You do bring up an interesting point on soaring costs. The company has only two mines available for mill feed at this time; the QR Mine and Bonanza Ledge. We can discuss the potential of other properties, but this has no bearing on the upcoming year, 2013.
There are proven and probable reserves 30,140 oz Au. Estimated resource is somewhat higher at combined measured and indicated 46,718 oz. The prefeasibility study envisioned a positive net present value at $850 gold, with operating costs a reasonable $821 oz, and payback in just ten months. This was the base case scenario. However, that's not what happened.
The Consolidated Financial Statements for the year ended February 29, 2012 (filed June 28) reveal a different story. In section 12.1, page 29, the QR Mine was flagged for an impairment test, " related to the current interruption of mining operations, recurring losses from operations and ongoing reliance on external funding to sustain operations." An asset is considered impaired when the carrying amount (it's book value on paper) is greater than it's recovery amount (how much it's worth in reality). The carrying amount for the QR Mine is a modest $1,616,292. That's what it's worth on paper.
So, they ran an impairment test and the QR Mine passed muster. But here's the kicker. The test assumed a gold price of $1,728 oz with a sensitivity of 1.1%. In other words, had they selected a gold price of $1,700 oz the QR Mine would have been declared impaired. At $1,700 gold the company can't make a profit. That's why the project is essentially mothballed.
Fast forward to Bonanza Ledge. They have a mining permit for 73,000 tonnes per year at a grade of 9.05 g/t. Please see the news release of December 6, 2011. It doesn't matter what the mill capacity is, since they are limited by the permit. They have 101,800 oz in reserves. So, in four years they can chew through the reserves. All numbers listed below are in metric. For some reason the company likes to report in American short tons, and these have been converted here to metric because that's what everyone else is using. Anyhow, this works out to 21,240 oz annual production. If we account for the 93% recovery rate used in the prefeasibility study of August 2009 (filed October 23, 2009), this is reduced to 19,754 oz. At $1700 gold this could be valued at $33,581,800.
That's overall gold production for the year. Now, what about the costs? See section 19.14 of the PFS. Once again all numbers have been converted to metric:
- Ore Mining = (297,532 t) X ($6.70/t) = $1,993,464
- Waste Mining = (5,328,528 t) X ($2.98/t) = $15,879,013
- Processing = (297,532 t) X ($27.54/t) = $8,194,031
- Admin = (297,532 t) X ($20.41/t) = $6,072,628
The total works out to $35,655,964 for the four year life of mine, or $8,913,991 per year. So,
$33,581,800 - $8,913,991 = $24,667,809 income per annum.
However, as with the QR Mine this is the base case. A base case is just a hypothetical what if. The same factors that plagued the QR Mine will also punish the bottom line for Bonanza Ledge. As the 2009 prefeasibility study shows an increase of only 10% in operating costs results in a sharply negative net present value. In other words, it doesn't pay to work. A higher American dollar also sharply reduces profits, offsetting any rise in gold price. The base case assumes a lower American dollar. Add to all this an expensive proclivity for enthusiastic drilling by management, and you begin to see a respectable, if modest, profit whittled back from the black and into the red.