Tim Treadgold: Rex returns with a US deal that has history written all over it
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History hangs heavily over a bold break-out move by South Australian-focused copper explorer Rex Minerals (ASX:RXM) as it embarks on a US adventure, following in the footsteps of the once-great Western Mining Corporation.
Centrepiece of the US move is a company which owns an old gold mine and associated exploration tenements called Hog Ranch in the mining-friendly jurisdiction of Nevada, home to some of the biggest goldmines in North America.
Said quickly and it sounds like a deal with potential, and that could be the case, but there’s a lot of ancient and modern history for Rex to manage before Hog Ranch will be seen as an asset to rival its promising Hillside copper project opposite Adelaide on the Yorke Peninsula.
One reason for the addition of a US asset is that Hillside has proved to be a difficult project to develop with a large resource of relatively low-grade ore averaging 0.6 per cent copper and 0.14 grams per tonne of gold.
An ideal location close to infrastructure has not been enough to get Hillside to the starting gate, leaving Rex to wait for a higher copper price.
Regular readers of Stockhead might remember that Rex has been examined twice before, and disappointed investors each time.
The first look was in late 2017 after Rex had shown signs of recovering from a share-price wipe-out that took it from $3.05 to 4c in five forgettable years.
This led to major design changes in the project, including the removal of a proposed iron ore component and a focus only on the copper and gold, though even then the numbers were not encouraging.
The second look by Stockhead was in May last year after Rex had staged a share-price recovery following the filing of a monstrous 2500-page Hillside environmental report.
The report outlined how it could produce 35,000 tonnes of copper and 24,000 ounces of gold a year at an all-in copper equivalent cost of $US1.88 ($2.67) a pound.
Unfortunately, the latest attempt to launch Hillside was at a time when the copper price was $US3.09/lb, its recent peak, and a time when the Rex share price also peaked at 22c. It’s been downhill since.
Hillside hasn’t gone away and in the right conditions it could still be a company-maker for Rex given its location at the southern end of SA’s “copper highway” that runs north to include BHP’s Olympic Dam mine and the twin projects of OZ Minerals (ASX:OZL), Prominent Hill and Carrapateena.
But in order to revitalise Rex the long trek to Nevada has started, not that it will be easy.
For starters, shareholder approval will be required to buy Hog Ranch Group because Rex chief executive, Richard Laufmann, and the company’s chief financial officer, are shareholders of the target company.
Once that hurdle is cleared, Rex has until September 30 to finalise a due diligence process, and only after that focus on the gold potential of the Nevada tenements.
The first reference point for work at Hog Ranch is the data left behind by WMC when it finished mining there in 1993 after a frustrating five-year campaign of marginal profitability at a time when the gold price was $US300 an ounce, and less.
Rex management will be intimately familiar with WMC’s Hog Ranch experience which started with a two-phase acquisition process costing $C100m ($108.7m) and $US29.75m – a huge outlay which led to the total production of just 140,825oz, depletion of the modest gold resource, and eventual sale of the asset by WMC in 1995.
Hog Ranch was one of several ill-timed and ill-executed deals by WMC, with another North American purchase, that of Seabright Minerals, one of the worst international expansion moves ever attempted by an Australian mining company.
This time, Rex believes, it will be different because geological knowledge has grown, there is a wealth of accumulated drilling data which could lead to the discovery of a deep epithermal gold system underlying the surface material extracted by WMC – and the gold price is almost five-times higher ($US1428/oz v $US300/oz).
In last week’s announcement by Rex of a non-binding heads of agreement to buy Hog Ranch, Laufmann said the acquisition would give Rex immediate exposure to the gold sector in one of the world’s best-endowed gold regions.
“The Hog Ranch gold project provides camp-scale (large scale) opportunities for small and large low-grade surface projects in addition to exciting high-grade underground epithermal deposits,” Laufmann said.
The surface material was the focus of WMC which operated Hog Ranch as a heap-leach facility because its grade of around 2g/t couldn’t support a conventional process circuit.
At today’s gold price, that 2g/t material in a heap leach, or via some other extraction process, could produce a very different financial result to that suffered by WMC.
For novice investors the WMC experience at Hog Ranch is a sobering reminder that geology can be tricky, as can computer programs.
In the memoirs left by WMC’s later chief executive and chairman, Sir Arvi Parbo, this note is recorded about the lower than expected gold reserves.
“It was found that the ore reserve calculations had been made using computer software which was not applicable to this type of ore occurrence,” Sir Arvi wrote.
“The geologists were in effect using a black box without understanding what was in the box.”
Now for Rex’s crack at Hog Ranch, if the due diligence stacks up and Rex shareholders approve the deal with some comfort in the extensive knowledge of the area and a much higher gold price.