Monsters of Rock: Will this mine ever get built?

Regis Resources flags final investment decision for McPhillamys gold mine in FY26
But it will look to make big capex savings before that point with the ~187,000ozpa development likely to cost $1bn
South32 tanks on alumina green tape, Woodside makes $1.8bn LNG buy and Perenti climbs on profit upgrade

With rampant inflation and volatile commodity prices, building a mine in this day and age is a tall ask.

Relatively uninspiring then, to see Regis Resources (ASX:RRL) confirm a near $1bn capital bill for its McPhillamys project in New South Wales, which would mean it will take six years of a near 9.5 year mine life to repay its construction costs.

The capex blowout was previously flagged with a final investment decision not pegged now until FY26, with the mid-tier gold miner now planning ‘value engineering and optimisation works’ to improve its financial metrics. To put that wait for investors into perspective, RRL has held McPhillamys since 2012.

The company currently produces upwards of 400,000ozpa in WA at its Duketon mines and via the 30% share it holds of AngloGold’s Tier-1 Tropicana project.

But both are heading underground beneath previous open pits, a capital intensive exercise and the latter is certainly ageing, with McPhillamy’s having spent years as the potential growth option to sustain and expand Regis’s production base.

It contains an updated ore reserve of 56Mt at 1.1g/t for 1.89Moz of gold, with a proposed 7Mtpa process plant expected to recover 1.71Moz of bullion over 9.4 years of processing.

Output would average 187,000ozpa, peaking at 235,000oz, with admittedly attractive all in sustaining costs of $1580/oz, total EBITDA of $2.8bn and pre-tax cash flow of $1.5bn.

At a $3000/oz gold price it holds a pre-tax NPV of $750m and IRR of 17.1%, but if you understand the phrase “death and taxes” it’s worth putting the post-tax numbers in here as well: $451m and 13.1%.

Payback is 5.3 years pre-tax, 6.1 years post-tax. The carrot is the potential for higher gold prices. At $3500/oz, closer to current spot of $3620/oz, post-tax NPV climbs to $848m with an IRR of 19% and payback of the $996m capex in four years.

Regis has found some high grade gold in recent intersections that could improve the scale and economics, with MD Jim Beyer stressing its plan to improve the economics at the 2.6Moz deposit, which will take two years to construct and after winning support from NSW’s Independent Planning Commission still needs a couple of approvals to get the mine shovel ready.

Not a roadblock

Gold was first discovered in the McPhillamys region in 1851 in tributaries of the Belubula River.

Despite this history, it’s been a long process for Regis to gain support from NSW authorities for the development, located down the road from the town of Blayney and Australia’s biggest gold mine, Cadia.

RBC Capital Markets analyst Alex Barkley, who has an outperform rating and $2.60 price target on $1.92, $1.5bn capped Regis, said the DFS update was positive.

“The McPhillamys DFS demonstrates the material latent value of the high-volume and long-life project,” he said in a note to clients.

RBC is a bit at odds on gold prices and discount rates – the cost of capital implied in the NPV. While Regis forecasts $3000/oz gold and a 5.5% discount rate, RBC predicts long-term gold of $2670/oz and a discount rate of $10%, driving a negative NPV of $43m.

“Broadly, we would find similar values to RRL if we changed our gold and discount rate assumptions. Importantly, gold futures are in contango, and gold hedging could lock in some of this considerable upside,” Barkley said.

“We do not explicitly value McPhillamys. However, it is implicitly included in our 43cps RRL group exploration value.”

RBC doesn’t see approvals risk as a big issue, but Barkley says the bank’s estimate of Regis’ current cash and bullion position of $8m net cash makes the $1bn capex bill look difficult in the near term.

“However, we think the latent value of the project could eventually be realised by another company via a hypothetical project sale,” he said.

“Such a transaction could offer substantial and immediate upside to RRL’s share price, in our view.”

And on the markets

How about the other large caps? Let’s take a Concorde and zip around a few stories.

Woodside Energy Group (ASX:WDS) is going to fork out US$900 million for the Driftwood LNG development in the United States, acquiring its New York listed owner Tellurian in a bid to add the future 27.6Mtpa LNG project to its pipeline.

With debt assumption and note repayments included the deal clocks up to US$1.2bn, or around $1.8bn Aussie.

FID on the initial two phases of the project near Lake Charles in Louisiana is due in the first quarter next year, with initial volumes of 11Mtpa and 5.5Mtpa targeted in two phases.

Its shares fell 2.3%, with investors likely glum about the prospect for further capex bills to hamstring returns amid the development of Scarborough gas in WA and Trion oil in the Gulf of Mexico.

Far more angsty were South32 (ASX:S32) shareholders, who threw $138m of the mining giant’s stock out the window in a 12.6% sell-off that lopped $2bn off its market cap.

The reason was stark naked, a US$554m impairment flagged on the Worsley Alumina operations in WA if it’s forced to adhere to conditions contained in an EPA report on mining new areas at the project last year.

“If imposed in their current form, several conditions recommended by the WA EPA create significant operating challenges for Worsley Alumina and impact its long-term viability,” S32 said in a statement.

“In Worsley Alumina’s view, several of the recommended conditions go beyond reasonable measures for managing environmental risks of the proposal based on scientific assessment and decades of operating experience.”

Another US$264m pre-tax will be impaired at the Cerro Matoso ferronickel mine in Colombia. A strategic review is due in the second half of this financial year.

South32 has also reduced guidance for FY25 by 5% for alumina (conveyor maintenance and regulatory delays), 7% for copper equivalent base metals at Sierra Gorda in Chile (geotechnical issues with managing clay content) and 9% for payable zinc equivalent production at the Cannington silver mine in Queensland (delayed weather impacts).

Its manganese output for 2024 fell 20% to 4.499Mt due to the cyclone which knocked out GEMCO in the Northern Territory, partly ameliorated by record production in response to the rising price environment caused by that outage at its South African mines.

Payable nickel output was largely unchanged at 40,600t for the year, with zinc 3% up at 60,700t, lead 11% hgher at 112,400t, silver up 12% to 13.27Moz, copper down 14% to 60,800t aluminium flat at 1.14Mt and alumina production slightly lower at 5.063Mt.

Met coal output from its soon to be sold Illawarra mines was 22% lower at 4.305Mt thanks to a planned longwall move.

Perenti (ASX:PRN) meanwhile surged 5.7% after the mining services supplier said its free cash flow would come in at around $180m, up from previous guidance of more than $100m.

It also won a number of contracts and extensions worth around $160m, including extensions with IGO (ASX:IGO) at its Forrestania nickel ops, Aeris Resources (ASX:AIS) at the Mt Colin copper mine in Queensland and a decline development contract with Spartan Resources (ASX:SPR).

That was most of the joy, with the materials sector down 0.86%.