It’s taken repeated management shuffles, failed takeover bids and a major financial restructuring exercise to get Capricorn Metals (ASX:CMM) to the point where it might finally be able to proceed with the development of its plum asset, the Karlawinda gold project in WA.

For long-term shareholders in Capricorn the focus on issues other than mine development has been a case of frustration piled on frustration.

Exactly what went wrong in the company’s boardroom has never been fully explained but it’s reasonable to assume that a lot fell into the category called personality clash.

READ: New Capricorn management wants to revisit ‘past failed’ deals

Revisiting the history of Capricorn is interesting but the more important message is that the past few months has seen the company start to look a lot more like it should have 12 months ago when Stockhead took its first detailed look at the company.

That original view in our January 3 report was of a business which planned to produce 100,000 ounces of gold a year from a big, but low-grade orebody about 60km south-east of BHP’s (ASX:BHP) iron ore mining centre of Newman in WA’s Pilbara region.

A $107m debt-funding package had been secured with Macquarie Bank with the project expected to yield gold over an initial 8.5 years at an all-in sustaining cost of $1,038 an ounce – a margin of close to $700 an ounce given the gold price at the time of $1,724/oz.

After that burst of optimism, the wheels fell off Capricorn. Though it remained a target of several suitors, including major gold producer, Regis Resources (ASX:RRL), which tried (and failed) to acquire the company, as did another bidder — Emerald Resources (ASX:EMR) working with private equity investor Hawkes Point Holdings.

Roll forward a few months from the destructive first half of 2019 to a point around mid-year when the new-look Capricorn started to emerge, led by a former chief executive of Regis, Mark Clark, and backed by a number of his former colleagues, and by one of the earlier failed bidders, Hawkes Point.


The road ahead

Despite major changes at head office, not a lot has changed at Karlawinda where the same geology waits for what is largely the same mine plan, with a few subtle but important variations on that theme.

For starters, the gold price is significantly higher, up 21 per cent in US dollars and 27.4 per cent in Australian dollars, from the $1,686/oz used in a 2018 management report to $2,148/oz.

The mine plan, which is being reviewed by the new management team, along with resource and reserve analysis and flowsheet design, is likely to be much the same as before.

This is because there is only so much that can be done with an orebody that might have a gently dipping and easy to mine configuration but which averages a lowly 1 gram of gold per tonne of ore.

The secret to making money from 1g/t dirt is to shift lots of it cheaply, which is what Capricorn believes can be done through a plant processing 3.5 million tonnes a year with connection to a passing gas pipeline likely to keep energy costs down.

The latest capital cost estimate for Karlawinda is $132m, though that was in June last year and a new number should emerge early in the New Year from the review process underway.

Forecast operating costs, which are also being reviewed, were last estimated by management to be $1,177.80/oz on an all-in sustaining basis, a number which points to a very handsome gross profit margin of more than $1,000/oz based on the latest gold price.

Macquarie Bank, which has just initiated coverage of Capricorn, reckons the all-in cost will turn out to be more like $1,350/oz and the pre-production capital requirement around $150m for a mine with a nine-year life at 100,000/oz a year.

But, even on Macquarie’s more cautious numbers Karlawinda should be a handsomely profitable operation, which begs the obvious question of why it wasn’t developed earlier?

Whatever the history, and it’s not pretty, Capricorn appears to be back on track, complete with a revitalised relationship with Macquarie, which has added the stock to its buy list with a price tip of $1.50 – 32c up on recent sales at $1.18.

“In our view, the new and highly experienced management team (at Capricorn) significantly reduces Karlawinda’s funding, development and operational risk,” Macquarie said.

The new management team has boosted investor interest in Capricorn and helped with a recent $83m capital raising and the securing of a 200,000/oz gold hedge at $2,249/oz which protects early-year cash flow.

Macquarie said Capricorn would undergo a “developer-to-producer” re-rating over the next 12 months as Karlawinda approaches first gold late in the September quarter of 2021.

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