Gold explorer Nusantara’s DFS in the spotlight
Now into the new year, it’s as good a time as any to take a closer look at small caps that are well-placed to deliver for shareholders over the coming 12 months.
Backed by an economically robust definitive feasibility study (DFS) and a bullish 2019 gold price outlook, Indonesia-focused gold explorer, Nusantara Resources (ASX:NUS), is one such ASX-junior that makes the cut.
By way of background, in 2017 the company became owners of the Awak Mas Gold Project, located in South Sulawesi Indonesia, which came with Mineral Resources at the Awak Mas, Salu Bulo and Tarra deposits, as well as previously completed pre-feasibility studies (PFS).
The project, which has all approvals in place for development, is one of just a few undeveloped gold projects within the Asia-Pacific region. It has an Ore Reserve of 1.1 million ounces, within a 2.0 million-ounce Mineral Resource.
Since the project has been in NUS’s hands, it has undertaken further Mineral Resource definition drilling, metallurgical evaluation, and mining studies which allowed for the completion of a DFS in the latter half of last year.
Explorers typically conduct a series of studies to evaluate whether a resource can be mined economically. These are scoping, preliminary feasibility, and definitive feasibility studies, with the latter used to support financing of the project.
In summary, the DFS supports an initial 11-year project producing ~100,000 oz per year, delivering strong margins. The initial capital cost was calculated at US$146 million, with pre-production mining expenditure of US$16 million, and project sustaining capital of US$29 million. The base case determined a post-tax net present value (NPV) of US$152 million, with a 20.3% internal rate of return (IRR) using a gold price of US$1250 per ounce, and importantly generates US$39 million per year of after tax free cash flow.
One major point to note is the low costs associated with the project’s development. The DFS determined a C1 cash cost of US$643 per ounce with an all-in sustaining cost (AISC) of US$758 per ounce. Based on current gold price, this means that the project is generating margins of around US$650/ounce.
The DFS identified the potential for an uplift in grade for the project’s Awak Mas and Salu Bulo deposits, as further drilling is undertaken to lift the reserve category to Measured status in the initial mining areas. Scenario financial analysis of these near-term opportunities shows a 7% grade uplift and an additional three years of mine life, significantly enhancing project economics, resulting in an NPV in the vicinity of US$250 million, and an IRR of approximately than 25%.
The project has significant potential to increase the mine life and a three-year extension would add US$50 million to the NPV. Nusantara’s exploration update in December clearly demonstrates large zones of mineralisation adjacent to the planned pit.
Additionally, a sensitivity analysis highlighted that just a 10% rise in the gold price would add $65 million to the project’s NPV.
With plenty of upside potential, the company is capped at just $33 million. And with Indonesia still underappreciated as an investment locale, the stock may be simply discounted due to a lack of understanding around its project’s location.
Yet Indonesia is one of the world’s most attractive investment destinations, with the National Resource Governance Institute ranking the country 11 out of 81 global mining destinations, supported by stable legal and regulatory regulations. Nusantara is the sole owner of the project and has an agreement with the Indonesian Government that confirms ownership to 2050 with the possibility of a 20-year extension.
The country already hosts some of the world’s great gold and copper deposits, ranking 7th in global gold production, while still offering exceptional exploration upside.