Grade might be king in gold mining but not far behind is an equally important measure, profit per ounce.

What the Karlawinda project of Capricorn Metals (ASX:CMM) misses with its lowly grade of 1 gram of gold a tonne it more than makes up with a profit approaching $800 an ounce.

There’s a lot in those opening paragraphs for novice investors to absorb, but the key message is that when the Australian dollar gold price rose above $1800 an ounce late last year the financial viability of every gold deposit was boosted.

Until now Karlawinda, which is located near BHP’s (ASX:BHP) iron ore mining centre of Newman in the north-west of WA, has been a project largely ignored because of its low-grade ore at a time when gold rivals such as Kirkland Lake (ASX:KLA) in Victoria are mining the bonanza grades of the sort that old-timers hunted.

It is stretching the point but a comparison between the latest drill results from Kirkland Lake’s Fosterville mine in Victoria, including 3.6 metres assaying 625 grams of gold per tonne (625g/t), drives home the difference with Karlawinda’s 1g/t looking somewhat insignificant.

Doesn’t have the grade, does have the $$

But missing in a grade comparison is the business case for even a low-grade goldmine at a time of high gold prices.

While Karlawinda does not have the grade, it does have the dollars as can be seen in the details of a $107m debt-funding package provided by Macquarie Bank.

Announced on December 13, the Macquarie deal was based on Karlawinda producing gold at an all-in sustaining cost of $1038/oz over the initial eight-and-a-half years of production at a rate of 100,000oz of gold a year.

The gold price is the key

On the day of the funding announcement the Australian gold price was $1724/oz, indicating a margin of $686/oz for the Karlawinda project, a handsome profit by any measure.

Since then, the gold price has moved higher as global financial conditions have worsened with the latest local gold price of around $1818/oz lifting Karlawinda’s margin by $94/oz in just a few weeks to around $780/oz.

Interestingly, the increasing potential profitability of Karlawinda has done nothing for Capricorn’s share which remains stuck at around 7c, perhaps because details of the equity component of the project’s funding is yet to be released but is likely to see the company raise around $25m from shareholders because that’s how much is needed reach the mine’s estimated capital cost of $132m.

More than a starter mine

Karlawinda is more than Capricorn’s first project.

It could turn out to be a “starter” mine with the potential to grow into something bigger and longer lasting than the current plan of a mine treating three million tonnes of ore through a conventional carbon-in-leach processing plant.

The mine itself will start in the Bibra orebody, a big but shallow structure which contains around 1.5 million ounces of gold with the potential for more to come as exploration probes through 10-metres of sand cover with the latest assays from the Francopan area including 26m at 1.03g/t from a depth of 132m, with higher grades in some holes.

Capricorn is confident that it has a first-mover advantage in what it describes as an emerging “greenstone” belt of the sort which has yielded much of WA’s gold.

The Bibra deposit is described as a continuous, structurally-controlled system with 50m thick, low-angle shoots, which should make for easy mining, as well as having the potential to have a longer life than in the current mine plan.

The project’s location, 60km south-east of Newman, means easy access to well-developed infrastructure services while operations will benefit from access to a nearby natural gas pipeline to fuel an onsite electricity generating power station.

Costs are the issue here

With its low-grade ore, the key to Karlawinda’s success will be in its ability to keep construction costs down, to move waste rock cheaply, and to operate its gold-processing plant efficiently.

A first step in that direction has been taken by trimming the estimated capital cost from $146.3m in a 2017 feasibility study to the current $132m with the reduction largely achieved through the negotiation of lower process plant costs.

With debt-funding in place and equity funding to come Capricorn has moved to within sight of a significant change in status from potential project developer to Australia’s newest gold producer.

The ore grade at Karlawinda might be low, but the profits could be quite high.

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