Far East Capital analyst Warwick Grigor recently travelled to South Africa, where he inspected ASX-listed West Wits Mining’s Witwatersrand Basin gold project.

As outlined in the latest Far East Capital weekly commentary, West Wits’ project is located in the Witwatersrand gold district that has been operating for over 100 years, producing more than 240-million ounces of gold. Over 41-million ounces have been produced from West Wits’ leases.

Grigor says West Wits is all about optionality on the gold price at these levels with a market capitalisation of only $33-million. He says the company is sitting on gold resources with a value of $4.9-billion.

Grigor says that what stood out from his visit to the project site was the very high standard of South African management and mining engineering competence.

He highlights that the project is expected to produce 200 000 oz/y of gold once it achieves steady-state.

“The underground experience in South Africa stands in contrast to our Australian scene where openpits have been the mainstay of the gold sector for many years. Some Australian mines have evolved into underground operations but the skill level still has to play catch up with that in South Africa,” Grigor commented.

He also commends the depth of infrastructure in South Africa.

“Sure, South Africa is suffering from loadshedding in the power grid due to insufficient investment recently, but we are also starting to see the risk of that increasing in Australia due to failure of government policy.

“Mining and other companies need back-up generators as part of the energy mix in order to have continuous power, but many Australian mines have had to operate on 100% diesel power due to their remoteness.

“So, investors need to get over their reluctance to invest in South Africa due to some ill-defined prejudices. No country or mining sector is ever risk-free, so we need to stop pretending that freedom from risk is an important feature for which we strive,” Grigor outlines.

He says a balanced decision is needed, taking into consideration the vast array of risks that mining companies have to weather, including political, managerial, geological, engineering, technical, social and compliance.

Grigor says West Wits has a multimillion-ounce gold project with strong in-country technical management.

He adds that the project is technically sound and has the potential to generate strong gold earnings for at least 10 to 20 years.

Grigor outlines the biggest risk as dilution from financing, given the low share prices and market capitalisations.

West Wits’ current mineral resource is 4.28-million ounces, 70% of which is in the measured and indicated categories, located along a 7 km strike length to a vertical depth of 1 500 m in three horizons – the Kimberley, Bird and Main reefs, Grigor points out.

He adds that the Qala Shallows has a strike of 1.85 km and a depth of 820 m.

There are a number of development plans that have been considered by West Wits, but ultimately the one adopted will be determined by the availability of capital.

Phase 1 (Qala Shallows) has already been assessed by a robust definitive feasibility study.

That contemplates 55 000 oz/y at an all-in sustaining cost of $962/oz at steady-state, with a net present value of $180-million and an internal rate of return of 38%.

Grigor says it will take three years of development and ramp-up to reach this production level, with the maximum capital drawdown required being $63-million.

He says this capital expenditure will be repaid in a short, two-year period once the 55 000 oz/y rate is achieved. The ore is to be toll treated at Sibanye’s Ezulweni mill.

Once Phase 1 has been established, the company will start working on Phase 2 (Project 200), which is intended to lift production to 200 000 oz/y.

However, at this point, Phase 2 is conceptual and dependent on the completion of feasibility studies and financing, Grigor points out.

“An important observation is that this is not a remnant mining exercise where you go scavenging around to pick up what previous operators had left behind. That sort of mining is always problematic.

“West Wits intends to develop new orebodies that were less economic than the five to eight orebodies of yesterday, but due to the improved gold price, would be profitable today,” Grigor avers.

The feasibility study assumed that the first two years of power would come from on-site generators at a cost of A$0.50/kWh.

However, while on location, Grigor says he observed a substation being built by the power authority that would enable grid power from day one. That could save up to $6-million of operating costs in the first two years, he posits.

“Granted, the generators would still be needed to cover the periods of loadshedding, but the $6-million in savings make a material difference to operating costs,” he highlights.

West Wits has signed a toll mining agreement with Sibanye-Stillwater whereby the Qala Shallows ore will be trucked to the Ezulwini treatment plant, 45 km by road. West Wits will be able to start trucking ore to Ezulwini five months after restart of mining, and that is dependent on additional financing.

In this vein, West Wits has engaged Cape Town-based Taurum International to advise on a debt package. Delivery of indicative terms sheets is imminent, Grigor notes.

He says that, once Far East Capital sees the term sheets, it will have a better idea of what the financing package will be.

Grigor mentions that West Wits has the opportunity to obtain up to another five-million ounces of gold from adjoining licences that could be granted or dealt with on a tribute basis. There are also depth extensions to consider, he notes.

However, these additional ounces will go to extending mine life rather than further upscaling yearly production targets, he explains.

Grigor also mentions that West Wits’ mining right gives it access to uranium orebodies, with these located in the Bird Reef Central structure that dips 35° to 45°, and could be accessible from the gold workings as they are only 15 m to 20 m distant.

“It is notable that these types of orebodies have been successfully mined in the Witwatersrand region in previous operations, serving as encouraging precedents for what West Wits has today,” Grigor states.