Tim Treadgold: Medusa struggles but it has cash in the bank and a plan to grow
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It’s been almost all downhill for Medusa Mining (ASX:MML) over the past nine years as the gold miner’s share price has plunged by 91.5 per cent, from $8.35 to latest sales at 71c.
And while it is unlikely that the stock will fly as high as it did in 2011 there are reasons to take a fresh look at Medusa.
Despite its Australian head office and ASX-listing, Medusa’s best asset is the Co-O mine in the Philippines and some of the company’s keenest followers have been London investors, led by a cheer-squad of British stockbrokers.
What the Brits liked was the high-grade gold in Co-O — a classic narrow-vein epithermal deposit, which can be tricky to mine as the veins pinch and swell thanks to their creation in a volcanic environment, sometimes yielding fabulous amounts of gold and sometimes not.
And then there’s the challenge of working in the Philippines where mining’s popularity with government and the locals can be as erratic as the veins chased by Medusa’s underground workers; fully supportive one day and not the next.
It’s because of the problems at Co-O that Medusa fell out of favour, with the share price slide also blamed on rising costs and declining production. The December quarter confirmed a modest performance which was saved by the high gold price.
In the latest three months, Medusa produced 20,792oz of gold at Co-O from ore containing a respectable 5.3 grams of gold a tonne.
The problem with that result is that it was well down on the 27,515oz produced in the previous (September) quarter.
The cash cost per ounce in the December quarter rose to $US808/oz ($1209/oz) compared with $US613/oz in the September quarter, while the all-in sustaining cost blew out to $US1346/oz versus $US997/oz in the prior quarter.
The net result of the production slide and higher costs was a share price which started weakening in early January, and continued to slip last week even as the gold price moved back up towards the $US1600/oz mark.
So, if Medusa has dropped off most investment radar screens over the past few years why would anyone take a fresh interest in the stock?
The answer to that question is that the sell-off in Medusa has probably gone far enough.
That’s because management is working on a plan to extend the life of Co-O while maintaining annual gold production at around 100,000oz – roughly half the target of a few years ago but a reasonable amount of gold for a small company which has a stock-market value of just $144m.
The key to the next phase of operations at Co-O is to go deeper, where drilling has revealed a continuation of high-grade mineralisation below existing operations while remaining open at depth with the only constraint being limits on drilling.
In other words, Medusa and its Co-O mine can be seen as much as an exploration play as a small gold producer with the exploration target being what lies at depth under the historic workings.
The major improvement in the next phase of Co-O’s life will be a switch from an old and not very efficient shaft system, which has limits on the amount of ore that can be hoisted to the surface, to a decline (or plunging roadway) that will enable heavy haulage equipment to bring more ore out in a safer way.
A comprehensive study by Medusa revealed that a decline would add years of life to the mine by overcoming the limitations of the existing system.
Construction of the decline is expected to start in the next few months and take 36 months to complete.
But most importantly it will not impact existing operations, with the estimated $US48m cost largely funded internally, from the $US25m that Medusa has in cash and from ongoing gold production.
Medusa chief executive David McGowan said in a statement when the decline development was first revealed late last month that the shaft and hoist system was not delivering enough ore to the surface processing facilities with the mill only operating at around 60 per cent of capacity.
“While historically Co-O has relied almost entirely on shafts for access and hoisting, we believe the introduction of a modern decline will provide significant benefits,” McGowan said.
“In addition to improved safety, efficiency and operational flexibility we expected a key benefit of the decline is the enhanced positions it will provide for in-mine and near-mine exploration.”
What McGowan means is that as the decline is dug down to the operational face of the mine, drill pads can be easily created along the way, which will help improve geological understanding of the orebody, especially of the hard-to track veins of high-grade gold while also looking for new veins.
Over the past 10 years, Co-O has yielded almost 1 million ounces of gold and with production guidance being maintained for 2020 at between 95,000 and 105,000oz (despite ongoing operational problems) it is possible to see Co-O having many more years of ongoing production.
And then there’s the enhanced exploration opportunity at depth and from targets close to the mine, at sites such as the recently discovered Royal Crown vein about 3km from the Co-O mill where an inferred resource of 50,000oz has already been outlined and with more drilling scheduled.
Co-O and Medusa have been around for a while but the mine and the company could be on the verge of a new life.