Tuesday, August 2, 2011

The KCN/RCO Connection - Bowdens Silver Project

On August 1st Kingsgate Consolidated (KCN) announced they had entered an agreement to purchase the Bowdens Silver Project in NSW (presently owned by Silver Standard Resources). I noticed the announcement (having seen it come up on the announcement feed that I recently added to the site), but made no further connection at the time.

Here is a excerpt from the KCN announcement:

The project has been subject to extensive technical and feasibility due diligence. Kingsgate's development team plans to fast-track the project through a Bankable Feasibility Study. Based on Kingsgate’s initial review, Bowdens could be in production by early 2014.
Bowdens has the potential to be a robust project with the possibility of increasing the resource base. Kingsgate plans to release a JORC-compliant resource and the conclusions of an updated scoping study within the next 2 months.
And then a little further along in the announcement:

Bowdens has the potential to be developed as an open pit operation with the capacity to sustain a 3-4Mtpa ore processing rate over a minimum 10 year mine life.
ASXIOU on Hot Copper noted that the project is actually one of Royalo Resources (RCO) prospects for a net smelter royalty of 1-2%.

I recently covered Royalco Resources in this post:

Resource junior paying 10% fully franked dividend

The share price closed 5% higher today and buyers are drying up, although depth in general is still very thin.

In the latest quarterly we find that RCO's cash position has increased to $15.2m which is around where I speculated in the earlier post. This means we have a cash backing at 28.8c per share, around 68% cash backed based on close price today (42c), although this will likely be somewhat reduced when the dividend is paid. The company has announced a fully franked bi-annual dividend (2cps) is to be paid in early September.

One of the larger risks I pointed out in the earlier post was that RCO's largest royalty was expected to finish around the end of 2012, however the Bowen project being fast tracked by KCN has the potential to take it's position and provide RCO holders with a long term income.

Based on some figures that KCN have provided (and some assumptions)...

4mtpa x 50g/t x 80% recovery rate = 5.15m Silver ounces per annum

Assuming a $25 margin per ounce (based on $15 cost/$40 Silver) we can estimate net revenue of around $128.75m from the project, RCO's share being 1-2% or around $1.3-$2.5m per annum. Of course this figure is highly dependent on the price of Silver and we can have much higher prices than $40 in 2014 when it is suggested production could commence.

We will know more in coming months as KCN complete the scoping study, but suffice to say this looks like an extremely positive development for RCO and I suspect shareholders are set to benefit from the sale and advancement of this project.

Very excited about the potential here (as a long term, high income producing buy and hold).

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