WPG Resources (ASX:WPG) has announced a feasibility study on the Tarcoola gold project in South Australia. That’s a very small project (with an ore reserve of less than 75,000 ounces gold) but as the initial capex is estimated to be just A$16.7M, the mine wouldn’t be very capital intensive.
The mine plan calls for an annual production of 20,000 ounces gold at an AISC of A$1088/oz, resulting in a net margin of approximately A$400-425 per ounce. WPG is very lucky the Australian Dollar is quite weak because if one would use a slightly stronger AUD (as the current USD/AUD exchange rate is just 1.36 compared to the USD/AUD exchange ratio of 1.43 used in the feasibility study), the net present value of the property would very likely have been negative. Additionally, WPG is using a base case scenario of A$1626 gold which is roughly A$150/oz (10%) above the current spot price.
WPG tried, but this project is more a call option on the gold price than anything else. Right now the economics of the project are too weak for us (given the already aggressive gold price and USD/AUD assumptions), so we don’t expect WPG to outperform the market based on the result of this feasibility study. It looks like the company’s resource estimate (which contains less than 100,000 ounces gold) hasn’t reached the critical mass yet. Should WPG be able to double the resources to 200,000 ounces and be able to slightly increase its annual output, then WPG should be able to increase the NPV.
Also keep in mind it looks like the breakdown of the A$16.7M capex does not include any contingency provision at all, so the potential for cost overruns does exist.
> Click here to go to WPG’s website
Disclosure: The author holds no position in WPG Resources and has no intention to initiate a position. Please see our disclaimer for current positions.
