Keras Resources (KRS.L) - Shard Capital Stockbrokers

22 March 2016
Keras Resources (KRS.L)
The Only Way to Play the Perfect Storm
Metals & Mining
1.2
1.1
Keras Resources is an AIM-quoted resource development company with a diverse suite of
assets in Australia and Africa. Given the iron ore sector downturn, Keras has stepped back
from its African iron ore projects to focus on near-term gold production assets in Western
Australia. Keras plans to commence gold production in Q2 2016, with a plan to build into a 3040koz producer. This new strategy drives shareholder value by acquiring access to permitted
projects with low capex and opex, and the potential for near-term cash flow.
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
Jan 2015
Apr 2015
Jul 2015
Market data:
Market
EPIC
Price
Oct 2015

Jan 2016
Source: LSE, KRS.L share price (p)
London (AIM)
KRS
1.09
12m High (p)
1.09
Shares (bn)
1.19
Free Float (%)
72%
12m Low (p)
Market Cap (£m)
0.35
Dave Reeves
James Carter
Roy Pitchford
Russell Lamming
Peter Hepburn-Brown
Non-Exec Chairman
Managing Director
Finance Director
Non-Exec Director




Non-Exec Director
Non-Exec Director
agreements in the Kalgoorlie region of Western Australia, one of the most prolific gold
producing regions in the world. Tribute Mining involves the mining of resources owned by
third parties, on existing mining leases, and sending the ore for toll treatment at a nearby
process plant. The deals are typically structured as profit share or royalty agreements.
Near-term Cash Flow. The advantage of a tribute deal is that because mining takes place on
existing leases, there is no onerous permitting process. Furthermore, mining is normally
focused on orebodies forming remnant resources below existing open pits, or previously
un-mined shallow deposits. The use of existing infrastructure and toll processing means
10.5
Description
Resource development company focused
primarily on gold projects in Western
Australia. First gold production due in Q2 2016
from a number of low capex tribute projects.
Longer term pipeline includes the Nayega
Manganese project in Togo, where Keras
awaits the granting of the Mining Licence.
www.kerasplc.com
Directors
Brian Moritz

Unique Strategy. Keras, previously known as Ferrex Plc, has secured three “Tribute”

that capital requirements to restart production are largely negligible, amounting to working
capital only, allowing projects to be fast-tracked into production.
Production Plan. Initial gold production will come from the Grants Patch Tribute project,
with first production and revenues due in Q2 2016. Throughout 2016, Keras plans to bring
on-line several other open pit operations, steadily ramping up gold production.
High-grade Upside. Cash flow from open pit mining will be used to develop high-grade
underground projects such as the Prince of Wales mine which previously produced 230koz
at 10g/t gold. Cash will also be directed towards new acquisitions in the WA gold space.
Best of the Best. Western Australia is ranked as the top jurisdiction in the world for mining
investment based on mineral policy, tax, geological prospectivity and other factors.
The Perfect Storm. The devaluation of the A$ has caused the Aussie gold price to soar away
from the US gold price, and in combination with lower input costs due to spare capacity,
Aussie gold miners are currently enjoying the perfect storm and sector-leading margins.
Pipeline. Keras could rapidly develop the Nayega manganese project in Togo within 9
months upon receipt of the mining permit, and subject to funding. Nayega is a low capital
intensity project with good infrastructure. Manganese is a key ingredient in steel, and
prices have sky-rocketed in 2016 due to limited stocks and a wave of Chinese demand.
Keras is the only way to gain pure-play exposure to the buoyant Australian gold sector either
on AIM or the Main Market. We have not undertaken DCF valuation analysis due to the fluid
nature of the production plan and lack of hard inputs (costs, schedules etc.) whilst Keras
Analyst
Phil Swinfen
+44 (0)207 186 9950
finalises mine plans. However, we see scope for a significant re-rating in the company’s shares
upon making the transition to producer. With near-term cash flow on the horizon and an
aggressive growth strategy in place, the shares offer a cheap entry point into a compelling gold
play, in our view.
22 March 2016
Contents
Keras: Gold and cash flow focus .........................................................................................3
Directors and Management ............................................................................................4
Company Structure .........................................................................................................5
Capital Structure ......................................................................................................... 5
A New Strategy – Refocus on Gold Tributes ...................................................................6
News Catalysts & Development Plan ..............................................................................8
Funding & Financials .......................................................................................................9
Valuation Considerations – too early to peg................................................................... 9
Australian Gold – Exploiting the sweet spot .................................................................10
Location – Western Australia is the No.1 Jurisdiction ..................................................13
Processing capacity in WA, plenty of options ...............................................................14
Australian Gold Tribute Projects .......................................................................................15
Keras – One of the only ways to play the sector on AIM ..........................................15
Tribute 1: Grants Patch ................................................................................................. 16
POW Underground – the high grade prize................................................................21
Tribute 2: Wycheproof ..................................................................................................23
Tribute 3: KalNorth ....................................................................................................... 24
Nayega Manganese - future potential .............................................................................28
Disclaimer ......................................................................................................................... 30
2
22 March 2016
Keras: Gold and cash flow focus
Keras Resources plc (ticker: KRS) is an AIM-quoted resource development company with
a diverse suite of assets in Australia and Africa. The company is focused on driving
shareholder value by attaining near-term cash flow through the development of
advanced stage, low capital expenditure mining projects in favourable jurisdictions.
The company’s current commodity focus is gold and Keras plans to commence initial
gold production from its portfolio of Australian gold assets in Q2 2016, taking advantage
of the opportunity created by currently low input costs and a favourable Australian
dollar gold price. Keras aims to become a 30-40kozpa gold producer.
Keras anticipates directing the free cash flow towards further development of highmargin Australian gold opportunities in addition to subsidising the development of the
company’s Nayega Manganese project in Togo, minimising equity dilution.
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
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Gold: Keras has secured three “Tribute” agreements in Western Australia; Grants
Patch, Wycheproof and KalNorth. The tribute agreements give Keras the right to
mine existing gold deposits on third party mining tenements, utilising existing
infrastructure and processing plants, typically in return for a profit share agreement
based on gold production. Keras has secured tribute agreements over some of the
most prospective areas in the prolific Western Australian Goldfields. Currently,
Keras’ tribute agreements cover historical resources of c. 585koz, and management
anticipate an initial production rate of 15-25kozpa from Q2 2016. The projects
benefit from extremely low or negligible acquisition cost, coupled with minimal
capex requirements with gold-bearing ore being processed through existing mills.
Manganese: Keras holds an 85% interest in the Nayega manganese permit in
northern Togo. A bankable feasibility study has been completed and the grant of a
mining permit is awaited. The BFS indicates that Nayega has potential to be a lowcapex, open pit mine, producing 250ktpa of 38% manganese concentrate.
Other: Keras also holds a variety of iron ore and manganese assets in Gabon and
South Africa. Given current iron ore market conditions, these projects are non-core
and Keras is assessing ways to realise value from the assets.
Keras’s share price has displayed a degree of weakness over the last two years, in-line
with peers due to considerable commodity sector headwinds and weak sentiment. With
mining and commodities approaching, or already at the bottom of a cyclical low,
virtually all resource companies have suffered significant share price declines. In
particular, iron ore prices have declined 75% since their peak in 2011. However, Keras’s
shares have gained considerable traction since December 2015 as a direct result of
refocusing the portfolio on Australian gold opportunities.
Figure 1 - KRS 3 year share price (p)
3.0
1.0
2.0
1.0
1.2
1.1
2.5
1.5
Figure 2 - KRS 1 year share price (p)
0.9
0.8
1st Gold acquisition
0.7
0.6
0.5
0.5
0.0
Jan 2013 Jul 2013 Jan 2014 Jul 2014 Jan 2015 Jul 2015 Jan 2016
Source: LSE
0.4
0.3
Jan 2015
Apr 2015
Jul 2015
Oct 2015
Jan 2016
Source: LSE
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22 March 2016
Directors and Management
Brian Moritz - Non-Executive Chairman
Brian is a Chartered Accountant and former Senior Partner of Grant Thornton, London.
He formed Grant Thornton’s Capital Markets Team which floated over 100 companies
on AIM under his chairmanship. In 1995 he retired from Grant Thornton to concentrate
on bringing new companies to the market. Brian was formerly chairman of African
Platinum PLC (Afplats) and Metal Bulletin PLC as well as currently being chairman of
several junior mining companies.
Dave Reeves - Managing Director
Experienced management team
with operating experience in a
wide range of commodities and
multiple continents
Dave holds a first class honours degree in mining engineering from the University of
New South Wales, a graduate diploma in applied finance and investment from the
Securities Institute of Australia, and a Western Australian first class mine managers
certificate of competency. He has over 25 years’ experience and has operated in
Australia, Africa and Europe in gold, precious metals, mineral sands, bulks and copper.
He is non-executive Chairman of ASX and AIM listed European Metals Holdings.
James Carter - Finance Director
James is a CPA with 17 years’ experience in the mining industry. James was most
recently CFO of Straits Resources, a diversified metals group listed on the ASX. Prior to
this James was CFO and Company Secretary of SGX-listed Straits Asia Resources and was
integral to its development as a 10Mtpa coal producer in Indonesia. His work at Straits
included debt and equity capital markets, tax strategy, M&A and corporate governance.
James is a board member of Worldwide Energy, an aspiring Indonesian coal company
and PTT Asia Pacific Mining.
Roy Pitchford - Non-Executive Director
Roy, a Charted Accountant, has more than 25 years’ senior management and executive
experience. Previously CEO of Cluff Resources Zimbabwe Ltd, Delta Gold Zimbabwe (Pvt)
Ltd, Zimplats, Afplats and African Minerals Ltd. Roy currently sits on numerous public
and private mining companies’ boards, and is CEO of Vast Resources.
Russell Lamming - Non-Executive Director
Russell Lamming is a qualified geologist with an honours degree in geology from the
University of the Witwatersrand and a Bachelor of Commerce in Economics from the
University of Natal. Russell has a broad range of experience including directorship of a
South African mining consultancy and precious metals analyst for a leading international
broker. Russell was also the CEO of AIM listed Chromex Mining and Goldplat Plc.
Peter Hepburn-Brown - Non-Executive Director
Peter Hepburn-Brown is a qualified mining engineer with over 35 years of international
mining experience, having managed gold mines in Australia and internationally. Peter
will be responsible for establishing gold production and assisting with the development
of Keras's other projects.
Peter George – Chief Operating Officer
Peter George is a qualified mining engineer with a First Class Western Australian Mine
Managers Ticket. Peter has over 22 years operating in gold and base metals company in
Australia and overseas. Peter has most recently managed an underground contracting
firm based out of Kalgoorlie.
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22 March 2016
Company Structure
Keras has a relatively simple structure. The company is registered in England and Wales,
with the company’s shares quoted on AIM. In December 2015, the company changed its
name to Keras Resources Plc from Ferrex Plc, with the ticker changing to KRS from FRX
to reflect the move away from the iron ore as a result of a strategic review and focus on
near-term cash flow opportunities and Australian gold.
Keras holds various interests in its mining assets via a wholly owned Guernsey
subsidiary, with operations in four countries; Australia, Togo, South Africa and Gabon, as
detailed in the figure below. The 74% ownership of the South Africa reflects BEE
requirements in the country. The Australian tribute operations are wholly-owned, and
although Keras does not own the mining tenements, it has exclusive right to mine in
certain defined areas, with each tribute agreement having its own economic structure;
typically, a 50:50 profit share agreement.
Keras’s first tribute agreement and foray into Australian Gold was precipitated by the
acquisition of Chaffers Mining, a private company, in November 2015. Keras has
aggressively grown its foot print in Western Australia and now holds three tribute
agreements; Grants Patch, Wycheproof and KalNorth. We expect the company to
identify further low-capex, high-margin opportunities with the potential to increase
production and grow cash flow.
Figure 3 -Simplified Company Structure
Capital Structure
Source: Shard Capital and Keras Resources
Keras had 1.19bn shares on issue as of the end of February 2015. The company’s shares
are largely held by management, along with a variety of retail investors. Institutional
holdings are limited at present, due to the size of the company.
Directors and management hold a c.25% interest in the company, insuring alignment
with shareholder interests, in our view. Free float is 72%. In February 2016, Keras closed
a position with YA Global of 45.8m shares and continues to be cognizant of the need to
manage equity dilution. As such, working capital required to commence gold production
in Q2 2016 was raised via a non-dilutive loan note in February 2016.
5
22 March 2016
A New Strategy – Refocus on Gold Tributes
Taking advantage of opportunities
A change of direction towards
Australian gold reflects a
continued focus on driving
shareholder returns
The stuttering of China’s growth engine, oversupply and general weak sentiment have
weighed considerably on both metal prices and mining equities. In particular, iron ore
prices have seen significant declines as major producers such as BHP Billiton and Rio
Tinto continue to ramp up production against a backdrop of fundamentally weak
demand. Iron ore prices have decreased from $190/t to $60/t currently. In addition,
many companies in the sector are saddled by a considerable debt burden built up due to
over-leveraging during the last commodities bull cycle, necessitating an inward-looking
focus on servicing debt, attempting to maintain dividends, cost optimisation, project
disposals, and of course drastic cuts in exploration expenditure.
This situation necessitated a strategic change of direction for Ferrex Plc, changing its
name to Keras Resources and re-focusing on advanced gold projects as the Board
deemed that iron ore in Africa would not deliver maximum value for shareholders. The
current cyclical downturn in commodities has created opportunities to acquire interests
in advanced stage projects with a direct route to production and near-term cash flow.
Small, but perfectly formed
The inward-looking focus of larger producers means that numerous opportunities have
emerged for smaller, more agile operators to investigate mining previously defined
orebodies on third party licences that are either too small, or for various reasons do not
meet senior company hurdle rates, including lack of management time and focus on
projects with a longer mine life. Thus smaller, short LOM projects are often neglected
even though they offer low capex and potentially attractive margins, especially for
operators with low overheads (low corporate G&A) and a streamlined structure.
What is a Gold Tribute Agreement?
Tributes are a unique style of
agreement, providing fast track
access to advanced near term
production assets with minimal
or no upfront capex. The
downside, is that they do not
capture 100% of the economics
of a deposit
A tribute is simply a type of project structure that gives the tribute holder an
entitlement to work a mine, deposit, or portion of, under an agreement with the mining
licence holder. Typically, the tribute holder will mine existing orebodies, either
comprised of remnant resources below historic pits or previously un-mined near-surface
deposits. Ore mined by the tribute holder is usually processed in the third party’s mill,
akin to toll treatment, with the tribute holder receiving payment based on the contained
gold less metallurgical recovery at the prevailing gold price. Tribute holders typically pay
royalties to the licence holder or enter into a profit share agreement. Fundamentally,
this is a win-win for both parties, although the downside is that the tribute holder does
not capture 100% of the economic benefit – this is mitigated by access to near-term
cash flow and an attractive IRR, given zero upfront capex and existing infrastructure.
Figure 4 -Advantages of Tribute Agreement style projects
Source: Shard Capital
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22 March 2016
As projects are located on existing mine sites, minimal capex is required as there is no
need to permit and construct a processing plant.
Subsidising future development to minimise dilution
Cash flow will be directed
towards expanding production
from high-grade underground
deposits or new acquisitions
Revenue from Grants Patch, the most advanced gold tribute should position Keras to
acquire larger projects, taking advantage of current valuations at the bottom of the
cycle. Cash flow will be utilised to bring the other tribute projects into production. In
additional funds will be directed towards re-starting the Prince of Wales underground
mine on the Grants Patch licence, and also for development of the Nayega manganese
project in Togo. This is likely to significantly reduce equity funding requirements and
reduce future dilution.
Leap-frogging the high risk / high cost stages
The rationale for the strategy of moving the company’s focus to advanced stage gold
tribute projects can be seen by reference to our conceptual resource life-cycle / value
curve below. The nature of the tribute agreements; mining previously identified
orebodies and processing at existing operations, effectively means that Keras by-passes
the high risk and high cost exploration and evaluation stages.
The benefit of this strategy is that Keras does not have to expend significant funds
testing and evaluating potential deposits. Rather, expenditure is limited to due diligence
and confirmatory drilling, in actual fact, essentially only grade control and blast-hole
drilling to directly support the commencement of mining. Keras also skips the high cost
and long time lines associated with feasibility studies and permitting.
Figure 5 - Resource value curve: Gold tributes well positioned
Source: Shard Capital
7
22 March 2016
News Catalysts & Development Plan
We expect increased news flow in 2016 for Keras as the company moves towards
maiden gold production at its Australian Tribute projects. Based on Keras’s current
schedule, first gold production is on track for Q2 2016 from two deposits (Anomaly 22
and Accord), part of the Grants Patch tribute.
Transitioning to become a gold
producer in Q2 2016 with an
aim to be producing 30-40 koz
per annum by 2017
From mid-2016 onwards, we believe Keras will hit its stride as production starts to ramp
up from multiple deposits. Bent Tree and Royal Standard North will be the next cabs off
the rank in the Grants Patch Tribute, followed by production from Wycheproof in Q3
2016. Following on, Keras then plans to expand the production base by mining open pits
on the KalNorth project, the company’s third tribute, from Q3 2016.
Building towards a 30-40koz pa gold producer
From 2017 onwards the production plan has not been finalised but it is likely to see the
introduction of underground mining into the mix, targeting Parrot Feathers (part of
KalNorth) and then the larger prize of the Prince of Wales underground (Grants Patch).
Ultimately, Keras’s vision in the near-term is to become a 30-40koz pa producer with
operations centred in Western Australia.
We do not expect a significant volume news flow from the company’s manganese asset
in Togo, although this remains an important project for Keras. We also anticipate that
Keras will enter into more tribute style deals and project acquisitions in Western
Australia.
Figure 6 - Conceptual development and production timeline
Source: Shard Capital estimates. Yellow blocks – potential production rate (annualised)
Based on the above, Keras anticipates the following production profile:
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
2016. Annualised 15-25koz. 15kozpa from Grants Patch and Wycheproof with
10kozpa coming on line from Lindsay’s open pit (KalNorth) from Q3.
2017. Annualised 30-40koz. 10kozpa from Lindsay’s underground, 15-20kozpa
from POW underground. Target run-rate 30-40kozpa.
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22 March 2016
Funding & Financials
The Board has considerable skin in the game
Ferrex (pre-Keras name change) completed a fund raising in February 2015 for £815,000
(127m shares at 0.5p) with significant support from the Board, increasing the alignment
of Director’s interests with Keras shareholders. The proceeds from the placing were
earmarked at the time for working capital as Ferrex evaluated financing options for the
construction of its 250ktpa manganese project in Togo.
In February 2016, Keras raised £563,889 through the issue of an unsecured loan note, in
order to provide the working capital required to commence production in Q2 at the
Grants Patch tribute project. Dave Reeves, Managing Director of Keras, and Peter
Hepburn-Brown, Non-Executive Director, subscribed for £194,444 and £50,000 nominal
value Notes respectively, considered to be a related party transaction under AIM rules.
The debt nature of the funding provided the advantage of not issuing equity and diluting
shareholders, in addition to further demonstrating the Board’s commitment to new
focus on Australian gold.
Keras is also looking at ways to realise value from non-core assets (all African iron assets
and the Leinster Manganese Project), with any funds from assets sales being directed to
the gold projects, or Nayega manganese project.
Fast-tracked open pits will subsidise further development
Keras does not require significant funding at this stage, as we believe once Grant’s Patch
is in production, cash flow will be used to ramp up production at other deposits
according to the mining plan and provide funds to potentially acquire further projects.
Once Keras has the open pit operations up and running, the company plans to
investigate development of higher grade underground opportunities such as Parrot
Feathers and the Prince of Wales. However, Keras may take the option of a small raise
to fast-track POW or KalNorth depending on the development schedule.
Keras has not disclosed the potential capital cost of developing POW or Parrot Feathers,
as the internal feasibility study has not been finalised yet. Thus is not possible to make
any assumptions about further fund raising plans for capital projects. However, we
believe that given existing underground infrastructure in place at POW, it is likely that
cash flow from the open pits has the potential to contribute a significant portion to the
capital outlay required to re-start underground mining.
Valuation Considerations – too early to peg
Focus on margins and cash flow
at present.
We will revisit valuation once
mine plans are finalised and the
data is available to build a DCF
model
We usually value gold developer and producers using a blend of NAV derived from
discounted cash flow analysis (our preferred valuation technique) and forward cash flow
multiples.
However, given the early stage of the gold projects, the lack of publically disclosed
production, operating cost, and capital cost schedules, and the fluid nature of the
production timeline over the coming year, it is not possible for us to build an accurate
DCF model and forecast Keras’s financials. Once Keras has completed and disclosed the
results of internal feasibility studies and set out a firm development plan, we will re-visit
a DCF valuation.
Near-term focus on cash flow
Until formal valuation is possible, we can only look at the potential for margins and cash
flow and the very low capex requirements associated with tribute mining. If Keras
manages to mine at an AISC in the range of A$1,000-$1,200/oz, then we believe that the
current tribute operations have the potential to kick of considerable cash flow, even
after royalties and profit shares are taken into account.
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22 March 2016
Australian Gold – Exploiting the sweet spot
It is important to understand the opportunity currently presented to Australian gold
producers as a result of the gold price and US Dollar / Australian Dollar FX rate. Despite
the wider commodity sector remaining in the doldrums, the Australian gold sector is
thriving on the back of robust margins. Keras Resources is thus set to make a well-timed
and potentially lucrative entry into a buoyant sector which is currently offering above
trend returns.
The chart below shows the divergence of gold prices denominated in Australian dollars
and South African Rand, from the primary US Dollar gold price.
Figure 7 -Gold prices – Australian Dollar and Rand prices diverge from USD
2,000
18,000
1,600
ZAR/oz
AUD/USD /oz
20,000
Gold price
currency divergence
1,800
22,000
16,000
1,400
14,000
1,200
12,000
1,000
10,000
Gold (AUD)
Gold (USD)
Gold (ZAR)
Source: Shard Capital, Gold.org, Kitco
Over the last three years in particular, a significant gap has opened up (Fig 8) between
the US Dollar Gold Price and the Australian gold price. This has been driven by the
partial breakdown in the relationship between the Australian Dollar and the US gold
price, which up until late 2014 tended to have a positive correlation, and the marked
depreciation of the Australian dollar. This is illustrated in Fig 9 which shows that from
Q4 2014 the US gold price trended flat or down, with a falling, but not perfectly
correlated AUD-USD FX rate, and a strongly rising gold price in Australian dollar terms.
Figure 9 - Gold price vs AUD-USD FX
1,800
1,600
1,600
Gold (A$ amd US$/oz)
1,800
1,400
1,200
1,000
1.10
1.00
0.90
AUD-USD FX
Figure 8 - Gold: Australian vs US Dollar Price
1,400
0.80
1,200
0.70
1,000
Gold (AUD)
Gold (USD)
0.60
Gold (AUD)
Gold (USD)
AUD/US FX
Source: Shard Capital, Kitco, Reuters
10
22 March 2016
US Dollar strength good for Aussie Gold
The recent strength in the US Dollar, with the dollar index up 23% over the last two
years has put downward pressure on the Australian dollar. In mid-July 2013 the Aussie
dollar was trading at parity with the US dollar, but is now at 0.78, having traded as low
as A$0.70 to the dollar in late 2015. Invariably, this is good news for the Aussie gold
price, with the weaker currency lifting demand for gold.
Back in 2011 when the US gold price was peaking at $1,900/oz, the Australian dollar was
also strong but… input costs remained high, negating much of the benefit of the rising
gold price.
Thus, the Australian gold industry has undergone a virtual renaissance over the last
three years with the depreciation of the Australian dollar and resulting high Aussie gold
price (only around $100 away from its all-time peak of A$1824/oz in August 2011)
providing significant tailwinds.
Cheap oil and spare capacity has driven down input costs
However, the other main factor which has contributed to the “perfect storm” is the
material decrease in input costs across the whole industry. As the iron-ore-led resources
boom fizzled out, Australian miners have seen rates for labour, drilling, consumables
(explosives, tyres, spare parts), freight rates, power and contracting fees decrease
significantly.
With high levels of spare capacity, miners have been able to negotiate deals on capital
equipment purchases as well as raw material inputs. All this has also been helped along
by the freefall in the oil price, a boon for energy intensive mining operations. This has
led to Australian gold miners currently enjoying the some of the highest margins in
recent history.
Figure 10 - Australian labour costs are falling
Figure 11 - AUD-USD FX and Oil Price (Brent)
102.5
140
102.0
120
101.0
100.5
0.80
60
40
99.5
20
Source: Australian Bureau of Statistics. Indexed 2008=100
0.90
80
100.0
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15
1.00
100
AUD/USD FX
Brent Crude ($/bbl)
101.5
99.0
1.10
0.70
0.60
BRENT
AUD/USD FX
Source: Shard Capital, Reuters
Labour costs cooling
Labour costs in Australia have been steadily falling. Labour costs impact the cost
structure of a mining operation significantly, with labour and wage costs representing
between 30% and 50% for a typical mine. During the resource boom between 2009 and
2012, wages in the resource sector increased by over 40%, reflecting the high demand
for labour as the industry expanded. However, mining employment fell by 19% in 2014,
and according to BIS Shrapnel, the industry is likely to see up to 20,000 jobs fade by the
end of 2018.
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22 March 2016
The outperformance of Australian gold equities versus some of the largest global
producers is marked. The two charts below show share prices indexed on 1st January
2015 and are presented using an identical scale for reference. The strong performance
of the Australian producers is clear.
Figure 12 - Australian Gold Producers Soar
Figure 13 - World Gold Producers Flat line
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
0
Newcrest
Regis resources
Alacer Gold
Northern Star
Evolution Mining
Goldcorp
Kinross
Barrick
Eldorado
Newmont
Gold Fields
Yamana
Source: Shard Capital, Reuters
To further illustrate the point as to why we believe Australian gold producers currently
offer superior returns, we have analysed the margin between the average All-InSustaining Cost (AISC) for 2015, versus the actual realised gold prices for the same
period, for a some of the largest Australian and Global gold producers. We have
normalised the data to US dollars. AISC is a relatively new metric which seeks to
measure more comprehensively the all-in cost of producing an ounce of gold, by
including G&A and sustaining capital on top of the usually reported cash costs.
The data is clear, with the Australian producers enjoying AISC margins of between $300$450/oz or 30-40%, versus global producers returning margins markedly lower - below
$300/oz and as low as $85/oz or 8-25%. Similarly, analysis of EBITDA margins taken from
2015 year-end financials indicate that in general, Australian producers have enjoyed
much higher margins.
Figure 14 - AISC margin (US$/oz and %)
450
AISC Margin (US$/oz)
400
350
300
21%
250
200
150
100
8%
22%
24% 25%
29%
12%
50
0
Australian Gold Producers
31%
31%
36%
38%
39%
41%
50%
2015 EBITDA Margin (%)
500
Figure 15 - EBITDA Margin (%)
40%
30%
20%
10%
0%
Global Gold Producers
Australian Gold Producers
Global Gold Producers
Source: Shard Capital, Company Annual Reports
The strong performance has been driven by more than just lower input costs and FX.
Australian producers have shown good cost management discipline, sweating assets
hard and undertaken major optimisation programmes in order to reshape assets and
run much leaner operations. This has resulted in greater profitability allowing Australian
producers to fix up their balance sheets, e.g. Newcrest reported free-cash flow of A$1bn
in 2015 (up from A$133m in 2014) and was able to reduce net debt by $819m.
12
22 March 2016
Location – Western Australia is the No.1 Jurisdiction
Western Australia ranked No.1
out of 109 jurisdictions based
on:
Geological prospectivity, policy,
tax, government support and
infrastructure amongst others
The latest Fraser Institute Survey of Mining Companies (2015) ranks Western Australia
as the top jurisdiction in the world (1 out of 109) based on its Investment Attractiveness
Index, an impressive accolade. Western Australia has demonstrated stability and the
fact that it has generally been ranked in the top 5 since the survey began over 10 years
ago is a considerable achievement.
Figure 16 -The Fraser Institutes’ Invest Attractiveness Index
Wester n Australia
Finland
Quebec
South A ustralia
Sweden
Brit ish Columbia
Kazakhstan
Greenland
Burki na Faso
Ghana
Namibia
Mexico
Papua New Guinea
Russia
Indonesia
Ethiopia
Madagascar
Brazi l
New Mexico
DRC
China
South Africa
Zambia
Angola
Philippines
Mal aysia
Fij i
Mal i
Myanmar
Niger
Ecuador
Bolivi a
Zi mbabwe
Keny a
Solomon Islands
Venezuela
0
20
40 Score % 60
80
100
Source: The Fraser Institute, Shard Capital
The ranking is based on a variety of extensive and wide ranging inputs encompassing
geological prospectivity, policy potential and best practice Mineral Potential Index.
These measures analyse the investment attractiveness taking in legislation, tax, stability,
environmental and labour regulations, geological databases and quality of infrastructure
to name only a few. Western Australia has been ranked No.1 and is deemed a best
practice environment i.e. one that contains a world class regulatory environment, highly
competitive taxation, no political risk or uncertainty, and a fully stable mining regime.
Furthermore, Western Australia was deemed one of the jurisdictions where it is possible
to permit and build a mine into production, faster than anywhere else in the world.
13
22 March 2016
Processing capacity in WA, plenty of options
The opportunities for developing tribute agreements in Western Australia are
numerous. With approximately 50 gold processing plants in the State there is no
shortage of potential mills, some of which will be amenable to toll processing
agreements and would welcome high-grade ore to blend into the mill.
Figure 17 - Western Australian Gold Processing Operations
1
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28
29
30
31
32
33
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35
36
37
38
39
40
41
42
43
44
45
46
47
48
Name
Boddi ngton
KCGM - Super Pi t
St Ives
Ga rden Wel l - Erl i s toun
Gra nny Smi th (Yi l gSthOps )
Sunri se Da m
Pa ddi ngton
Edna Ma y
Jundee
Mool a rt Wel l
Ca rosue Da m
Ka nowna Bel l e
Scuddl es
Checker Mi l l
Nul l a gi ne
Gol den Ea gl e
Tri dent Pl a nt
Agnew
Sons of Gwa l i a
Ra nda l l s (Sa l t Creek)
Greenfi el ds Mi l l
La kewood
Da rl ot
La wl ers
Pa ul sens
Burba nks Mi l l
Tropi ca na
Cura ra Wel l
Fortnum
Whi te Wel l
Ni mbus
Andy Wel l (Process i ng Pl a nt)
Bl ue Bi rd
Thunderbox
Ma rvel Loch
Bronzewi ng
Ba rni coa t
Pl utoni c Pl a nt
Wi l una
Bul l a nt
Sa nds tone
Mi nja r (a t M1)
Coyote
Bri ghts ta r
Burna kura
Ba mboo Creek
Ni chol sons
Mt Hol l a nd
State
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
WA
Company
Newmont Mi ni ng Corpora ti on
Ba rri ck Gol d Corp/Newmont Corp
Gol d Fi el ds
Regi s Resources Li mi ted
Gol d Fi el ds
Angl ogol d/As ha nti
Norton Gol d Fi el ds Li mi ted
Evol uti on Mi ni ng Li mi ted
Newmont Mi ni ng Corpora ti on
Regi s Resources Li mi ted
Sa ra cen Mi nera l Hol di ngs Li mi ted
Ba rri ck Gol d Corpora ti on
Mi nmeta l s Res ources Li mi ted (MMG)
Ra mel i us Res ources Li mi ted
Mi l l enni um Mi nera l s Ltd
Mi l l enni um Mi nera l s Ltd
Meta l s X
Gol d Fi el ds
St Ba rba ra Li mi ted
Si l ver La ke Resources
FMR Inves tements
Si l ver La ke Resources Li mi ted
Gol d Fi el ds
Gol d Fi el ds
Northern Sta r Resources Li mi ted
Ra mel i us Res ources Li mi ted
Angl oGol d As ha nti Li mi ted
Mount Ma gnet South NL(MMS)
Res ource a nd Investment NL
Cobra Mi ni ng-Muti nyGol d
McPhers ons Rewa rd Gol d Li mi ted
Dora y Mi nera l s
Reed Res ources Li mi ted
Sa ra cen Mi nera l Hol di ngs
St Ba rba ra Li mi ted
Meta l i ko Res ources
Focus Mi nera l s Li mi ted
Northern Sta r Resources
Apex Mi nera l s NL
Norton Gol dfi el ds
Southern Cros s Gol dfi el ds Li mi ted
Mi nja r Gol d Pty Ltd
Ta na mi Gol d NL
Stone Res ources Austra l i a Li mi ted
Kentor Gol d Li mi ted
Ha oma Mi ni ng NL
Bul l eti n Resources Li mi ted
Convergent Mi nera l s Li mi ted
Status
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Opera ti ng
Commenced Sep 2013
Refurbi s hment??
Refurbi s hment
?
Refurbi s hment
Commenced 2013
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re & Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re a nd Ma i ntena nce
Ca re & Ma i ntena nce
Ca re & Ma i ntena nce
Ca re a nd Ma i ntena nce
Production
Capacity (ktpa)
36,000
12,200
4,800
4,000
4,000
3,600
3,300
2,800
2,500
2,500
2,400
1,900
1,800
1,700
1,500
1,500
1,350
1,300
1,200
1,200
1,000
1,000
700
700
450
200
5,800
1,200
1,000
900
490
200
3,000
2,500
2500
2,300
1450
1,200
700
700
600
600
350
300
260
150
120
0
Location
Boddi ngton
KCGM
St Ives
La v-Duke
Gra nny Smi th
Sunri s e Da m
Pa ddi ngton
Edna Ma y
Jundee
Mool a rt Wel l
Ca ros ue Da m
Ka nowna Bel l e
Gol den Grove
Mt Ma gnet
Nul l a gi ne
Nul l a gi ne
Hi ggi ns vi l l e
La wl ers
Leonora
Sa l t Creek
3 km E Cool ga rdi e
South Ka l
Da rl ot
La wl ers
SW Pi l ba ra
Cool ga rdi e
Tropi ca na
Ki rka l ocka
Pea k Hi l l
Tucka bi a nna
SE Ka l goorl i e
Nth of Meeka tha rra
Meeka tha rra
Leonora
Ma rvel Loch
Ya nda l
La verton
Ma rymi a
Wi l una
Bul l a nt
Sa ndstone
Ya l goo
Ta na mi
SE La verton
Burna kura
Pi l ba ra
La mboo
Forres ta ni a
Process type
Cu-Au
Gra vi ty-CIL-roa ster
Gra vi ty - CIP
CIL
CIP
Gra vi ty - CIL
Gra vi ty - CIP
Gra vi ty - CIP CIL
Au
CIP - CIL
Pol y Met
Gra vi ty - CIL
CIL
CIL
CIP
Au
CIL
CIL
Au
CIL
CIL
CIL
CIL
CIL
CIP - CIL
CIL
Gra vi ty - CIL
Pol y Met
CIL
CIL
CIL
CIL Oxi de Pl a nt
Bi ox - CIP
CIP
CIP
CIP
CIL
Gra vi ty
CIL
CIL
Source: Geoscience Australia
14
22 March 2016
Australian Gold Tribute Projects
Keras Resources currently has three gold tribute agreements in Western Australia;
Grants Patch, Wycheproof and KalNorth, all located in the Western Australian
Goldfields. In total, the tribute agreements cover known historical resources of 585koz.
Grants Patch will be the first tribute to go into production.
Figure 18 - Keras’s tribute projects are all located in the prolific Kalgoorlie District
Keras currently has three tribute
agreements:
Grants Patch
Wycheproof
KalNorth
Source: Keras Resources
Keras – One of the only ways to play the sector on AIM
No other mining company on
either AIM or the LSE Main List
provides exposure to the
Australian gold sector.
Keras will soon be the only
Australian gold producer on the
UK market
If all goes to plan and Keras is successful in its plans for maiden gold production by Q22016, then the company will be become somewhat of a rare breed on the AIM market.
Despite the dominance of mining companies on AIM (c.140 companies out of 1000),
only 36 of those are gold mining, and none of those have producing gold mines in
Australia. We believe that Keras will soon become the only Australian gold producer on
AIM and the only way to gain pure-play exposure to this buoyant sector. It is also worth
noting that this is also the case for the eight gold miners listed on the LSE’s Main
Market.
As far as AIM goes, the only other companies with exposure to Australian gold have very
early stage exploration projects; Greatland Gold (Ernest Giles gold project, WA, early
stage exploration. Wishbone gold (Queensland, early stage and moved focus to trading
operations in Dubai) and SolGold (idle projects in Queensland).
15
22 March 2016
Tribute 1: Grants Patch
Tribute with Norton Goldfields.
Ore mined by Keras will be
processed in Norton’s
Paddington Mill
Keras acquired the Grants Patch gold project in late 2015 through the acquisition of
100% of Chaffers Mining, a private company. Chaffers Mining had negotiated a five-year
tribute agreement with Norton Goldfields to mine defined gold deposits located on
Norton’s leases, covering both open pit and high-grade underground deposits. Keras
commenced mining at the project in late March 2016 and expects first production and
revenues from Q2.
Norton’s leases are located 30km north of Kalgoorlie, centred on the Paddington mine
complex. Keras plans to transport ore to Norton’s Paddington processing plant, located
25km away. Infrastructure is good, with an existing road network meaning that
additional expenditure on infrastructure is not required.
Figure 19 -Grants Patch – Regional Location – in the heart of the Goldfields
Source: Keras Resources, Chaffers Mining
Low acquisition cost
Keras acquired 100% of Chaffers for an initial consideration of £465k in shares (93m
shares at 0.5p), with an additional consideration of £465k (at the 30day VWAP) on
production of 10koz gold. This represents an extremely low acquisition cost by industry
standards, in our view, equating to c.$4/oz resource based on historic resources of
350koz, well below current EV/oz valuations of c$25/oz for gold developers. Based on
anticipated production of 30kozpa, this equates to $48/oz annual production ounce,
significantly below the average $1000/oz we assess for non-producers.
16
22 March 2016
Tribute structure – a win-win situation
The tribute agreement has a simple structure whereby Keras will pay all mining and
processing costs, plus a 22% royalty on gold recovered to Norton. The agreement is for a
five-year period but we envisage scope for this to be extended, given that the
agreement benefits both parties; providing access to near-term production projects for
Keras, and an additional revenue stream for Norton at no cost. Furthermore, there are
80 known prospects across Norton’s tenement package.
Norton Goldfields (ASX: NGF) was a mid-tier gold producer until the company was
acquired by its majority shareholder, Zijin Mining Group in June 2015. Zijin is a large
state-owned Chinese group – one of the largest gold producers and the largest copper
producer in China. Norton became a wholly owned subsidiary of Zijin.
Average resource grade 2g/t is
well above the industry average
Resources – robust grade
The total historic resources for all the deposits within the Grants Patch Tribute amount
to 363koz. Deposits comprise of remnant resources below previously mined open pits
and underground, plus unmined near surface deposits. Chaffers estimated that 461koz
of gold had previously been mined from the assets. The average grade of 2g/t Au
compares well to other deposits in the region, in our view, and in particular against the
average 0.82g/t grade of undeveloped gold projects worldwide.
Figure 20 - Historical Resources (Non-JORC)
Name of deposit
Accord
Bent Tree
Anomaly 22
Golden Arrow
Wendy Gully
Regal
Prince of Wales
Tattersals North
Tattersals South
Coco
Zsa
Dark Horse
Total
Type
Open Pit
Open Pit
Open Pit
Open Pit
Underground
Open Pit
Underground
Open Pit
Open Pit
Open Pit
Open Pit
Open Pit
Tonnes (kt)
Grade (g/t Au)
Contained Gold (ozs)
245
1.14
8,980
437
1.52
21,369
55
1.60
2,814
199
1.60
10,237
2,250
2.23
161,316
635
1.80
36,748
154
8.00
39,610
47
1.35
2,029
44
2.07
2,892
5
6.53
1,000
364
1.59
18,608
1,307
1.38
57,998
5,741
1.97
363,601
Source: Keras Resources, Chaffers Mining. Estimates at various cut-off grades
Geology - a highly prolific terrane
Mineralisation in the Paddington area is typical of the shear-zone related lode gold style
associated with the Archean Yilgarn Craton. The rocks form part of the extensive
Kalgoorlie granite-greenstone belt, a highly prolific terrane with a >160Moz endowment.
The gold at Paddington is mainly hosted within a granophyric quartz dolerite intruding
and crosscutting a basic volcanic unit, with mineralisation hosted in sheeted quartz
veins. Mineralisation also occurs within laterite as a supergene enriched zone.
Keras will use a hire mining fleet
which arrived on site in early
March 2016
At Grant’s patch mineralisation is generally hosted entirely within a mafic sequence. The
key takeaway is that gold mineralisation is non-refractory and moderately high-grade.
Mining – simple, low cost, no pre-strip!
Mining is straightforward, utilising conventional truck and shovel open pit techniques.
Drilling is required for grade control and blast hole purposes only, with virtually all
expenditure directly supporting the re-start of production. It is important to recognise
that no pre-strip is required, i.e. it is not necessary to pre-mine significant tonnes of
waste rock before gaining access to ore. Mining will immediately access ore, reducing
working capital requirements and the time to first cash flow.
17
22 March 2016
Processing
Keras will mine various deposits on the tribute ground and deliver the ore to the
Paddington Mill, where it will be weighed and sampled using an installed Sample Plant.
Keras will be paid on the tonnes delivered times the sample grade and % recovery from
the Sample Plant within 30 days of ore delivery.
Production Plan – First Gold in Q2 2016
Keras plans to develop the shallow laterite and oxide deposits first in order to generate
cash flow. The first two deposits targeted as part of this strategy are Accord and
Anomaly 22. Keras has verified historical data and undertaken in-house modelling which
indicates that the two deposits collectively contain an estimated 164kt at 1.4g/t for
7.2koz Au. A small RC (reverse circulation) drill programme supports mine planning and
Keras is aiming for a mining run-rate of 30,000tpm during Q2 2016. In conjunction with
Wycheproof, Keras plans to produce at an annualised rate of 15koz pa.
Starting off with a bulk sample
A 10,000t bulk sample will
provide confidence in the grade
and mining practices, plus have
the added advantage of
providing early cash flow
Keras completed its first blast at Anomaly 22 on 17th March, an impressive achievement,
coming only four months after signing the tribute agreement. An initial bulk sample of
10,000t will be mined in order to confirm grade continuity, mining practices and ore
delivery mechanisms to the Paddington Mill.
Keras believes that Accord and Anomaly 22 will provide enough ore to support four to
five months of mining. The mining of these deposits forms the first step in achieving
Keras’s aim of establishing a c.30kozpa mining operation. The cost to commence
production is limited to working capital only, which Keras anticipates to be a low $300k.
Modelling of Bent Tree (21koz at 1.52g/t), a remnant open pit, previously owned by
Barrick Gold, is ongoing with a view to scheduling the deposit after Anomaly 22 and
Accord.
Figure 21 -Grants Patch deposit locations
Source: Keras Resources, Chaffers Mining
18
22 March 2016
All set and ready to commence mining
The photos demonstrate the advanced stage of operations at the Grants Patch project.
It is important to note the speed with which Keras can transition into a gold producer by
targeting shallow deposits with little or no strip ratio, where gold mineralisation starts
from surface.
Figure 22 - Clearing underway at Accord
Figure 23 - First laterite pit cleared for mining
Figure 24 - Mining fleet en-route to site
Figure 25 - Blasthole rig on-site
Source: Keras Resources
19
22 March 2016
Paddington – feeding a hungry mill – Keras has the grade to play
The Paddington mining operation has a long history. A combined open pit and
underground operation which produced 178koz in 2014, with Norton guiding 182190koz at a C1 cash cost of A$870-920/oz.
The Paddington mill is located with Norton’s 1,105km2 tenement package. Norton’s
strategy remains firmly on organic growth as part of a plan to increase production and
reduce costs. The strategy remains focused on achieving base-load production from
open pits mines such as Enterprise and Wattlebird, supplemented with higher grade ore
from underground mines such as Homestead and Bullant.
Paddington Mill is crying out for
high-grade feed
Paddington has 7Moz in JORC-compliant resources at 1.47g/t Au and 1.1Moz reserves at
1.86g/t Au. It is pertinent to note that the 1.1Moz reserves are sourced from 15
different deposits, and thus Paddington is the very definition of a regional processing
hub which is set up to process ore from multiple deposits. This means that ore mined by
Keras should seamlessly fit into the mill’s processing schedule.
Paddington’s LOM plan is based on supplementing base-load production with smaller
higher grade open pit deposits and ore from third parties which are selected to meet
ore-blending requirements, whether soft oxide or hard primary ores. Paddington
already processes third party ore from Phoenix Gold (since taken over by Evolution
Mining) and Excelsior Gold. Soft laterite-hosted ore is always in high-demand for mills as
it is metallurgical simple to process and often higher grade.
The mill has a nameplate capacity of 3.3Mtpa, but in 2014 record throughput of
3.7Mtpa was achieved. The average grade mined in FY14 was 1.31g/t for open pit and
5.6g/t from underground sources. The deposits covered in Keras’s tribute agreement
have an average grade of 1.52g/t (open pit only) and Prince of Wales (underground) has
a grade of 8-10g/t Au. This means that on a grade basis, ore mined by Keras should be
sought after.
Figure 26 - Paddington Mill location and infrastructure
Source: Norton Goldfields
20
22 March 2016
POW Underground – the high grade prize
Keras has commenced an internal feasibility study focussed on assessing options for restart of mining at the high-grade Prince of Wales (“POW”) underground mine. The mine
operated historically but was closed in 1992 when cyclonic rains flooded the mine and
made the headframe and winder unusable. POW produced 230koz at an average grade
of 9.56g/t as detailed in the table below.
Figure 27 - Prince of Wales – Historical Production
Period
1987-1992
Pre-1971
Total
Tonnes (kt)
570
184
754
Grade (g/t Au)
8.7
12.2
9.56
Contained Gold (ozs)
159,435
72,440
231,875
Source: Keras Resources
The long section below illustrates the extensive development and mine infrastructure
already in place at POW. The mine is accessed by a shaft which connects down to the 7
Level. Before mining can re-commence, Keras plans to rehabilitate this existing shaft and
install a new headframe and winder – a process which is expected to take 9-12 months,
depending on the level of rehabilitation required.
Due to the thin nature of the orebody (1.2m), narrow vein mining methods will be
employed using hand-held machines, of which the Keras team has extensive experience.
Figure 28 - Prince of Wales Long Section
Source: Keras Resources
21
22 March 2016
Untapped Potential
The POW orebody is developed as a steeply dipping siliceous lode hosted within metabasalt and the orebody remains open to the east, west and down dip, representing an
exciting opportunity for Keras to go back into existing workings and commence
development without the need to sink a new capital intensive shaft or decline. As can be
seen on the long section on the previous page, numerous high-grade intercepts have
been identified below the current stoping level (Level 10), including 6m at 11g/t Au and
0.42m at 126g/t Au.
POW could produce 15-20koz per annum
Keras believes that the POW lode may contain 650kt of ore, grading 8-12g/t Au which
would equate to 167-250koz of contained gold. The company plans to re-access
historical stopes to accelerate production whilst developing down to level 11 to access
already delineated high-grade ore. Keras plans to produce at a rate of 5,000tpm, which
based on an assumed head-grade of 10g/t Au, metallurgical recovery of 90%, but
excluding dilution, equates to c. 17kozpa.
It is too early-stage to estimate the capital cost to re-start mining at POW until Keras has
completed the internal feasibility study. However, given the underground infrastructure
already in place, we anticipate a significant component of initial capex to be funded
from cash flow generated from the open pit tribute operations.
Future underground sources being evaluated for the Paddington mill include Tuart
(6.39g/t), Golden Kilometre (4.17g/t) and Federal (5.36g/t). Thus, POW at 8-10g/t Au
looks attractive as a potential feed source.
22
22 March 2016
Tribute 2: Wycheproof
Keras acquired the Wycheproof gold tribute agreement in February 2016, structured as
a profit share agreement with Kalgoorlie Mining Associates, a private company. The
tribute dovetails nicely with Keras’s existing Grants Patch tribute agreement and will
contribute to the combined 15koz pa rate from both tributes.
Small but potentially lucrative
Wycheproof is a small high-grade shallow deposit located on an existing mining lease.
The deposit has a non-JORC resource of 75kt at 2.87g/t Au for 6,974oz contained gold at
a 1g/t cut-off. The deposit is well suited for a discrete open pit operation with low strip
ratio. Wycheproof is located 18km from Norton’s Paddington mill.
The majority of mineralisation is contained within a westerly dipping quartz porphyry
which extends from surface to base of drilling and is open at depth. There are several
cross cutting faults which seem to have increased the mineralisation in and around the
intersection plane between these and the mineralised quartz porphyry.
Complements Grants Patch
Keras believes that Wycheproof could be brought into production within a short
timeline, with mining to be undertaken alongside production from Grants Patch, utilising
any idle standing time of the mining fleet and providing a useful stop gap in the mining
schedule.
Mining is anticipated to commence in Q3 2016, subject to approval of the Mining
Proposal and Project Management Plans. Norton Goldfields has a first right of refusal to
treat the ore and Keras is in the process of finalising an agreement in this regard.
Another low cost acquisition
The tribute agreement is structured as a profit share with minimal consideration paid
upfront; 5% of the predicted profit is to be paid upfront to the permit holder, plus A$70k
to the right-to-mine owner on first production. Once in production a 2% royalty is
payable to Norton, with all profits then shared 50:50 between Keras and the right-tomine owner.
23
22 March 2016
Tribute 3: KalNorth
Keras entered into an option agreement for a third tribute in March 2016 with KalNorth
Gold Mines Limited (ASX:KGM). KalNorth is an ASX-listed gold developer which holds a
dominant 1,400km2 land position in the Eastern Goldfields, Western Australia. The
agreement is structured as a profit share over the Lindsay’s Project, and Keras is
targeting first production in Q3 2016.
Location, Location, Location
Lindsay’s project is located 65km NNE of Kalgoorlie, c.60km NE of Grants Patch, and is
the largest project within the more extensive Lindsay’s Field area which is comprised of
a contiguous package of two granted mining leases and several prospecting licences.
Infrastructure is good with the tenements accessible via a network of sealed and gravel
roads. The tenements are also covered by land access agreement with Central East
Native Title Group.
As the map below demonstrates, the Lindsay’s project is exceptionally well located with
five gold processing plants located nearby, all of which have a history of treating toll ore.
During Lindsay’s brief period of operation in 2013, ore was processed at Saracen’s
Carosue Dam mill, 70km to the east, where a haul road still exists.
Figure 29 - Lindsay’s Project map
Source: KalNorth Gold Mines
Tribute Structure
The tribute structure is simple and critically has no upfront acquisition cost. The
agreement is structured as a profit share. Gross revenue will be allocated in order as
follows:



Payment of State or Government royalties, direct operating expenditure and
working capital expenditure.
10% of operating cash flow deemed as a management fee payable to Keras.
Amount remaining after deducting the management fee to be split 49:51
between Keras and KalNorth for a gold price equal or lower than A$1,600/oz
and 70:30 to Keras at a gold price above A$1,600/oz.
24
22 March 2016
Well-defined Resource
JORC-compliant resources that form part of the tribute agreement amount to 3.9Mt at
1.7g/t Au for 215koz contained gold, of which 165koz or 77% sits in the indicated
category, demonstrating the continuity and confidence of the resource estimate. The
gold grade is variable, particularly at Parrot Feathers which displays marked nugget
effect due to the vein-hosted nature. Mineralisation extends 0.5m from the vein into the
wall rock at Parrot Feathers which should help reduce dilution.
Figure 30 - Lindsay’s Mineral Resource Estimate – JORC-compliant (2004)
Deposit
Eastern Structure
Parrot Feathers*
Central Structure
Neves Prospect
Total
Indicated
Tonnes (kt) Grade (g/t)
1,479
1.6
140
4.0
1,315
1.1
491
1.6
3,425
1.5
Ozs
76,000
18,000
46,500
24,900
165,400
Tonnes (kt)
203
261
48
38
550
Inferred
Total
Grade (g/t)
Ozs
Tonnes (kt) Grade (g/t)
Ozs
1.6
10,500
1,682
1.6
86,500
4.3
36,000
401
4.2
54,000
1.1
1,700
1,363
1.1
48,200
1.3
1,500
529
1.6
26,400
2.8
49,700
3,975
1.7
215,100
Source: Keras Resources. *Parrot Feathers is JORC-compliant (2012)
Geology and mineralisation – continuous vein with depth potential
High-grade mineralisation
remains open to depth
The project is situated in the Archean Kalgoorlie terrain, in the Eastern Goldfields, within
a broad NW trending deformed sequence of basalts, dolerites and intercalated
metasedimentary rocks. Mineralisation is typical of orogenic systems with a strong lithostructural control with gold associated with a series of moderately southwest-dipping
shear zones, with the most robust gold mineralisation hosted within dolerite.
At Parrot Feathers, high grade gold mineralisation occurs in a zone of alteration and
quartz-sulphide veining within the host shear. Mineralisation has been demonstrated to
extend to considerable depths, with the main vein defined over a 300m strike length,
down-dip for 440m, and mineralisation remains open at depth. The vein varies in
thickness from 0.5m to 5m, but is generally 1-2m wide.
The deepest intersection in the current wireframe at 440m returned 4m at 3.4g/t Au
indicating the potential to expand the resource to depth, in our view. Mineralisation
extends up to 200m below the current resource envelope with historic drill intercepts
outside the resource including 1.15m @ 10.12g/t and 2.8m @ 4.41g/t.
Furthermore, the width, grade, continuity and geometry of the Parrot Feathers vein
exposed in the base of the stage 2 pit provides further confidence in extrapolating the
structure to depth. Three diamond holes in 2015 targeted the vein below the pit and
intersected mineralisation in the expected position.
Figure 31 - Lindsay’s X-Section showing main vein
Figure 32 - Schematic of potential underground operation
Source: KalNorth
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22 March 2016
History – Challenging mining but now an opportunity for Keras
Mining commenced from the Parrot Feathers open pit in January 2013 with KalNorth
planning to mine c.400kt over an 18-month period and produce 40koz gold. Ore was
hauled in 170t trucks along a 72km haul road to Saracen’s Carosue Dam processing
plant. Three open pits were developed, the largest being Stage 2 which focused on the
Parrot Feathers Structure as described previously.
However, due to a combination of low gold prices and technical challenges, only 132kt
of ore was processed, yielding a mere 6,153oz, and mining operations were suspended
in August 2013.
Primarily, this was due to the challenges associated with mining a flat-dipping narrow
mineralised structure, exacerbated by poor equipment availability, blasting issues and
grade control problems with poor reconciliation to the geological model due to dilution.
At the time it was difficult to make instant changes due to the 4 week turn-around time
for sample assays. These are typical issues with mining narrow vein, nugget deposits but
we believe that Keras’s approach and narrow vein mining knowledge should overcome
these historical issues.
Figure 33 - Lindsay’s Pit
Source: KalNorth Gold Mines, Ravensgate
Mining and Processing – new technology set to improve
It is not possible to accurately
forecast the level of gold
production for the project at this
stage as the mining plan is still
being revised, but it is likely to
significantly boost Keras’s
production profile, in our view.
Conceptually, Keras is aiming for
10koz pa from Lindsay’s open
pit from Q3 2016, and then
10koz pa from Lindsay’s
underground from 2017
Keras plans to focus initially on the open pits, targeting near-surface mineralisation for
early cash flow, the “low hanging fruit”. The gold mineralisation is hosted in quartz
(white/transparent crystalline) whereas the host rock is basalt (a dense, dark-coloured
mafic rock). Thus, Keras plans to mine, crush and then utilise an optical sorter to
separate the mineralised quartz from the waste. This cost-effective and efficient
technique will sort the crushed rock on the basis of colour and brightness to concentrate
the quartz, minimising dilution (maintaining grade) and reduce the tonnage (and thus
loading/transport costs). It is anticipated that ore will be treated in one of the five
nearby mills, although given the existing haul road to Carosue Dam, we believe it makes
sense to truck the ore here. Discussions with mills are underway.
Production Plan – On track for Q3
Keras will compile a revised open pit mining plan to KalNorth and submit it to the
Western Australian Mines Department for approval. All permits are in place and Keras
anticipates that first production from Parrot Feathers will commence in Q3 2016.
Subsequently, Keras has six months to prepare a plan for underground development to
exploit the high grade 5-6g/t material in the vein at depth. The current Stage 2 pit
provides immediate access to commence a decline underground. Keras will decline and
develop “on ore” to lower costs and kick-start cash flow. Parrot Feathers currently has a
JORC-compliant resource of 401kt at 4.2g/t for 54koz.
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22 March 2016
The annotated image below demonstrates the mine layout at Lindsay’s and Parrot
Feathers and the significant infrastructure in place to support a low-cost restart of
mining operations.
Figure 34 - Parrot Feathers pit and mine infrastructure layout
Source: Keras Resources
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22 March 2016
Nayega Manganese - future potential
Keras holds an 85% interest in the advanced-stage Nayega manganese project in
northern Togo, West Africa, consisting of five Exploration Permits covering 92,390
hectares. Nayega is a low capex, open pit project at an advanced stage of development,
with a Definitive Feasibility Study (DFS) completed in May 2015. However, mine
development is dependent on the final receipt of the mining licence.
Figure 35 - Nayega location map
Figure 36 and 37 - Lomé Port and Togo road infrastructure
Source: Keras Resources
Good infrastructure and logistics
The project site is located in Northern Togo, 30km from a main road with direct access
to the regionally important deep-water port of Lomé 600km to the south. The project
also benefits from the national power grid being located only 5km away. Togo has a
large cement/clinker industry which exports approximately 800ktpa of clinker north to
Burkina Faso. The trucks return empty and Keras has negotiated a low backhaul rate,
with the plan to stockpile material at Lomé Port for bulk loading in 12m draft vessels.
DFS indicates robust scalable project with a short construction time
In May 2015, Keras completed a preliminary DFS in conjunction with defining a maiden
reserve of 8.48Mt at 14% Mn based on the M&I resource of 11Mt at 13.1% Mn. The DFS
also indicated a significant reduction in capital and operating costs from previous
studies along with a plan for an accelerated start-up.
The DFS envisions a 750ktpa ore mining operation and a simple scrubbing/screening and
DMS process in order to produce 250ktpa of manganese grading 38% Mn. Mining is low
cost and simple with an average mining depth of only 4m and no waste stripping or
drilling and blasting required. Keras believes that Nayega could be developed to
production in approximately 9 months from receiving the mining licence, subject to
financing.
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22 March 2016
Advanced discussions and waiting on permits
Keras remains in advanced discussions with a number of parties in relation to financing
the development of the project. The company has made significant progress in securing
draft marketing agreements and key mining and trucking contracts.
The Mining Convention for Nayega has been agreed and initialled, and the
Environmental Permit has been Awarded. The only outstanding permitting hurdle is the
award of the final Mining Permit.
Manganese – essential ingredient in steel production
Manganese is essential to iron and steel production by virtue of its sulfur-fixing,
deoxidizing, and alloying properties. Steelmaking, including its ironmaking component,
accounts for most domestic manganese demand, presently in the range of 85% to 90%
of the total, according to the USGS.
Manganese ferroalloys, consisting of various grades of ferromanganese and
silicomanganese, are used to provide most of this key ingredient to steelmaking, and as
such the construction, machinery, and transportation industries are the leading
consumers of manganese. Finished steel products typically contain between 0.5% and
2% manganese, although austenitic stainless steels such as the 200 series where
manganese is used a partial replacement for nickel require between 5% and 9% Mn.
Manganese also is a key component of certain widely used aluminum alloys and, in
oxide form, dry cell batteries. It also has numerous applications in the fertilizer and
pigment industry.
South Africa, Brazil, Ukraine and Austral host the largest manganese deposits in the
world, with South Africa being the largest producer. Approximately 50Mt of Manganese
ore is produced each year, according to the USGS.
Manganese prices have gone through the roof recently
Manganese prices saw a resurgence in March 2016, with the Metal Bulletin 37%
Manganese (FOB Port Elizabeth) ore index reaching a two-year high at $3.59/dmtu,
more than doubling from $1.41 at the end of 2015.
The meteoric price rise is the result of producers raising prices into a renewed wave of
demand from China, as concerns over falling supplies continued, compounded by a
recent rise in iron ore prices. According to Platts, there are limited stocks of manganese
at present and the “Chinese are scrambling to buy”.
This trend has also been observed worldwide, with South Africa’s UMC reporting that it
has no more April stocks and has moved on to marketing May stocks. According to
market sources, reduced supplies of South African ore are available due to recent mine
cut-backs as companies have optimised and scaled down non-core or high cost
operations.
Manganese ore stocks at Tianjin port in China are estimated at c.800kt-900kt currently,
down from close to 2Mt at the end of 2015, according to Platts, and thus the supply
squeeze looks likely to continue for the time being.
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22 March 2016
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