It's a bit difficult to figure out what's going on with Omineca Mining (TSXV:OMM) at the Wingdam placer gold project in BC because "everyone knows" that placer gold doesn't work in public companies. I don't know that, but I understand why people say it. I'm impressed that OMM found a way around it -- they might have created a nice little royalty by doing so! I'm watching for this sampling program to generate enough cash to make the Wingdam project a going concern and provide funding for OMM to do bigger and better things. How did I get to that conclusion?
Back in May 2018, I wrote about the signs of life that I was seeing at OMM. I didn't expect them to find 2 private companies to step up and make the bulk sampling program happen, but I'm glad they did. Good work, OMM.
OMM now has a carried interest in this bulk sampling, which is a great place to be. What kind of profit should we expect on this exotic deal?
Long story short, it looks like there might be $12.5M in free cash headed to OMM treasury from this bulk sampling program.
How did I get that number? Read on for all the details.
The company recently announced details of their deal with their 2 new counterparties. Key facts are as follows.
- "Under the mining services agreement, HCC will supply all labour, equipment, material, supplies and services necessary to carry out the bulk sample on the Property at a fixed rate of CDN $850 per ounce of gold recovered. The mining services agreement and rate will cover the bulk sample planned for 2019 and any subsequent sampling activities over the entire 2.4-kilometre underground paleochannel comprising the Property."
- "... KR Investments is granted the sole and exclusive option to acquire an undivided 50% interest in the Wingdam Project's placer tenures. KR Investments can exercise its option to acquire the 50% interest by completing, at its sole cost and expense, all the development work required to prepare the Property for a bulk sampling program on or before December 31, 2019. "
This put OMM into the race. They found someone to pay for the underground mine development work and someone else to do the operations. Are these companies competent? Dig deeper outside this note to satisfy your own concerns.
This recent news from OMM is great for deal structure (carried interest!) but it doesn't give any production guidance. Since we're dealing with a gold mine, 43-101 rules apply. Problem is, the exploration work on this placer gold deposit are "not enough" to allow OMM to talk about the economics for the project. Apparently they can mine the thing, but they can't tell us much about it. Now if that doesn't get you excited, then I'd encourage you to learn more about "information arbitrage" in the mining business.
Thankfully, us little guys have a chance to see what's coming by looking back to a document from 2016. This report is not (!) a 43-101 report. But it is useful. Some key facts from that were as follows:
- "Total Mining Costs $750/Re Au Eq TrOz."
- "Estimated Total Capital Requirement $18.9M."
- "... initial 300m of paleo-channel. The model projects that the Phase 1 operation should yield 21,150 refined Au equivalent"
The capital and mining costs are now borne by OMM's counterparties, but that estimate of 21,150 ounces is important. If the bulk sampling program at Wingdam yields 20,000 ounces, then what does that mean for OMM? Well, OMM own 50% of the project so OMM would get 10,000 ounces. And their deal with the miner means they will pay (CAD) $850 per ounce as total costs. Total costs. Compared with a current gold price of $2,000 per ounce, this is a margin of $1,250. For 10,000 ounces, that's the $12.5M headline number I mentioned.
The twist comes in when you understand that the number of ounces is uncertain.
Could the bulk sample give more than that? Yes. How much more? I don't know, but I do know that OMM will get 50% of all those ounces! If, for example, they get 32,000 ounces from the bulk sample, then OMM nets $1,250 on 16,000 ounces for a total of $20M in free cash flow. In 2019. From a Bulk Sampling. Imagine that!
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