Last month, Newcore Gold (NCAU.V) released the results of an updated Preliminary Economic Assessment on its fully owned Enchi gold project in Ghana. The study was zeroing in on a heap leach processing scenario with an annual throughput of 6.6 million tonnes at an average grade of 0.62 g/t gold resulting in a total of 983,000 ounces of recovered gold over an 11 year mine life. The average mined grade was established at 0.57 g/t and thanks to a relatively low strip ratio of 2.1:1 and a decent recovery rate of 79%, the production profile is very reasonable.

The average output in years 2-5 will exceed 100,000 ounces of gold while the LOM AISC is estimated at $1066/oz.

This, in combination with a low initial capex of US$97M, helped the economic scenario as the after-tax NPV5% at $1650 gold is approximately US$212M. Thanks to the high gold production in the first few years of the mine life, the Internal Rate of Return got boosted to 42% on an after-tax basis. Using a more optimistic gold price of $1850/oz, the after-tax NPV5% increases to US$302M while the IRR jumps to 54%.

That’s a good start, but considering it’s an Africa based project, a discount rate of 5% doesn’t cut it. As the 10 year US treasury is getting close to 1.50%, a markup of only 350 bp to the risk-free interest rate for an African gold project is quite optimistic, and we are looking forward to seeing a sensitivity analysis in the NI43-101 technical report to see how the NPV evolves using a 7% or 8% discount rate. The explanation for using 5% usually is ‘every gold project uses 5%’, but that’s not a reasonable explanation and that doesn’t make it right as a discount rate should be decided on using the risk-free interest rate plus a mark-up for the (perceived) geopolitical risk.

Nonetheless, it’s a good starting point for the Enchi project, and investors should be aware just a third of the recently completed 66,000 meters of drilling was actually included in the updated resource and mine plan. It appears to be quite likely future resource updates will increase the amount of (mineable) ounces and a mine life extension will have a positive impact on the NPV of the project. On top of that, additional metallurgical test work is being completed which should increase the confidence in developing Enchi as a heap leach project, and perhaps the average recovery rate could be boosted a little bit from the base case scenario of 79%. For every 1% increase of the recovery rate, about 10,000 ounces of gold will be recovered over the entire mine life.


Disclosure: The author has a long position in Newcore Gold. Please read our disclaimer.

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