POST SHAREHOLDER MEETING THOUGHTS, Courtesy of Dr DeCosta
Two of the main goals in assessing the value of any mining deposit and its proper contribution to the owner/seller’s market capitalization are to calculate its “net present value” or “NPV” and its “internal rate of return” or “IRR”. The recent shareholder’s meeting and information session advanced us in this process quite a bit.
We now know that the remuneration being paid to Medinah USA will be binary and includes a 7.5% retained ownership based on a “free carried interest”/Net smelter royalty (“NSR&rdquo
and it will have a cash component based on $90 million being paid for every $2 billion worth of ore blocked out based on “in situ” valuations. “In situ” valuations for polymetallic deposits like that at Lipangue are based primarily on grade, tonnage and the price of the various metals on the date of the valuation determination.
This is slightly different than basing value on the number of ounces in the various NI-43-101 categories multiplied by “X” amount per ounce in any given category. The “in situ” or “in ground” modality is favorable to Medinah if they anticipate that the prices of the 5 metals sought after will continue their trend upwards. If the purchaser shares this mindset then it puts the pressure on the purchasers to attack the mountain aggressively.
Although the vast majority of the drilling by Medinah and ACA Howe was done on the “Gordon Pipe”, due to the fact that the deposit consists of a copper-gold porphyry and a copper-moly porphyry as well as “about a dozen” related intrusions (as per the hyper spectral satellite imaging study results) the estimated valuation process can advance NOW due to the use of “models” and especially the work of Singer and Cox.
What they did was design and construct “porphyry deposit models” so that mining engineers with a limited amount of data could evaluate probable economic viability early on in the process and thereby transform geoscience information into a form useful to mining decision makers. The foundation of the mineral deposit models is information about known deposits. What they did was study many, many hundreds of fully drilled out copper porphyry deposits of 3 main sub-types and made that information available to the mining economists to help them make their decisions. By far and away the greatest beneficiaries of all of this work are the owners of the “Lipangue” type of deposits which clearly fit, in this case 2 of the sub-types of porphyry deposits (Cu-Au and CU-Mo), but for which only a limited information is available in any one area of intense drilling like that at Medinah’s “Gordon Pipe”.
For instance, we know that the Gordon Pipe has about 5.3 million tonnes of ore present whose “in situ” value today is about $2.2 billion or about $410 per tonne on an “in situ” basis. We also know that the combined tonnage of the average-sized porphyries of these two subtypes is 500 million tonnes. By extrapolation and with a certain but difficult to define level of statistical certainty, one might predict that the “in situ” value of the 2 porphyries might approach $205 billion. DO NOT BELIEVE THIS FIGURE FOR A MOMENT BUT DO TRY TO GAIN AN UNDERSTANDING FOR THE CONCEPT OF RELATING KNOWN INFORMATION LIKE THE GRADE, TONNAGE AND VALUATION FOR THE ORE AT THE GORDON PIPE AND THE ABILITY TO USE “DEPOSIT MODELS” TO ESTIMATE ECONOMIC VIABILITY.
Note that the statistical validity of that $410 per tonne figure after drilling 18 holes in a confined amount of space (25-50 meter spacing) should be fairly high in a porphyry environment known for its homogeneity. The density of the granodiorite hosting the ore is very well established at 2.65 tonnes per cubic meter and calculating the number of cubic meters of ore is derived from drill results. One of the keys of using models is that the many hundred of deposits studied were thoroughly drilled out in 3 dimensions. The authors are quick to point out that you cannot use an approach like this to predict the grade and tonnage for much less predictable epithermal vein deposits with very little homogeneity.
The important thing about porphyries is that the 3 main subtypes fit tightly into these models. These deposits are huge (250-600 million tonnes of ore), of moderate grade (0.38 gm/tonne gold, 0.44% Cu and 0.03% moly) and involve extremely long mine lives. Perhaps most importantly they are PREDICTABLE once the proper subtype has been identified. Following the theme of the need to “learn from history”, what Singer selflessly did was to get “history” delineated to the umpteenth degree when it comes to copper porphyry deposits.
As far as the relative size of Medinah’s westernmost copper porphyry, the Cu-Au one, the typical diameter of the zone of mineralization around the centrally located “porphyry stock” is about 1,500 meters. However, inclusion body studies done at the Gordon Pipe and the LDM manto/skarn area revealed the same progenitor (parent) pluton despite the fact that these 2 outcrops are 3,200 meters apart. This might hint that the Cu-Au porphyry might be a bit larger than the norm.
As far as the average amount of ore tonnage cited per copper porphyry subtype those numbers were from the work of Cox and Singer. Note that a study of 55 porphyry deposits by Mutschler, Ludington and Bookstrom reveals that the average “Copper-gold” porphyry has approximately 300 million tonnes (metric or long tons) of economic mineralization while the average “Copper-moly” porphyry “weighs in” at approximately 500 million tonnes of economic mineralization or “ore”. For the sake of conservatism we’ll work with Singer’s much smaller numbers. The satellite imagery report of C.S. Perez states that there are “at least hundreds of millions of tonnes of resources” at Lipangue.
I can’t stress how important it is for you fans of “theminingplay.com” to study this all-important article by Singer et. al. They have all but drilled out this deposit for you in front of your own eyes via their decades of diligent work on this incredible project.
http://pubs.usgs.gov/of/2008/1155/of2008-1155.pdf The components of a “Net Present Value” calculation of both Medinah’s 7.5% free carried interest/NSR asset and its purchase price based on $90 million per $2 billion of ore blocked out in situ is starting to take shape. The IRR calculation is a bit down the road. Recall that $20 million taken in 25 years from now does NOT have a “present value” of $20 million due to the time value of money. Because of this a proper “discount factor” needs to be implemented. These are usually determined by things like the safeness of the country you are operating in as well as prevailing interest rates.
I’m still a bit fuzzy on the date at which the final calculation of the “purchase price” is to be done. It appears that these calculations might be done at the termination of the first 18,000 meters of drilling which I assume is going to occur rather rapidly especially as the chance of the price of gold breaking out to the upside looms ever present for the purchasers. Because of the structuring of the purchase agreement and the twin assets of the 7.5% royalty as well as the yet to be determined purchase price Medinah shareholders clearly now have gained economic exposure to any breakout in the price of gold to the upside with limited downwards exposure due to the guaranteed $90 million base purchase price level for Medinah USA.
DISCLAIMER: Do not treat this as a solicitation to buy or sell the securities of any issuer cited.
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