A Preliminary Economic Assessment (“PEA”) is a significant milestone for junior exploration companies, essentially it promotes them into a select group of “valued asset” owners in the mining industry. It is a third-party assessment of the economic viability of the project’s resource estimates which a company has completed to date and it is an outline of the steps to be taken to reach commercial production.
Phillipe Cloutier could not be happier with the PEA prepared for Cartier Resources’ (ECR.V) Chimo mine near Val d’Or Quebec. “A PEA is a first pass assessment,” said Cloutier in an interview. “It’s a group of independent engineers giving a professional opinion that “this thing can fly”.”
“The PEA triggers a whole new audience of investors,” said Cloutier. “An investment banker looks at this professional assessment and can say, “I can run with this”.
Essentially what a PEA does is take the resource estimates, the hole-by-hole drill results and grades and develops a preliminary mine plan. It examines the main elements it would take to bring the mine into production. Then the PEA assigns hard numbers, with conservative assumptions, to the underground development and operating costs of mining and milling. Those numbers in hand, the engineers calculate the likely production numbers for the operating mine over its projected life and make an assumption as to what the gold produced will fetch in the market.
There are a lot of moving parts in a PEA and a lot of professional assumptions which are, because 3rd party, independent and subject to peer review, usually very conservative.
In Chimo’s case the headline numbers go like this:
- Long-term gold price of US$1,750/oz,
- Exchange rate of CAD$1.00 = US$0.77
- Post-tax NPV5% of CAD$388M and IRR of 20.8%
- Post-tax payback period of 2.9 years and mine life of 9.7 years
- Capex of CAD$341M
- Average all-in sustaining cost of US$755/oz
- Average annual production of 116,900 oz 4,500 tpd underground operation
One takeaway from these numbers is that Cartier would have a free cash flow of just under $1000 an ounce on 117,000 ounces for 117 million dollars US per year free cash flow from the operation. But that is based on two, very conservative, premises: $1750 gold (currently gold is trading around $2000) and that the gold ounces in the current resource estimates are all that there are!
There is also another very conservative assumption built into the calculations: the PEA assumes, and includes in the CAPEX, that Cartier will build its own mill. That is estimated to cost 112.7 million dollars itself and there are several million dollars in additional CAPEX allocated to “Surface Infrastructure”.
Which makes sense. “Until now we have been in our comfort zone, exploration,” said Cloutier. “Now we are in the mine building business. We intend to continue building on solid foundations as we grow.”
Critically, the Chimo mine is a brownfield development. It already has a nearly 1000-meter shaft with levels and levels of presently flooded tunnels. “It’s a past producing mine,” said Cloutier. “It’s close to Val d’Or, but not too close. We won’t be disturbing anyone but people can easily drive to work.”
The location is important for another reason. There is a lot of excess milling capacity in the Val d’Or area. For the PEA, Cartier voluntarily did not consider toll milling as it would have tied the calculations to one scenario. But there are nearby milling options which would eliminate the need to immediately spend the 100 plus million on a mill. Attractive for Cartier, very attractive to a potential buyer or joint venture partner who might just own some of that spare milling capacity.
So now Cloutier has his elevator pitch:
- Chimo is economically viable
- The project has characteristics which will bring real benefits beyond the conservative PEA
- Chimo will continue to grow, lots more gold ounces to be discovered
This last point is important. Right now, the PEA calls for 31% of the mined ounces to come from the East Chimo section of the prospective mine. However, as Cloutier points out, “That section is all open. It’s been lightly drilled and it remains open at depth and along strike. There are more ounces there.”
Continuing to drill and add ounces to the indicated and inferred 2,353,000 current resources will lead to an updated PEA. One which will, I expect, top 3 million ounces.
The market has not really taken on the fact that Cartier has shifted from an explorer to a well-advanced explorer-developer. Its 41 million market cap values its 2.35 million ounces at just under $19 an ounce. Advanced-stage development companies have been changing hands starting at $100 an ounce.
5x Cartier’s current share price of $0.13 would be attractive. But Cloutier is not stopping here, drills will be turning on West Nordeau and East Chimo which would lead to a revised resource estimate and PEA..