Proactive investors

Additional information

Additional	Information
Market:	ASX | AIM
Sector:	Gold Mining
Epic:	LRL
News:	Latest news
Web Site:	Leyshon Resources
Other Articles:	22-09-200917-09-200930-04-2009

Leyshon Resources - battening down the hatches

by Wendy Durham

With running costs of just A$200,000 per month and almost A$8 million in the bank at the end of their September quarter, Leyshon Resources is probably better placed than most junior developers to survive the current uncertainties in the mining and exploration sector.

Whilst its share price – in common with virtually every company in the sector – has plummeted as investors have flown to cash rather than continue to risk their capital in equities, Leyshon has one other distinct advantage: it’s a gold developer.

Commodities are having a hard time. A global industrial slowdown will hurt the demand for virtually all metals that have industrial applications. The commodity darlings of just six months ago – platinum, nickel, copper – were dramatically sold off during October, and are now being shunned. Nickel has been harder hit than most. Its 2007 rise to US$25+ per lb led to significant demand destruction and substitution, which has – with the exception of the now-uneconomic nickel-pig iron – been largely maintained. Stocks are high and rising, and the price is low and still falling. Across all these commodities, supply destruction is now making itself felt. Nickel mines are being closed and production decreased. PGM production is also subject to closure, moth-balling and – in South Africa – will continue to be constrained by power rationing. Copper, zinc and lead output is being cut back or is under review by miners worldwide. Iron ore and seaborne coking coal may halve in price for the 2009 contract year, as steel production is already falling dramatically and some steel producers are asking for renegotiation of 2008 contracts.

But gold is a different story. There are industrial uses for gold, but they are not dominant price-leaders. Gold has maintained its centuries-old allure as an immutable store of value. It too has suffered from the commodities sell off, as deleveraging has forced sales willy nilly of anything that would put cash in the kitty. But in times of turmoil, gold is a preferred safe haven, and physical gold in the form of bars and coins is already very thin on the ground and, where obtainable at all, can be at a sharp premium to the spot price. The current dollar strength, driven by repatriation of previously-lent dollars, can only survive as long as deleveraging continues. Should a global recession follow, as predicted, then gold will come into its own again, and the keenest gold bugs – who never have less than extreme views! - are talking of US$1,500-2,000 an ounce.

And Leyshon has 1.2 million of them. Ounces, that is. Of gold. Their 70% owned Zheng Guang gold-silver-zinc deposit in Heilongjiang province presently contains 30 million tonnes of ore running at 1.5 g/t gold equivalent, for 1,477,000 ounces at a half-gramme cut-off. The actual composition of the resource is 1.2 million ounces gold, 4.5 million ounces silver and 120,000 tonnes zinc.

This resource – the Main Zone at Zheng Guang - is hosted in mineralisation which outcrops to surface, dips to the west, and is still open at depth. Initial development will be via open pit, but there are possibilities for underground mining once the pit is exhausted. Initially, a starter pit with low stripping ratios will mine the oxide ores, treating them via a CIL circuit. The deeper-lying sulphides will be processed after the first year of operations using an expanded flotation circuit to deliver gold, silver and a zinc concentrate. A minelife of approximately 15 years is forecast from the Main Zone alone, at the rate of 76,000 ounces of gold in 2009 rising to 115,000 of gold equivalent by 2012. Operating costs are low, ranging from under US$250 per ounce with full by-product credits to US$350 in the event of unfavourable prices for silver and zinc.

Leyshon’s estimates of pre-tax profits (EBITDA) rise from US$38 million in 2009, to US$70 million from 2012 onwards based on the lower of the operating cost forecasts. Key for shareholders, once mining operations are running profitably, is Leyshon’s plan to retain only enough of the profits within the business to meet sustaining capex and finance a small annual exploration budget. The balance will be returned to shareholders as dividends.

Capex for the project, although currently being reassessed, was forecast last July at US$54 million, and much development work has already been carried out on site since the groundbreaking ceremony in August, including the completion of the access road. Land acquisitions for the 16 km long power line have been agreed, and construction was due to commence following the harvest. Over 50% of the mechanical equipment has been sourced, the crushing circuit fabrication is complete and first ball mill fabrication well advanced. Leyshon don’t anticipate delays arising from late delivery of long lead time items, and – subject to funding – expect to start construction in earnest in April 2009, with first commissioning before the end of the year.

In view of the uncertainty in the markets, and lack of confidence in equity investment generally, Leyshon have shelved for the time being their plans for listing on the Hong Kong exchange, and have also postponed their intended equity fund-raising for the pre-construction phases of the mine. A detailed engineering review is currently underway which is exploring ways to get the project to cash flow with a reduced capital requirement, and this is expected to be delivered in the early Spring. In the meantime, on-site work has been suspended to conserve cash, and the engineering and geological teams have been temporarily demobilised. Project finance is being discussed with three international banks which have been unaffected by the recent financial upheavals, and, say Leyshon, are actively lending to resource project developers in emerging markets.

China is now the world’s largest gold producer, but Zheng Guang is the first joint venture in the province between a foreign development company and the Qiqiha’er Brigade of the Heilongjiang Bureau of Geology and Mineral Resources (BGMR), one of the largest organizations of its kind in China. By the end of next year, Zheng Guang should – provided all goes well and project finance can be secured - become the first jointly developed mine in the province.  

BGMR has been very supportive of the project, providing a range of services to the joint venture from its complement of 4,000 technical staff, drill rigs, laboratory and other technical facilities. This valuable support has moved the project rapidly ahead on an extremely cost-effective basis, as demonstrated by the current discovery cost of just US$5 per ounce.

Yet, even with all this going for it – and the prospect of a dividend too - Leyshon has seen its share price collapse from a healthy 25p on 1st July to just 2.5p today. In spite of the excellent progress at Zheng Guang and the relative resilience of the gold price compared with the base metals it has met the same fate as any other junior and has been sold off relentlessly.  At a market cap of just over £5 million, it is trading at less than twice its cash.

With over £3 million in the bank right now and its low cash burn, Leyshon is fortunate in that it can afford to mark time for quite a while. Indeed, it has already made plans to do exactly that during the winter months, whilst it grapples with the Zheng Guang engineering review.

By the time Spring comes, the world of gold mining could be a very different place.

Register here to be notified of Proactiveinvestors One2One Forums.