Rox Resources Limited (RXL) Earnings Call Transcript

I'm Nicholas Read from Read Corporate, and I'm very pleased to welcome you to this investor webinar with Australian gold developer, Rox Resources, ASX Ticker RXL. Thanks very much for your time this morning. Rox is focused on redeveloping the 2.3 million-ounce Youanmi gold project in Western Australia, one of the few new high-grade development assets of scale in the Australian gold sector. I'm very pleased this morning to welcome Rox' Managing Director, Rob Ryan, to run us through the Youanmi pre-feasibility study, which was released to market yesterday morning. This positive PFS has confirmed the potential for Youanmi to become a 100,000-ounce-plus per annum producer, a high-margin operation with impressively low all-in sustaining costs and very strong financial returns. On the back of the study, Canaccord analyst, Paul Howard, has this morning issued a flash update for Rox, reiterating his firm's speculative buy recommendation with a $0.51 price target, and that compares with Rox' current share price of around $0.13. Before I hand over to Rob, just a reminder that this is intended to be an interactive session. So if you do have questions for Rob, please use the Q&A tab on your browser to lock them, and I'll make sure that I'll put them all to Rob as soon as he finishes presenting. So with that introduction, Rob, welcome. We've got some lovely gold bars on the front of your presentation. That's what this is all about. So please go ahead and run us through the Rox Youanmi story.

Thanks very much, Nick, and I'm sure that we'll get to produce a fair few of these gold bars in the future. And the pre-feasibility study really does set the basis of what is a starting point for our development. At 100,000 ounces per annum, there's tremendous upside to be able to expand upon that in our 2.3-million ounce resource as well as some of our exciting sort of high-grade targets outside of that. The Youanmi project, as it stands now, has delivered an ore reserve of about 540,000 ounces at very high grade of 4.4 grams a tonne. This will be a long-life project with over 7-year, nearly an 8-year, mine life with an average run rate of about 103,000 ounces per annum, with tremendous upside to be able to expand upon that. Now when we start looking at all-in sustaining costs, it's $1,600 an ounce. At the gold price today, where it was around $3,650 an ounce, that's $3,000 an ounce in cash margin for every ounce we're going to produce. This is a high-grade project, and it is highly leveraged to the gold price at these values. When you look at the net present value at the current spot price and the IRR, we're talking of a nearly $700 million NPV at an IRR of 55%. So this does present a tremendous development opportunity for Rox. And we're located in the Murchison district, which is a hot bed for M&A, development and exploration activities, over the past 12, 18 months. Youanmi is a tremendous opportunity to create a stand-alone project with a large resource base, and it is a significant resource. It is high grade at 4.5 grams a tonne. There's not many resources that can compare to the scale of opportunity we have here at Youanmi. The resource in the top 400 meters averages around 4,000, 4,500 ounces of vertical meter. You can see by the long section that when we start looking to the southern end of the project, there is very sparse drilling. And there is an opportunity to significantly grow the project, especially around the Pollard area and a recent discovery at Paddy's, which sits probably around 500 meters to the south of Youanmi main load, to continue to build upon what is an exciting development opportunity. It has a high-grade ore reserve, 546,000 ounces at 4.5 grams a tonne. Here we are, we have a look at the long section. And what you can see is it is a continuous ore zone with a lot of potential to grow. Link has been an area that we focused on in the last 12, 18 months, drilling Link out and building the resource and building the confidence in the resource through there, and that's helped establish our ore reserve today. Link has continued to build from what was a small resource, initially, a large inferred component. And we've been able to add the majority of that material into reserve. When we start having to look further to the south at Pollard, you'll see a small high-grade pod at the southern end of the Youanmi open pit. This is an area of extremely high grade, but just hasn't had the drilling applied to it. And we will look to drill this out over the coming months and be able to get that up to a reserve level for the definitive feasibility study. The key study outcomes, it is a long-life project. We're talking sort of 7- to 8-year mine life, with the opportunity to continue to grow upon that. We'll look to build a processing plant with around 750,000-tonne per annum capacity, and there is the opportunity to be able to expand on that throughput. Total material mined over the project will be close to 6 million tonnes at an average grade of 4.5 grams. We'll look to continue to drill out some of the higher-grade areas of this resource and continue to add more high-grade underground ounces to this development profile in the future. The project NPVs on a post-tax basis present a compelling investment opportunity. At $320 million post-tax NPV discounted at 8% gives a 33% IRR post tax. When we start having a look at some of these outcomes on a current spot price basis, they accelerate quite dramatically. And that is driven by our low all-in sustaining costs. When we start comparing ourselves to our peers, who are of a similar scale and similar market cap in the junior Gulf space, our all-in sustaining costs at $1,676 an ounce comfortably puts us at the lower end of the production profile. There is the opportunity to continue to build on what is quite a low all-in sustaining cost already by realizing increased throughputs and increased ounce production over the life of the project to be able to further reduce that all-in sustaining cost. The project, as it currently stands, would generate in excess of $150 million of EBITDA per annum. This is a significant cash build. And what it does mean is we can go out to financiers now and start having a look at getting project financing based on the pre-feasibility study. It is a high-grade, high-cash build operation and will be able to support a good amount of debt. The preproduction capital costs around $245 million. And when you look at that in comparison to the NPV, there's a comfortable 2x ratio on that CapEx to NPV. When you start running that at spot price, and we've calculated spot at $3,500, which is still $150 an ounce below where we sit today, it's almost a 3x uplift in valuation. And when you look at our current market capitalization of $59 million, and we do have around $7 million in the bank as we speak today, the value gap there is about 5.5x valuation in comparison to the value of the project. And at the current spot price, it's almost at 8x valuation uplift. And with that low all-in sustaining cost, it means that the project can be sustainable over fluctuations in the gold price environment. We've done a sensitivity analysis down to $2,900 an ounce, plus all the way up to $3,700 an ounce, and the metrics of the project still remain outstanding. There is the opportunity to continue to refine the mining profile. When we start having a look at the grade produced over the project, you will see it does accelerate 3 years, 5 to 8, and that's predominantly due to a lot of the high-grade material being deeper in the mine plan on the main load or being in and around the southern area of the Pollard area that has not as high drill density to get that material up into a reserve status. So there is the opportunity as we continue to drill out the ore body to look to bring those higher-grade ounces forward in the mine plan and to be able to increase that grade in the early years in the mine life. And that will help with the ramp-up of production. So at the moment, 3 years, 7 and 8 is when we get some of the highest grade and some of our lowest all-in sustaining costs of the project in able to bring some of that -- those ounces forward, we'd be able to drop our all-in sustaining costs in the early years. The processing layout is fairly simple. It's a 3-stage crush-and-grinding circuit, which is pretty standard across the gold fields. We will go into a flotation circuit to produce a gold concentrate, which will then be treated using the Albion process. It's essentially an ultra-fine grind and oxidation process, which has been employed by quite a number of junior gold companies over the past few years. The intention is to produce doré on-site, and yes, we will look to produce 100,000 ounces per annum of gold. And there is the opportunity to be able to upscale on this process as we continue to drill out the resource and add more mining inventory. And that will be our next steps. The infill drilling campaign for the resource development will kick off in the next few weeks. The idea would be is to drill some of those inferred stopes out to indicated status and get those into a mining reserve for DFS studies. In line with that, we will also look to grow the resource in and around that Southern area to mine, specifically targeting the high-grade Paddy's discovery that was made last year, drilling that downdip and drilling that out to the north to join up with the Youanmi main load. We will commence our definitive feasibility study, which will focus on the variability test work over the ore body. That will really focus on refining that processing flow sheet and get it down to a point where it's at a final investment decision phase. We'll commit all the necessary approvals to get the project up and running as well as getting all of our heritage surveys in line. And there's tremendous room to grow the resource, as I said before, specifically Pollard at the southern end of the ore zone. There's a very limited amount of drilling in and around that area. And we want to continue to drill that out and bring more high-grade ounces into the resource. Pollard, at the very southern end, eventually offsets to where Paddy's is. So to be able to drill both Paddy's and Pollard and potentially link those 2 areas together will give us quite a significant mining area over the southern end of that ore body that, at the moment, doesn't come into very late in the mine plan. Being able to expand upon that and grow that, we'll be able to add our additional ounces into our production target. The Pollard area, as you can see highlighted by the drill collars in the green on the left, sits at the southern end of Youanmi open pit, and Paddy's in the red box is the area that we'll look to continue to drill out and grow. The Southern offsetting fold, as you can see in the inset, is where we initially had that very high grade, sort of 24 meters at 35 grams a tonne last year. We will continue to drill in and around that and grow that -- and grow Paddy's below that sort of 150-meter mark as well as targeting the northern side of that fault, where there's been 0 drilling below that 150-meter mark. So being able to target that potential offset to Paddy's and potentially link that into Pollard will give us quite a lot of development opportunity. So to wrap it up, as I said, we've got a very high-grade reserve and resource. What we will look to do over the next few months is continue to drill out that resource and add additional ounces, one, to the resource; and two, to our mining reserve. There's a significant opportunity to grow that resource along that exploration target. There's 1.1 million to 1.8 million ounces in the exploration target we've defined at Youanmi. And if we're able to convert at least half of that, we could potentially be sitting on an additional 0.5 million ounces to put straight into our mine plan, and that would be a significant upside in not only the mine life at Youanmi, but also the production potential. There are compelling PFS financials already as what we see is our base case scenario, and this will be a platform that we'll be able to continue to grow from. Thank you very much for your time today, and I'll hand it over to Nick, and I'll look forward to answering your questions.

Thanks very much, Rob. That's a great presentation, very simple and clear. And we have had quite a few questions. Just a reminder to everyone, don't miss out on the opportunity to quiz Rob, while we've got him pinned down there over in West Perth. Rob, I'll dive straight into it. And just sort of starting from our first question, an investor makes the observation here that Canada's resources recently had some issues. And as we've read about in the press, due to a hedge book issue, with their financing. And the question really is, and it's a good one, what is your thinking around financing strategy for this CapEx? There's an issue in the gold sector at the moment. Can you talk us through your thinking around that and whether you would anticipate hedging? You mentioned the debt capacity of the project based on the financials. Can you just give us some thoughts there?

So we will start taking this out and marketing the project to a lot of financiers over the coming months. Now, obviously, with any project development, it will be a mix between debt and equity that you'll look to add. There's obviously hedging requirements that are required at times by some financiers. So there are opportunities to look at hedging or trying to potentially minimize your hedging by using put options and some other things. So there has been some interesting instruments used over the last couple of years. I'll look at Pantoro for their funding solution, how they effectively zipped -- got debt with 0 hedging and was able to get that project into production. And they've been in a position where they've been able to continue to ride the highs of the gold price through that time frame. I also look at some of the options that maybe Archean Resources have done as well, where they've purchased a bit of downside risk protection, and it's cost them about $50 an ounce. But they've hedged at a lowering gold price of $3,000 an ounce. They don't need to sell gold at that. It's just a bit of downside protection. So there are some interesting opportunities out there within the financial market to maybe steer away from some of your typical hedging requirements. But we'll continue to investigate those over the coming months and before we make a FID.

Fair enough. So you're well aware of, obviously, the issues, and I suppose the different options out there. A follow-up question from the same investor is when is first revenue expected? So I did note that you said -- so DFS sometime in '25. Can you give us a sort of high-level time total through the FID?

For standard sort of DFS time frames, it's around 12 months. Now we will look to do whatever is in our power to be able to bring that forward. So we're working through that DFS schedule as we speak. The intention would be to get the DFS complete by around the sort of Q3 mark of next year. And then financing would probably be around 6 months thereafter. The ideal scenario is to be a 12-month production build and then getting that out to first gold sometime in 2027.

Excellent. Next question here is, what are the advantages of processing to a gold doré rather than a gold concentrate?

It's a much easier market to sell gold, and everyone takes golds bars, I guess. I guess that's the easiest stance that they can put out there. Even though the gold concentrate market is quite well developed, there are a lot of buys in there. There's still a lot of opaqueness. Obviously, with a lot of the smelters being in China and working through traders and the like, although I'm not adverse to sort of gold concentrate production and pushing that through the process as well. The benefit of producing gold bars is, as I said, everyone buys gold. You, me, probably just about 75% of the population has invested in gold in some way or form, whether it be through the superfunds or the like. So that does present a much easier sales process. And the benefit of producing gold bars on site is it dramatically reduces your all-in sustaining costs. You don't have to transport charges associated with shipping a concentrate, and you don't have the TCRCs applied as well. So lowering that all-in sustaining costs will mean that you have the potential to continue to find more gold and make a much higher margin over a much longer term.

Yes. Clearly, as you said in your message, you'll sell those gold bars on this presentation. So I like that. The next question here is what work have you done to prove that the Albion process can process your ores efficiently? And I suppose a follow-up to that, this project, obviously, operated using BIOX very successfully, I think, in the '80s and '90s. Why have you opted for Albion as opposed to, say, BIOX?

So we had a look at the BIOX process as well as the Albion process, and they are 2 very similar outcomes in terms of financial metrics and capital exposure and the like. We looked at it on a bit of a spot analysis. So it was a qualitative decision that we made. One of the benefits that you do have with the ultra-fine grind and oxidation of Albion is it is a process, I think, you're less reliant on biological matter. And you're probably less susceptible to water quality and temperature issues than what you are with BIOX. So obviously, Youanmi can get quite hot in the summer up to sort of 45-degree C, then maintaining your tanks at -- or maintaining -- trying to maintain a process that's sort of 60 degrees can become quite hot, especially when it's an exothermic reaction. So there has been a lot of work done on the Albion project -- process across testing the various main load, hanging wall loads and having a look at what was a previously mined stockpile as well. We have a lot of data on the BIOX process that shows you only need a very low oxidation rate, and that is very similar to the outcomes of the Albion process as well. So now what we will look to do is a full variability study across the [ hollow ] zone that will then give us the data for a definitive feasibility study for the Albion process, and will get us to a point where we can lock down 100% the processing routes and the amount of oxidation time needed in that Albion reactor to be able to get also the outcome of what will be at 92%, 93% recovery.

Excellent. Thanks, Rob. Next question here is just in relation to power. So the investor makes the observation that the power cost used in the PFS is $0.283 per kilowatt hour. This appears high compared to operating assets in the region. Is there a reason for this?

Yes. So we've had a look at some of the gas costs, and there has been a rise in the natural gas costs over the past sort of 6, 12 months. And when we start comparing that to our peers, it's just the point in the cycle where we are at the moment. So a PFS is always done at a point in time. And one of the things we've seen in our costing scenario is a lot of costs are probably at the highest they've been for a long time. What that does show is we're doing this study at a time where costs are extremely high, and our all-in sustaining costs are still extremely low. And the opportunity for them is if we're able to further refine those costs as we move into DFS, there is the opportunity to improve on the financial metrics to the process.

So all subject to optimization as part of the DFS?

Correct.

The next question is, will future metallurgical test work programs include pilot scale test work to confirm the sizing of the Albion circuits and associated infrastructure?

Yes. So what the core technologies in Glencore have is they effectively they've developed a pilot-style scenarios, where they run through, and that's where they effectively are able to develop the process where it runs in their lab. And then what they can do is do batches of variability test work while using that sort of pilot-scale scenario. So that's the next step of the process that we've been sort of talking to the guys with over the past sort of few weeks, and we'll look to start implementing that network test work campaign over the coming months.

Excellent. Next question, did the PFS or any previous studies consider the pressure oxidation sort of process?

We have looked at pressure oxidation, and there has been a comparison to pressure oxidation. This really, at the scale of the asset, the capital cost become prohibitive. Through previous experience, I've had a look at what a similar-scale POX plant would be, and capital costs just for the POX into the circuit could potentially get up to sort of $200 million. So that's when we're considering it's an extra sort of $40 or $50 for an Albion plant. It's a significant cost differential for POX. So -- and the operating costs are higher than an Albion. Generally, POX plants work, and what is evidenced by sort of what you see with the grade, is when it's done at a much larger scale. Your types of mines like [indiscernible] and the like, where they're treating millions of tonnes of concentrate per annum, not so much where a smaller scale producer is trying to produce 100,000 tonnes of concentrate per annum.

Excellent. Thanks, Rob. There's some questions around the upcoming drilling program. So firstly, when do you expect that program to kick off?