In Part 2 of this article series we depicted four different gold mine archetypes based on whether the property has a large or small discounted reserve (~2100 thousand ounces Vs. ~4500 thousand ounces) and whether it has a high or low AISC ($450 Vs. $900). These archetypes are described in the table below, including their go-forward, time adjusted NPV based on a $1,300/oz. gold price and including the gold recovery rate. The final column describes each mine type’s main driver for operational improvement to reduce AISC.
In this article (Part 3 of 3) we explore how dramatic shifts in the gold price will influence the value of each mine type, along with the implications for ownership philosophy and the effects of operational improvements to reduce AISC. It may appear at first glance that the Blue-Chip and Safe operations, with their low AISC’s, are innately more desirable that high cost mine types. However, presuming each type of mine could be acquired (or sold) for a price commensurate with its apparent NPV, Small and Large Upside Plays simply represent a different type of ownership philosophy. The table below shows how each mine type’s go-forward NPV would change were the gold price to rise to $1,600/oz. or fall to $1,000/oz. Also shown, in the final column, is the NPV impact of achieving a 10% reduction in AISC.
Whereas the value of the low cost mine types (Safe and Blue-Chip) only increases by 35% with a $300/oz. appreciation in gold price, the value of the high cost mine types (Small and Large Upside) rises by much more: 75%. Of course their value also falls by much more when the price declines. As such, the Upside Plays represent a higher-risk-higher-reward-type of ownership philosophy as compared to the low AISC mine types. For example, both the Safe mine type and the Large Upside mine types have an NPV of $1.8B at $1,300/oz. but the Large Upside mine could appreciate to $3.2B (or depreciate to $0.5B) with a $300/oz. swing in gold price whereas the value of the Safe Play stays within a much tighter range: $1.2B – $2.4B.
Also worth noting is that achieving a 10% reduction is AISC creates the most value in the Large Upside mine type, where the greatest total amount is being spent to produce the metal. As such, a perfectly legitimate strategy would be to work hard at reducing the AISC of a Large Upside Play, where this effort will pay the greatest dividend, in order to increase its resilience to a price drop and in anticipation of reaping a large reward when the price rises. In fact, if you were highly confident in your ability to drive AISC down, it may be possible to create more value this way than by owning and operating a Blue Chip operation.
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