Tuesday, June 9, 2015

Profit Margin #2

Profit Margin in any mining project is king.
A previous post talked about Chidliak and profit margin -- Profit Margin - Chidliak

For every 1 tonne of material at CH-6 kimberlite at Chidliak, the profit margin on that tonne is going to be in the range of $500.

You need that margin to be able to pay for capital, mill construction, road construction, etc.

Majority of projects do not nearly have the same buffer in the margin as Chidliak has.

This has become front and center again with very recent news by NAR (North Arrow Minerals).
They processed a bulk sample, roughly the same size as CH-6's bulk sample (1K tonnes of material plus or minus) and had a nice parcel to evaluate from

The grade on the bulk sample from NAR came out at 0.284 cpt. Very low as compared to CH-6's.
That 0.284 cpt was on the 1mm sieve as well. Chidliak uses the 1.18 mm for reporting grades.
However, they did have some very fancy and deep hued yellow stones that had the potential to be worth a lot of $$'s.

It turns out, they are not worth as much as needed. The valuation turned out to be $36 US per carat with a model range between $43 US to $92 US per carat. A significant range for the valuation.

They did mention that the sample grade may not be representative as it came from a certain area and now they mention that the valuation has to be used with caution because of the size of the parcel (small).

What is the profit margin?

Assume operating cost is CAD$75 per tonne (open pit northern mining)

Revenue low end = 0.284 x $43US/0.8 (conversion to CAD) = CAD$15 per tonne
Revenue high end = 0.284 x $92US/0.8 = CAD$33 per tonne
Assume grade is much higher (0.5) = 0.5 x 92 / 0.8 = CAD$36.8 per tonne.

At the very high end, it looks like revenue could reach CAD$40 per tonne.
With a mining cost of CAD$75, you end up with a negative $35 profit margin.

Does not matter how big or small the deposit is, it needs significant hope to be able to turn the equation positive.

At market time, Chidliak is only worth 3 x NAR's market capitlization.

Does a $500 per tonne profit margin only justify being worth 3 x a negative $40 per tonne margin?

The quality of the diamonds count big time.
Beyond CH-6,7 and CH-44, some of the individual stones (0.99 carats or larger) on the other kimberlites at Chidliak are stunning and are just the tip of the iceberg. 

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