We have recently visited Inca One Gold’s (IO.V) Chala One processing plant where the company is in the final stages of upgrading the existing 20 tpd mill to a modern facility capable of processing in excess of 100 tonnes per day.

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Access, infrastructure and security

Getting to Chala One is extremely easy. The Pan-American Highway runs right through the city of Chala and from there it’s a short 3 kilometer ride on a well-maintained dirt road to get to the mill. There seems to be plenty of labor forces available in Chala and the company is trying hard to source a lot of the equipment and hardware it needs from the local town. Once construction is completed activities will have been completed, the local merchants of Chala will definitely feel it.

The plant is currently running on diesel powered generators but since there is a power grid just a few kilometers away, Inca One is hopeful it will be able to connect the processing plant to the power grid in the not so distant future. There used the be a moratorium for ‘industrial’ companies to get connected to the power lines but as the power shortage in the Chala district has been solved, this moratorium will likely be lifted soon.

When entering the Chala processing facility, an armed guard checks off the names of the people who want to enter and if there are any non-staff visitors, the ID-card has to be left behind at the entrance gate. All guards were armed with shotguns, so it looks like Inca One has gone to great lengths to protect its staff and plant from intruders. On top of that, nobody really knows when the carbon harvests will be transported as that information is kept on a ‘need to know’-basis, which reduces the transportation risk.

The expansion plans and the time line for completion

When we were at the Chala One site, the first ball mill with a theoretical capacity of 50 tonnes per day was being commissioned using a blend of lower-grade ore mixed with higher-grade ore. This fine-tuning is expected to take approximately 1-2 months, so the company definitely remains on schedule to finish the commissioning stage of both ball mills by the end of Q1 2015. We also noticed the mills were quite big and even though Inca One didn’t want to confirm our suspicions, we think the mills on site will be capable of processing more than 50 tonnes per day. This could create a lot of additional value as a throughput of 110 tpd vs 100 tpd increases the throughput by 10% and will very likely increase the cash flow by more than 10% (as additional economies of scale will be kicking in).

We were positively surprised by the Chala One site as everything looks very clean and very well structured. The company definitely has growth plans and there’s plenty of space to install additional CIL tanks. The CIL tanks were almost fully ready and we expect the contractor to have finished construction by now. The next steps will be to gradually increase the output through mill one and two, as well as increasing the average grade to the ‘sweet spot’ rate of 0.8 oz/t.

As Peru is a catholic country, there also was a ceremony to officially inaugurate the Chala One plant so things can hardly go wrong when the plant has been blessed by a local priest.

The Ore Sourcing progress – Transparency will be key

Before Inca One started to upgrade the Chala processing plant, our main concern was that we weren’t sure the company would be successful in attracting as much gold ore as it needed. We have been proven wrong on this one as looking at the stockpiled ore tells us that small-scale mining companies and mom&pop operations are very interested in selling their ore to Chala One.

This is caused by several factors of which transparency is paramount. Inca One has commissioned its own scale so all trucks are being weighed on site instead of relying on (unreliable) third party scales. The trucker immediately sees the weight of his truck and then continues towards the crushing station. The ore he’s delivering is being crushed immediately and three samples are taken and sent to the lab for analysis. Payment for delivery usually happens within just a few business days afterwards.

We had the chance to talk to one of Inca One’s main ore suppliers who was attending the opening ceremony. They confirmed that Inca One’s level of transparency was one of their main reasons to give this new operator a try. A few weeks ago they sent a truckload of high-grade ore hundreds of kilometers to the Chala plant. They have previously shipped ore to Inca One’s nearby Canadian competitor but now seem to be preferring Inca One’s mill facility, which is a huge accomplishment.

There’s plenty more high-grade ore available, and Inca One is mulling over raising additional debt to make sure it can continue its ore purchases whilst it’s still ramping up production as it doesn’t want to turn potential ore suppliers down. The impact on the financials will be limited as we aren’t expecting the company to add a substantial amount of debt (we are guesstimating this number to be $1-1.5M max).

Conclusion

Inca One is still on track to get its mill fully operational in 2015. The company will need approximately a quarter to overcome all the teething problems which are quite typical for a company in the commodity markets. We are confident that Inca One’s transition from construction to production will go smoothly.

The sourcing of ore is going extremely well, and we expect an increased number of carbon harvests from January 2015 on. 100 tonnes per day definitely won’t be the end point for Inca One’s Chala operation as the application forms to expand to 200 tonnes per day are already in the mail, and the company has taken future expansion potential into consideration when they designed the position of the mills and CIL tanks.

Inca One is ready to hit the ground running in 2015 and should be free cash flow positive by next summer. CEO Ed Kelly and his team are ready to roll out their strategy and will very likely acquire more old and small plants in Peru to convert those into state-of-the-art processing facilities. 2015 will be an important year for Inca One and we have no doubt the share price will be much higher one year from now.

Disclosure: Inca One Gold is a sponsoring company. Please see our disclaimer for current positions.

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