Minefield: Old mines perform new tricks

Summary: Three miners with potentially promising prospects given they are reviving old mines and teaching them new tricks. 

Key take-out: Anything could happen. Some of these discoveries were made at mines supposed to be nearing their end, others were completely overlooked by prior owners.

As with every edition of Minefield, this article is not providing investment advice. For all of InvestSMART's stock recommendations, click here.

Red 5

It sounds awfully hard to overlook 1.9 million ounces of gold but that’s essentially what happened at the historic Tarmoola mine in WA which is now known as King of the Hills (KOTH), with early signs pointing to the old mine becoming a winner for its owner, Red 5.

A fresh look at the geology of KOTH, which has had multiple owners since producing its first gold in 1990, has revealed what appears to be at least 1.9m/oz in an area immediately adjacent to the old open pit.

The very hard rock that covers the large area is called granodiorite, and there is a reason no one looked at it. The rock lies to the east of the gold veins that caught the eye of early miners. It is not your standard gold-rich type of rock found in the WA goldfields, and it is also expensive to crush in the processing circuit.

Red 5, a company with an impressive group of major shareholders, was not convinced that the granodiorite (which is as hard as its cousin, granite) had been properly tested, either by a fresh round of drilling or in the drill-core left by earlier owners, a list that includes Mt Edon Gold, Sons of Gwalia and the better-known producer Saracen.

When taking a fresh look at the rocks around the pit, the first move was to change the angle of the drilling, then drive deep into the granodiorite. The rock did not contain the rich veins of the pit but a myriad of small veins, or veinlets, much like the porphyry copper mines of South America.

Some of the results from the reangled holes verged on the spectacular, in length if not grade, including 330 metres assaying 1.7 grams of gold a tonne, and 234m at 2g/t.

It was the results of this first phase of drilling which led to Red 5 declaring a maiden resource at KOTH. Earlier this month Red 5 declared 28.7 million tonnes of ore at 2g/t for 1.88 million ounces.

All this at an old mine supposed to be nearing its end.

It gets better. Not only is there that maiden resource, but Red 5 also found gold in some of the old core that had never been tested by earlier owners. When assaying old core in the project area recently named the Eastern Margin Contact, Red 5 found nine samples grading more than 10g/t and 85 at more than 1g/t.

What’s happening at KOTH is a remarkable vindication for the investors who backed the revival story after Red 5 hit serious problems with government authorities at its Siana goldmine in the Philippines.

After being forced to stop mining at Siana, a multi-stage gold deal emerged in WA. Saracen sold KOTH to Red 5 for an issue of shares, and Gold Fields of South Africa sold it the nearby Darlot mine.

Saracen emerged with a 10.5 per cent stake in Red 5. Gold Fields has a 19.9 per cent stake, and the big fund manager, Franklin Templeton, has a 14.6 per cent stake.

The next steps at KOTH will be more exploration and a study into whether a bulk mining business can be developed. Rather than focus on a small number of rich veins, a bulk mine takes everything. It relies on the economies of scale to make a profit.

On the market, Red 5 shares have risen by 2.6c (46 per cent) to 8.8c over the past few weeks as news of the KOTH discovery has reached investors, along with progress at the Darlot mine and the potential to restart the Siana project.

Orion Minerals (ORN)

Australia is not the only country with an old mine showing signs of new life.

The Prieska zinc and copper mine in South Africa emerged as a potentially significant redevelopment by dual ASX and Johannesburg-listed Orion Minerals.

In its heyday, Prieska was a world-class business employing 4000 people, but a combination of low mineral prices in the late 1980s and the complications of doing business in South Africa at the time saw mining stop in 1991. A lot of ore was left behind.

Over the past two years Orion has been beavering away at Prieska. At one stage it had 20 drilling rigs on site, with the core that Orion have recovered forming the basis of a significant new resource calculation of 28.7 million tonnes assaying 3.77 per cent zinc and 1.16 per cent copper.

A scoping study released this week on those numbers showed the potential for an initial 10 years of mining producing up to 80,000 tonnes of zinc a year and 22,000t of copper.

Redeveloping Prieska would cost up to $A330 million with payback achieved in three years from a business expected to operate at a 38 per cent internal rate of return.

The prospect of getting Prieska back into production is generating considerable interest in South Africa. This is partly because several senior government officials once worked there, and because it is seen as a demonstration of South Africa improving its appeal to international investors.

Breathing new life into an old mine is only part of the Prieska story. Another aspect of the Prieska revival is the application of modern exploration techniques in a region which has seen limited work for almost three decades.

Early-stage geophysical surveys have identified the potential for Prieska ‘look-alike’ structures. Geologists expect this because the main orebody is classified as a volcanogenic massive sulphide (VMS) and they are often found in clusters.

In effect, Prieska could become a starter mine for something bigger in the Northern Cape region of South Africa.

On the market, Orion has not been a star. It has limped through the last 12 months at around 3c and dropped to 52-week lows in mid-December. The stock is valued at around $35 million.

Alliance Mineral Assets (A40)

Last month, Alliance was the 50 per cent owner of the Bald Hill lithium mine in WA. Now, Alliance is the outright owner after a merger with its partner, Tawana Resources.

Cleaning up the corporate structure opens the way for Alliance to consider different expansion opportunities, such as a project-plant upgrade to boost output of lithium concentrate and extend the mines current life expectancy of around nine years.

Like other Australian hard-rock lithium miners, Alliance is finding that its concentrate is in strong demand in Asia from companies which convert lithium into a variety of battery-grade chemicals.

Bald Hill, located near the nickel-mining centre of Kambalda, was originally explored for another technology metal, tantalum. This is a significant by-product in the project’s lithium which is being sold to the Hong Kong-based commodity trader, Burwill, and a Chinese electric motor company.

The mine started production at a nameplate capacity of 155,000 tonnes of lithium concentrate per year. It could expand relatively easily to 260,000t with the prospect of further growth as exploration accelerates.

Not widely researched, Alliance has earned a ‘speculative buy’ tip from Canaccord Genuity. The broker has claimed a price target of 50c, almost double the stock’s last sales at 26c.

Canaccord reckons that Alliance will generate strong profits thanks to a fixed-price offtake sales agreement at $US880 a tonne for concentrate containing 6 per cent lithium. The broker did the numbers on a pre-tax profit next year of $41.4 million next year potentially rising to $136.9 million in 2020.

“We anticipate solid operating cash flow moving into 2020, which combined with the healthy balance sheet, provides sufficient capacity for funding plant upgrade works and exploration activity,” Canaccord said.