December 16, 2011
Troy Resources Starts To Deliver On Its Promise At The Casposo Mine
By Our Man in Oz
www.minesite.com/aus.html (( Free registration ))
One month’s production does not a goldmine make, but when the cost of production in that month is an eye-catching US$103 an ounce it sure gets the juices flowing. That is precisely what happened last week when the chief executive of ASX-listed Troy Resources, Paul Benson, almost casually trundled out before a London audience the latest production news from the company’s Casposo mine in Argentina. If points were being awarded for the top talk at the Australia Day component of the Mines & Money conference, Paul would have won hands down, not for flair (that’s not Paul) but for an almost deadpan delivery of an astonishingly strong mining story.
“It is an impressive number,” he told Minesite’s Man in Oz when both of us had safely returned home, far from the chilly winds blowing across London from an even chillier Europe. “But, you really shouldn’t look at it in isolation. We’ll have our ups and down over time.” Oh dear, thought Minesite’s Man, here we go again, just when he’s getting excited about the outlook for Troy the chief executive hoses him down. Given the usual irrational exuberance of mining company CEOs there is something almost bizarre about a company boss who almost delights in spelling out the negatives and listing the things that could go wrong.
“I’ve been in the mining industry a long time,” Paul said when challenged on his ultra-cautious observations. Applying an Australian variation to a famous address by one-time U.S. President, Abraham Lincoln, Paul described his approach as one of: “You can bull**** some of the people some of the time, and all of the people some of the time, but you can’t get away with it all of the time with all of the people.” No explanation is needed for that little homily, though a bit more flesh needs to be added to the Troy story because it is a stock which just keeps on delivering, and almost certainly has a lot more to deliver.
The “crown jewel”, as Paul calls it, is Casposo, a project acquired in its undeveloped state at a bargain basement price of US$22 million in mid-2009, and developed at an even more impressive US$45 million (47 per cent less than the estimate of the original owner, Intrepid Mines) the project started to hit its early-years design output rate of around 80,000 ounces annually in September. It is a somewhat meaningless exercise, but instructive nevertheless, to consider what that October production cost means to Casposo, if achieved on an annual basis. Essentially, 12-months of gold production (including silver credits) at US$103 per ounce means the orebody acquisition cost, and plant development cost, could be paid for with about six months of cash flow.
It never works out that way, and Paul would be horrified to see such an optimistic assessment, but as ballpark introduction to Casposo, and what it means to own and operate a high-grade, low-cost mine, that’s what is theoretically possible. For a more sober view it’s best to let Paul do the talking, starting with the big picture of where Troy is today as the operator of two South American goldmines, Casposo and Andorinhas in Brazil, which between them helped the company post a modest profit last financial year of A$14.6 million, and pay a solid dividend of A10 cents a share.
Last year, however, was last year, and almost certainly the last in a series of “transition” years as Troy has migrated its operations from Australia to South America. In the current year, as reflected in a strong upward surge in the share price from as low as A$3.02 in March to recent sales around A$4.60, will be the first of what might called New Troy, a company producing well in excess of 100,000 ounces of gold a year at one of the lowest costs of any ASX-listed miner. Whether that US$103 per ounce at Casposo in October will be matched in future months remains to be seen, but the December cash cost will be aided by lower power costs after a switch from diesel generated power to grid power.
Lower costs and rising production are one of Troy’s attractions. The other, and perhaps the major attraction is the blue-sky exploration appeal of a company which has just started to unravel the geological secrets of a complex epithermal vein system. So far, Casposo has been seen as a relatively short-life project with Troy having a six-to-seven year mine plan, and an annoying mid-career decline in production as the mine makes the shift from open pit to underground. That issue, which has frightened some stockbrokers, is being addressed with a steady stream of “along strike” discoveries boosting the resource numbers, and with outcropping, gold-bearing, quartz veins providing Troy with walk-up targets to keep the three drilling rigs on site busy for the next three years.
“We’ve always believed we’ll have an extended mine life,” Paul said, before telling a small story against his own deep conservatism. “These types of epithermal deposits can be slow to reveal their hidden wealth so I’ve always played down the chances of quick success. The extension to the Kamila deposit was, however, a lesson in what can happen. I had just spent part of a board meeting explaining to the other directors that exploration would take time to produce the success we wanted. We went through a number of case studies showing how long it could take from discovery to when the mother-lode was found, with the object being to not build up hopes for quick-fire success.
“After all that preparation to get the directors primed for the long haul one of my executives called me across to show me a picture emailed from site showing the core which had just been extracted from the latest round of drilling. Just by looking at that core you could see it was lousy with silver, so I went back to the board and said disregard what I’ve just said.” That example is one of the upside surprises that epithermal vein systems can deliver, and while Paul would never say he expects more it would be a smart investor who, when doing his homework on Troy, looks through some of the cautious commentary and learns to live with a company which is determined to under-promise and over-deliver – to the point of being deliciously annoying.
::::::::::::::::::::::::::::