November 24, 2011
Focus Minerals To Deliver News On The Treasure Island Exploration Project
Our Man in Oz
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If mining companies were rewarded for effort then the share price of Focus Minerals would be a lot higher than it is today. But, the fact that the Australian goldminer has been unable to gain much traction with investors could be a bonus for late arrivals on the scene of a stock which should be re-rated once its beds down its mining costs and expansion initiatives. Over the past 12-months, as Focus has been expanding gold production and undertaking the bold acquisition of the troubled Crescent Gold, investors have been sitting on the sidelines which means that after a sharp price rise in January and February, Focus is pretty much back to where it started the year, trading at around A6 cents, and begging the obvious question: what’s going to be the re-rating catalyst?
Monday’s annual meeting could flag the start of the market taking a fresh look at Focus because that’s the time when a detailed report will be delivered on the company’s best chance for a greenfields gold discovery. Unfortunately, not too many investors will be in the room when an updated report on the Treasure Island exploration project is delivered, a result of Focus deciding to hold its meeting in the historic Western Australian goldmining town of Coolgardie, which is also the centre of the company’s main mining operations – but not a place well known for corporate events given that it is a five-hour drive east of Perth.
Sentiment, and a desire to display its “goldfields” roots is undoubtedly why Focus has decided to use the Coolgardie meeting as an opportunity to tell more about Treasure Island, a discovery on the northern edge of Lake Lefroy, a salt lake which lies on top of the fabulously rich Boulder-Lefroy fault-line, broadly in-line with the Kalgoorlie goldfield and, more importantly bearing interesting similarities to the rich St Ives gold deposit discovered by the old Western Mining and now worked by South Africa’s Gold Fields group.
For much of the past year the market has been keen to learn more about Treasure Island, with Focus declining to rush its field work. “We’re pretty confident that we have discovered what will eventually be recognised as a significant new gold camp,” Focus chief executive, Campbell Baird told Minesite ahead of Monday’s meeting. “But it’s early days exploring a 226 square kilometre tenement package that has only just had its first ever holes drilled. From that information and from surface work our geologists have managed to identify multiple vein arrays along 300 metres of strike on the island itself. Additional targets under the lake have been identified along 6 kilometres of strike, including paleochannels.
While Focus unlocks the potential of Treasure Island, a discovery which could be the key to unlocking the company’s share price, the day-to-day work is much more mundane because the engine-room of the stock consists of two mature goldmining operations heading for a combined output of 200,000 ounces in 2012. Flagship of the business remains the Coolgardie mines were Focus is working a series of open pits and underground operations, including Tindals and The Mount, which are on track to yield 100,000oz. The Laverton operations which came with the acquisition of Crescent are expected to yield another 100,000oz.
“The Crescent acquisition has the potential to transform Focus,” Campbell said. “We have become one of Australia’s major gold producers and a stock included in the ASX 300 (a list of the top 300 listed stocks). It is this production platform from four operating mines, with two still in the ramp-up phase which the market does not yet seem to have recognised. We’re confident that production can be maintained from our 4.3 million ounce resource base, and convert much of that into the higher reserve category.”
But, even Campbell acknowledges that there are issues weighing on the collective mind of institutional investors, including the relatively high cost structure of Focus’s mines, especially the Crescent operations, and the need to demonstrate that the Focus management team can do a better job that the Crescent team at the Laverton mines. Another unspoken issue is the continued sell-down by Deutsche Bank of Focus shares acquired in the Crescent share-swap takeover. “It does seem that Deutsche just wants to rid itself of any memories of dealing with Crescent, so the order has gone out to sell,” Campbell said. “Whether that’s linked to the financial and banking problems in the Eurozone is anybody’s guess, but I can understand why people might think that.”
Of all the issues which Focus has to face the most important is the cost of production, and right now that’s not pretty – especially at Laverton. In the September quarter, the Coolgardie mines boosted gold production to 24,319 ounces at an operating cost of A$944 an ounce, down slightly on the A$981 per ounce in the June quarter. Given that the average price received was A$1583 per ounce that left Focus with a reasonable profit. Crescent, however, appears to have been a different story and while the newly acquired 81.6 per cent subsidiary produced 21,915 ounces of gold in the September quarter the company did not reveal the cost of production which observers in Australia believe to have been around A$1400 per ounce.
“We are working hard to lower costs at the Laverton operations, and we are achieving some success,” Campbell said. “Over the next few quarters I believe you’ll see costs come down to around A$1100 an ounce.” Good news as that is for Focus the end result is that the two centres of operation look like they will struggle to drive down production costs substantially below A$1000 per ounce in the short term. While the gold price is high that’s not a major problem. But if the gold price slips significantly Focus will be under the microscope, and in need of a dose of good news from Treasure Island and other exploration programs to shake off the unwanted tag of being a high-cost miner.
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