiven for thinking a buying opportunity may be on the cards - especially if they believe the current trading range will remain intact.
Leyshon Resources is, so far, one of only a handful of companies that have managed to enter China and find a pot of gold. Despite China’s success as a gold producer, there are only a small number of overseas companies that have successfully moved into production - Leyshon Resources joining the ranks of producers is as close to a “sure bet” as you will get.
Having divested itself of its Australian assets, Leyshon relocated to China and signed a joint venture agreement with the Heilongjiang Bureau of Geology and Mineral Resources (HBGMR) in 2003. Now, Leyshon and HBGMR are developing the first-ever Sino and foreign owned gold mine in the mineral-rich Heilongjiang Province (formerly Manchuria) – the Zheng Guang project being 70% owned by Leyshon Resources and 30% owned by HBGMR.
For Leyshon Resources, 2007 was a year of delivering what the market already expected. A 43,000 metre infill drilling programme was completed with the primary goal to convert the Zheng Guang gold-zinc project from a largely inferred resource to a measured and indicated resource. As of April 2008, Zheng Guang has a total inferred, indicated and measured resource of 1.16 million ounces of gold, 4.5 million ounces of silver and 120,000 tonnes of zinc, using a ½ gram gold cut-off. The bulk of the drilling campaign was focused on the “main ore zone” where a shallow oxidised mineralised zone has been defined and will be the subject of a first stage mine plan. But there is a lot more to Zheng Guang than the main ore body; at least six further anomalies have the potential to add ounces in the ground, and one of them in particular - Zheng Guang North, only 750 metres from the Main Ore Zone - has already returned very encouraging results, including 8 metres at 17.6 grams per tonne gold from only 19 metres below surface. Leyshon is also looking to expand its understanding of the regional geology and add further resources to the mine life. As part of this ambition, Leyshon applied for, and received, new licences covering a further 83 square kilometres close to, and along strike from, Zheng Guang.
Funding exploration and development at Zheng Guang has never been an issue either, and Paul Atherley, Managing Director, is a significant shareholder and wants to stay that way, so dilutive fundraising is kept to a minimum.
This week, Leyshon released an updated estimate on the capital and operating cost projections for Zheng Guang, and it was a tale of two stories. First the capital expenditure (CAPEX) estimates for the mine increased by 14%; this may sound large, but Leyshon is building this mine from an exceptionally low budget, so even with the increase, the overall development cost is comparatively cheap compared with developments of a similar size in other countries. The CAPEX is low thanks to a very low strip ratio and simple mining methods, combined with excellent infrastructure, low cost Chinese-manufactured mining kit, and a very good Chinese partner. The previous CAPEX estimate for the 1.5 million tonnes per annum carbon in leach (CIL) plant and flotation circuit was US$50 million.
Leyshon’s Managing Director, Paul Atherley, believes the CIL plant will pay for itself within 12 months of production, allowing the company to use cash flows beyond that period to fund the flotation circuit, so it can then produce zinc concentrate – the second stage of the mine plan. Once in full production, at around 100,000 gold equivalent ounces per annum (e.g. including zinc and silver credits), Zheng Guang is expected to produce US$90 million in revenues per annum.
Ambrian Capital selected Leyshon Resources as its top pick for 2008, and has set a share price target of 40 pence. Ambrian estimates that on a gold price of US$850/oz, company revenues and operating cash flow forecasts are US$68m and US$40m, respectively, on 76,000oz of production in 2010, and US$118m and US$70m on 114,000oz in 2012.
Far more significantly, Leyshon also confirmed that the cash cost, per ounce, is actually lower than previous forecasts, at US$238 per ounce. At this sort of level, Zheng Guang will be an exceptionally strong cash flow generator and will be one of the lowest cost gold mines in existence.
With A$15.5 million in the bank on the 31 December 2007, and a rising share price, it seems hard to imagine a scenario where Leyshon won’t be able to fund the development of Zheng Guang. The year 2007 went as well as, or even better than expected, and despite concerns over rising costs in the mining industry, Leyshon’s Zheng Guang still has all the hallmarks of an ultra low-cost producer that will generate impressive cash flow for many years to come; one could easily argue that once in production, the company should trade at a premium to its peers. Leyshon is also considering listing on the Hong Kong Stock Exchange, which may result in it trading on a much higher multiple than it would receive on the ASX and AIM markets.
All of this excellent progress is set against a backdrop of a strong gold price – still pure china gold.
Other Leyshon Resources news
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11/06/08 Leyshon Resources confirms construction of main access road
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28/04/08 Leyshon Resources upgrades Zheng Guang Project resource
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04/12/07 Leyshon Resources maintains momentum