macphersons reward gold ltd - macphersons … · number of game changing acquisitions. ... mrp has...

RESEARCH NOTE – PATERSONS SECURITIES LIMITED 1

All information and advice is confidential and for the private information of the person to whom it is provided and is provided without any responsibility or liability on any account whatsoever on the part of this firm or any member or employee thereof.

RESEARCH NOTE

MACPHERSONS REWARD GOLD LTD

Investment Highlights

MacPhersons Reward Gold Ltd (MRP) is a Kalgoorlie-based exploration company which listed on the ASX in December 2010. Since listing, MRP has established a maiden gold resource at the MacPhersons Reward gold project and has recently made a number of game changing acquisitions. Purchase of the Nimbus silver-gold-zinc mine and mill has added a new dimension to the company’s production profile. Currently upgrading the mill to allow for silver and gold production, MRP is set to become a producer by the end of FY2012. Furthermore, MRP is carrying out due diligence on the underexplored Boroora gold tenement which envelopes the Nimbus landholding. We view MRP as a near term production story with good exploration upside and therefore recommend the stock as a SPEC BUY.

MacPhersons Reward gold project: The company’s namesake project has been the focus of activity since listing in late 2010. MRP has concentrated on defining the extent of mineralisation within four interconnected historic open pits as well as exploring some regional targets. Drill results have demonstrated good continuity of mineralisation culminating in the release of its maiden resource of 1.7Mt at 1.7g/t for 94.1koz of gold. The Tycho deposit is the most advanced of the regional prospects and on the back of phase 1 drilling the company released a resource of 430kt at 1.5g/t for 21koz of gold. The nearby Franks Find and Bakers Find prospects still require drill testing but offer exciting potential for further resource definition.

Nimbus silver-gold-zinc mine: The acquisition of the Nimbus mine was initially done as a way to fast track gold production by utilising and upgrading the existing silver mill to treat ore from the MacPhersons gold project. However, with skyrocketing silver prices MRP is exploring the potential of recommencing silver mining and also investigating the economic prospectively of polymetallic mineralisation within the landholding. The company has set an initial exploration target of 6Moz silver based on historical drilling and modelling work done by CSA Global. With drilling at Nimbus due to begin in September and the plant to be commissioned by mid next year the company is well advanced in the journey to becoming a producer.

Due diligence on Boorara: MRP has entered into a binding HoA to acquire the Boorara tenement package that envelopes the Nimbus mine and mill. While the landholding comes with a modest JORC resource of 84.6koz of gold, due diligence has identified a stockwork of high grade veins 500m north of the current resource outline. The geological setting is analogous to the Golden Ridge/Kanowna Belle zone and while mostly prospective for gold it also offers potential for extensions to polymetallic mineralisation similar to that seen at the Nimbus mine.

Parallel milling setup: Since the acquisition of the Nimbus silver mill MRP has made the decision to develop a parallel gold and silver circuit on site. With refurbishment of the silver plant well underway, MRP has also acquired key plant components for the gold circuit such as an 800Mw ball mill, primary crusher and CIL leach tanks. Commissioning of the plant is expected toward the end of FY2012 with start-up feed for the silver circuit being retreated tailings and historic stockpiles and gold feed to be sourced from the MacPhersons Gold project.

14th September 2011

12mth Rating SPECULATIVE BUY

RIC: MRP.AX BBG: MRP. AU

Issued Capital m 194.05

Price A$ 0.295

Market Cap. (FD) A$m 63.8

Net Debt/Equity % NA

Cash A$m 21

52wk High/Low A$ 0.41/0.25

Analyst: Tim McCormack

Phone: (+61 8) 9263 1647

Email: [email protected]

Disclosure: Patersons Securities acted as Lead Manager to MRP’s IPO for $30m at $0.30/sh in December 2010. Patersons received fees for this service.

An investment in this company should be considered speculative and note assumptions employed are contingent on broader market conditions remaining buoyant. These can change at short notice. Recommendations are current at the time of publication.

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Gold miner with a silver lining

13 January 2009



Background

The company was established as a private entity in 2008 and entered into a series of agreements to acquire the MacPhersons Gold project shortly thereafter. Operating under the name Coolgardie Super Pit Pty Ltd and headed up by current MRP Managing Director - Morrie Goodz, Chairman - Ashok Parekh and Non-executive Director - Jeff Williams the company raised $2.9m to fund development and conduct due diligence on the project. Later renamed as MacPhersons Reward Gold Ltd (MRP) the company listed on the ASX in December 2010.

The company’s primary focus has been on extending and consolidating known gold mineralisation within several previously mined open pits at the MacPhersons Reward gold project near Coolgardie in Western Australia. More recently MRP has initiated two key transactions which has 1) seen the company take possession of the Nimbus mine and mill only 10kms from Kalgoorlie and 2) on the completion of positive due diligence will see the company take ownership of the 33km2 Boorara tenement package which envelopes the Nimbus project.

The Nimbus mill will become a production hub for both centres with the MRP planning to expand the silver milling capacity and introduce a gold circuit allowing ore from both centres to be treated at Nimbus. With the refurbishment underway and key gold circuit components already purchased management indicate the plant should be commissioned by the end of FY2012.

Figure 1: Location of the MacPhersons project relevant to the Nimbus mine and mill

Source: Company Reports

Capital Structure

MRP has 194.05m shares on issue (5.8m escrowed until December 2011 and 63.7m escrowed until December 2012) and 22m options which are exercisable at $0.30 before 31 December 2013. The company is fully funded for exploration and on completion of the Nimbus and Boorara acquisitions will have ~$21m in cash and no debt. Major shareholders include Ashok Parekh (Chairman) and Ray Wright (Operations manager) who have a 15.53% and 15.13% respective interest.

13 January 2009



Asset Overview

The MacPhersons Gold project and Nimbus/Boorara projects are located ~50kms apart. The MacPhersons Reward Gold mine near Coolgardie has been the drilling focus since listing and with a number of production strategies in the pipeline we expect to see developmental guidance in the near term. The recently purchased Nimbus silver mine is 10kms from Kalgoorlie and will be well complemented by the Boorara landholding should the company choose to proceed with the purchase.

MacPhersons

The photo in Figure 2 shows the main prospect area at the MacPhersons Reward gold project which consists of four interconnected open pits - Powell, MacPhersons, Salvo and Kerry. The plan is to drill depth and strike extensions to unify the interconnected pits and expand the resource. MRP has indicated a potential “big pit” option which is becoming increasingly viable with appreciating gold prices and would greatly improve the economies of scale of the project. The Tycho prospect is most advanced of the regional targets and may serve as a start-up production centre. Figure 3 shows the location of the prospects and we note that Franks Find and Bakers Find offer good resource potential with further drilling required.

Figure 2: The 4 interconnected open pits at MacPhersons Reward (looking NE)


Geology

Geology of the project area is bounded by the Burbanks Shear zone which lies 3kms to the east. A felsic intrusion known as the MacPhersons Reward tonalite hosts the gold mineralisation along the lowermost basalt-komatiite contact. The tonalite is 100m thick within the immediate mine area and extends to the Bakers Find prospect for an overall strike length of 2.4 km (Figure 3).

Gold mineralisation is predominantly contained within the tonalite in sheeted quartz veins. Interpretations of drilling data indicate that mineralisation has occurred in two stages,

13 January 2009



resulting in various widths of mineralisation and mineral assemblages. Early stage gold grades tend to vary between 0.5g/t to 2g/t with progressive deformation events developing quartz reefs within a biotite-chlorite stockwork envelope. These reefs vary in width from 0.2 to 2.0m and are well mineralised with gold grades ranging from 1g/t to 138.2g/t

Figure 3: The MacPhersons Reward gold project


Big Pit Scenario

MRP is exploring a “big pit” mining scenario, whereby the 4 existing pits would be optimised within the one pit shell. Exploration between and below the existing pits has returned encouraging intercepts, although further drilling is required to increase confidence in the resources for pit optimisation studies. The concept is well supported by the increasing gold prices which improve the economics of the project.

MRP has had at least one drill rig concentrating on the in-pit drill out at the MacPhersons/Powell open pits since listing. Historically there are no records of diamond drilling below the MacPhersons open pit and 95% of historic drilling data is shallower than 70 metres. We see good potential for MRP if drilling can deliver sufficient results to support the big pit scenario, which would give the company a significant resource and mine life. How the actual production profile unfolds will become apparent as scoping and feasibility studies are completed. While the big pit option is being explored, the alternative for management to stage pit development if it better suits milling requirements remains.

13 January 2009



Figure 4: Stacked mineralised reefs below the 4 interconnected historical pits


Tycho Deposit

The Tycho deposit is located 2km south of the Macpherson’s open pit and is the most advanced of the regional prospects. The deposit is a Greenfield discovery with no previous drilling or old workings. Mineralisation is characterised by shallow dipping biotite-chlorite-talc shear hosted zones and on the back of phase 1 drilling MRP released a resource of 430kt at 1.5g/t for 21koz of gold. The company remains confident of increasing the resource inventory with the latest round of diamond drilling indicating 2 shear hosted gold zones that continue to a depth greater than 100m.

As seen in Figure 5 the deposit has minimal overburden (from 4m of transported alluvial cover). The deposit style lends itself well to a low cost open pit operation which is supported by the presence of mineralised halos around quartz shears that tend to grade as high as 0.5g/t. We expect to see ongoing positive news from the current drilling program and should see a resource upgrade at the deposit by Q3 FY2012.

Figure 5: Flat lying nature of the Tycho deposit – 2 zones of mineralisation (Spider 1 & 2)


13 January 2009



Drilling strategy for the 2H CY2011 at MacPhersons Gold project

The cross section shown in Figure 6 highlights the drilling program at the Macpherson Gold project. Currently utilising 2 diamond drill rigs, MRP has indicated Franks Find, Bakers Find and drilling under the Salvo and Kerry open pits as priority targets for the later part of this year. Exploration upside to this drilling program is encouraging in that little drilling has been completed over a depth of 50m and where it has mineralisation tended to continue at depth. We note that management indicated that on completion of the current Tycho drill out (late September) one of the rigs will be moved to the Nimbus project and begin resource definition drilling. MRP also has an Auger rig working on defining regional anomalies.

Figure 6: Drilling strategy at the MacPhersons Project


Nimbus

The Nimbus mine and mill was a strategic acquisition which will fast track the company’s journey to production. While the purchase represents an avenue to early production the associated tenure also comes with a highly prospective silver deposit as well as polymetallic zinc-lead and minor gold anomalies. Historically, Polymetals produced 3.6Moz of silver between 2006-2007 at a head grade of 353g/t and cash costs of around $6.50/oz. With today’s silver prices hovering around $40/oz re-birthing the silver project is significantly attractive given potential margins.

The mill and landholding was acquired from Reed Resources (RDR) and was satisfied for $3m in cash and $1.5m worth of MRP shares, with RDR retaining a 1% royalty on zinc production from the two mining leases. A toll treating arrangement is also in place whereby RDR can treat ore from its Sand Queen mine located north of Kalgoorlie.

Geology and Economic Potential

Geologically speaking the project sits along the Boorara Shear zone, which in the broader region is associated with primarily gold and some polymetallic mineralisation. Nimbus is unique and essentially a VMS deposit lying within the regional structure characterised by associations of silver-gold-zinc-lead. None of the previous land owners were able to fully delineate the extent of mineralisation but we highlight that this style of deposit tends to occur in clusters thus supporting the exploration upside of the project.

13 January 2009



In July this year MRP enlisted CSA global to undertake resource work based on historic drilling and consequently released an exploration target of 6Moz of silver. Although extensions to the mineralisation were modelled, wide drill spacing’s do not allow for a JORC complaint resource. MRP is confident based on current modelling that the 6Moz target can be upgraded to JORC resource categories on the back of drilling that is set to commence in September 2011. Figure 7 demonstrate good high grade extension to mineralisation beyond the floor of the old pit. We note that mineralisation does become transitional at depth and previous owners noted an increase in mercury content with the more sulphide rich ore.

Figure 7: Block model highlighting extensions to mineralisation beyond the old pit


The VMS style of mineralisation has also lead MRP to evaluate the economic potential of association elements such as zinc and lead. As a result of the resource review there is the potential to develop a significant zinc operation which sits down plunge of the silver mineralisation (Figure 8). Initial wireframes of the mineralisation have indicated economic potential for zinc mining at depth and along strike from the Discovery deposit. This aspect of the project has never been the priority for any historic drilling program and we expect good news flow as MRP explores this style of mineralisation.

Figure 8: Mineralised extensions at the Discovery pit (Blue =Silver, Green/Purple =Zinc)


13 January 2009



Modelling also suggests existence of up to 5 VMS lenses which are yet to be explored. With this style of mineralisation typically clustering the potential for new discovery and extensions to the know mineralisation is high. Figure 9 demonstrates wireframe extensions to the mineralisation and also highlights the close proximity of the mining centres to the processing facility.

Figure 9: Mineralised extensions to the Discovery pit


Boorara

MRP has entered into a “binding” Heads of Agreement to acquire the Boorara gold and polymetalllic project from Polymetals (PLY). The 33km2 landholding is comprised of 18 tenements and envelopes the Nimbus mine and mill. Located 10kms from the Superpit the project comes with a JORC classified resource of 84.6koz of gold and good exploration potential.

The Boorara Shear Zone is extensively under-explored and forms part of the Golden Ridge/Kanowna Belle zone, recognised as the second largest gold production domain in the Kalgoorlie region after the KCGM’s Superpit. Gold mineralisation typically occurs as quartz stockwork concentrated along sheared contacts between intrusive dykes and metasediment host rock. Exploration by current owners Polymetals has identified 4 areas of near surface mineralisation along a strike length of ~1.5km.

Previous intersections of up to 7m at 112g/t (including 1m at 738g/t) are located 500m north of the current resource and demonstrate the underexplored nature and potential of the landholding. Furthermore, Boorara offers good prospectively for extensions to polymetallic silver-gold-zinc-lead-copper deposits, both as Greenfield discoveries and as mineralised extensions old workings. The Brindabella, Condor, Tramways and Gretal deposits are examples of such polymetallic mineralisation within the landholding that requires further drill out.

Upon the successful completion of due diligence, MRP will execute formal documentation to acquire the Boorara Project from Polymetals for a consideration of $2.5m in cash (includes $50,000 non-refundable deposit) and $0.5m worth of MRP ordinary shares.

13 January 2009



Figure 10: The Boorara landholding enveloping the Nimbus silver mine


Nimbus – the processing hub

As fore mentioned MRP is pursuing a processing strategy whereby the 200ktpa Nimbus silver plant will be refurbished and a separate 490ktpa gold circuit will be introduced to treat product from the MacPhersons gold project (Figure 10). MRP have indicated commissioning of the mill toward the end of FY2012 and already started refurbishing major components of the existing plant, begun acquiring additional equipment for the parallel gold circuit and initiated connection to the mains power grid.

Figure 11: Simple flow chart of the parallel gold and silver Nimbus mill

Source: PSL Research

Start up mill feed for the silver circuit will be sourced from a 15kt existing stockpile which runs up to ~200g/t silver and 100-170kt of tailings that runs between 100 and 150g/t silver. This represents a low cost upfront means to generate cash flow in the short term and should produce approximately 450koz of silver, which represent revenue of $19m at a silver

13 January 2009



price of $40. Processing this material in the short term provides cashflow while MRP drill out the silver resource and establish a mining strategy for the open pits.

We expect gold mining at the MacPhersons gold project to commence roughly inline with commissioning of the plant. At this stage the Tycho deposit is shaping up at a likely start up operation due the low stripping ratio and minimal capex requirement. With phase 2 drilling to be completed shortly we expect to see a resource upgrade at the deposit which will determine exactly how it fits into the production profile. The MacPhersons project “big pit” option is shaping up as a longer term more robust ore supply that is not likely to come on line in the near term unless management make the decision to stage development and target areas of the resource that are most developed.

Valuation

While MRP is trading above our industry average on an EV/Resource metric at ~$228/oz of gold, we expect to see a re-rating as resource upgrades from the MacPhersons Gold project become apparent toward the end of the year. We see the near term production potential and prospective silver/zinc resources from the Nimbus mines as not fully realised by the market thus MRP offers good upside for the savvy investor.

Note that in the calculation of the EV/Resource we have assumed MRP to advance with the Boorara acquisition, therefore the cash consideration and additional resource of ~86Koz are factored into the calculation.

Figure 12: MRP on an EV/Resource metric

Source: PSL Research

13 January 2009



Risks

Exploration and resource upgrade: The challenge remains with MRP to deliver on exploration targets and upgrade the current resource base. If the company does go ahead with the Boorara acquisition it will need to prioritise a drilling program that incorporates all 3 project areas and number of rigs available. Whether this involves an increased exploration budget or re-evaluation of priority targets, the company is in a position whereby it needs to increase its resource inventory as production is just around the corner.

Commodity Prices: Going forward the majority of MRP’s revenues will be derived from the extraction and sale of gold and silver. Fluctuations in prices will affect the company’s reserve estimates, ability to obtain financing and its financial condition. We envisage start-up cash costs for the MacPhersons project to be higher than average due to pre-strip/cutback requirements which has the company leveraged to the gold price in the start up phase. While current gold and silver prices offer significant margins, caution must be recognised as to future commodity prices.

Scheduling and timing: MRP has indicated commissioning of the mill toward the end of FY2012. Commissioning should coincide with beginning of production mining from the MacPhersons project as well as the ramp up of the tailings treatment at Nimbus. The transformation from explorer to producer in the near term will need to be effectively planned and managed.

Foreign Exchange Risk: As an Australian company, fluctuations in foreign currency exchange rates between the Australian dollar and US dollar have the potential to decrease the profitability of the company. MRP has not taken any steps to hedge against currency fluctuations

Financial: If MRP do need to return to the market for funding there can be no assurances that capital will be available at a reasonable cost which could see dilution issues in the future.

Cutback mining: The MacPhersons gold project will require a significant cutback if it is to proceed with the big pit option. The development of the cutback may have to be staged to ensure it coincides with the commissioning of the processing facility in mid 2012. The negative aspect of this option is that stripping ratios will be high in the developmental stages which will drive up operational costs/oz.

Conclusion

We see MRP as a unique and exciting investment opportunity. A gold, silver and zinc producer in the Goldfields is rare and a facet that will no doubt grab market attention as it comes to fruition. With an extremely experienced, well connected management team we believe the company of poised to emerge from infantile explorer to a dual commodity producer by this time next year.

While FY2013 will yield modest ounces of gold and silver, near term production will reap the rewards of high commodity prices and provide a solid footing for the company to grow. With production only 9 months away we expect to see a steady news flow of resource upgrades, project progress and scoping studies which will build further value in the stock. We rate the stock a SPEC BUY.

13 January 2009



Directors and Management

Ashok Parekh, Chairman – Executive Director

Mr Ashok Parekh is a chartered accountant who owns a large Accounting Practice in Kalgoorlie, which he has operated for 25 years. He was awarded the Centenary Medal in 2003 by the Governor General of Australia, and was recently awarded the Meritorious Service Award by the Institute of Chartered Accountants, the highest award granted by the institute in Australia. Mr Parekh has over 25 years experience in providing advice to mining companies and service providers to the mining industry. He has spent many years negotiating with publically listed companies and prospectors on mining deals which have resulted in IPOs and the commencement of new gold mining operations. He has also been involved in the management of gold mining and milling companies in the Kalgoorlie region.

Morrie Goodz, Managing Director

Mr Morrie Goodz is a mining geologist and a Fellow of the Australasian Institute of Mining and Metallurgy. He has 33 years industry experience including nine years experience in international mineral exploration in North America and Africa. Since 1985 he has been based in Australia with operational and strategic management roles at the A1, Morning Star, Daisy Milano and Kalgoorlie Consolidated Gold Mines. Since 1987, Mr Goodz has been the Principal Consultant of Goodz GMC, providing geological and mine planning services. Mr Goodz was responsible for the project conception and discovery of the Daisy Milano shear zone extension where, amongst other operations, he designed and constructed the current decline and underground operations to the number 12 Level at the Daisy Milano gold mine. Mr Goodz is actively involved in promoting mining education with various professional bodies and the WA School of Mines, and was the Chair of the AusIMM Sustainable Mining conference in August 2010. Mr Goodz is an active public speaker at conferences and workshops on mine design, business improvement and strategic planning.

Jeff Williams Non Executive Director

Mr Jeffrey Williams has 16 years experience as a professional mining engineer in Australia and seven years in the stockbroking industry, and is a Fellow of the Australasian Institute of Mining and Metallurgy. His mining experience ranges from mine planning, underground management and feasibility studies through to mine development. He has held various positions with CRA Limited at Broken Hill and has played a major role as a Senior Project Engineer with North Limited. Mr Williams is currently Managing Director of Mineral Deposits Limited and a Non-Executive Director of Morning Star Gold NL. Mr Williams established Nimbus Resources (now Mineral Deposits Limited) in 1997, and acquired mineral sands assets from BHP-Billiton near Hawks Nest on the New South Wales coast in 1998. Mineral Deposits Limited has since secured the Sabodala gold and Grande Cote zircon projects in Senegal in West Africa, and commenced gold production in March 2009.

Stephen Hewitt-Dutton, Company Secretary

Hewitt-Dutton has over 20 years of experience in corporate finance, accounting and company secretarial matters. He is an Associate Director of Trident Capital and holds a Bachelor of Business from Curtin University, is an affiliate of the Institute of Chartered Accountants and a Senior Associate of FinSIA. Stephen is currently Company Secretary for three ASX listed companies. Before joining Trident Capital, Mr. Hewitt-Dutton was an Associate Director of Carmichael Corporate where he assisted clients by providing equity market, IPO and M&A advice and assistance. He has held Financial Controller and Company Secretary positions for both public and private companies for in excess of 15 years.

Ray Wright, Operations Manager

Mr. Ray Wright has 45 years of mining industry experience, including 35 years as a Mine Manager. In many of these projects, he has performed the role of owner/operator. Key roles have included being involved in the development and production of the Maude & Yellow Girl gold mines at Glen Wills, Wattle Gully gold mine at Castlemaine, Stannary Hills tin mines, Atherton, the A1 & Morning Star gold mines at Woods Point, and the Daisy Milano mine at Mt Monger in Western Australia. Mr Wright has also been involved in the construction and expansion of processing plants relating to the above operations, including the Burbanks gold processing plant at Coolgardie. Mr Wright is a certificated mine manager and will act in the role of Operations Manager.

13 January 2009



William (Bill) Powell, Prospecting Manager

Mr Bill Powell started prospecting in the family business from the age of ten. He has an extensive mining history which covers the discovery and development of many mines in the Kalgoorlie, Coolgardie and Higginsville gold fields. In 1983, Mr Powell was responsible for the discovery of his namesake, the Powell open pit mine and then the re-discovery and development of the MacPhersons Reward mine. Between 1984 and 1986, he discovered several gold-bearing deposits which led to the first “Coolgardie Super Pit” prior to the development of Kalgoorlie’s superpit.

Stock recommendations: Investment ratings are a function of Patersons expectation of total return (forecast price appreciation plus dividend yield) within the next 12 months. The investment ratings are Buy (expected total return of 10% or more), Hold (-10% to +10% total return) and Sell (> 10% negative total return). In addition we have a Speculative Buy rating covering higher risk stocks that may not be of investment grade due to low market capitalisation, high debt levels, or significant risks in the business model. Investment ratings are determined at the time of initiation of coverage, or a change in target price. At other times the expected total return may fall outside of these ranges because of price movements and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. This Document is not to be passed on to any third party without our prior written consent.

13 January 2009



macphersons reward gold ltd - macphersons … · number of game changing acquisitions. ... mrp has...

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