Executive Summary
Lion One Metals (“Lion One”) (TSX:LIO) (ASX:LLO) has been developing the Tuvatu Gold project (“Tuvatu”) on the main island of Viti Levu in Fiji since it was acquired in January 2011. At the time the project had declared mineral resources of 0.21 million ounces (“Moz”) grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category.
Despite continuous exploration and drilling, it has been difficult to grow the resource base. The latest mineral resource estimation dated 2018 showed resource growth of only 0.21 Moz gold. This converts to a rate of addition of less than 30,000 oz per year. The reason for the slow progress is the nature of mineralisation. The mineralisation is in high-grade, but very narrow (generally less than 1 m thick) lode structures that are very variable in both thickness and grade over short distances.
Our review of the resource estimation methodology raises several concerns. The drill density is low and the nugget effect is high. A high proportion of Inferred resources and an impractically narrow minimum width have been used in the mine plan. A review of two longitudinal sections comparing block grade with drill intersection grade is not convincing. The sections show large sections of the lode structure being uneconomical. The uncertainty associated with the resource estimation is evident from the confidence attached to the resource categories with almost 60% of the gold in the Inferred category.
Given the small Indicated resource it did not make sense for Lion One to promote and develop the project based on a pre-feasibility or feasibility study. Inferred resources cannot be included in pre-feasibility or feasibility studies – the resources have not been derisked enough for this level of study. Lion One was therefore obliged to opt for a preliminary economic assessment (“PEA”). PEAs allow the inclusion of Inferred resources in the production schedule.
Worryingly, the PEA completely ignored the uncertain nature of the resources by proposing longhole open stoping (“LHOS”) as a mining method. LHOS is a relatively high production, low-cost mining method. It works well when the ground conditions are good, the structure has a very regular attitude and is relatively wide, and when grades are above the cut-off grade over decent dimensions.
At Tuvatu, although the ground conditions are supposedly good, other factors are not so encouraging. The structure is narrow, highly variable and irregular. Grades above the cut-off grade are not evident over decent dimensions. Oh dear. LHOS is neither a suitable nor realistic choice of mining method.
A more suitable selection of mining method for this kind of orebody is Shrinkage Mining. Shinkage Mining is a relatively low production, high-cost mining method. It works well when the ground conditions are poor, the structure is narrow with an irregular attitude, and when grades are variably distributed above cut-off grade. Shrinkage Mining is much better suited to a Tuvatu-style orebody than LHOS.
Nevertheless, the PEA was published on the basis of LHOS and a very high production rate compared to the total available mill feed. The suggested life of mine (“LOM”) slightly exceeds four years. On paper, this may work, but such a crammed schedule usually involves over-capitalisation in the process plant and in development. One way around the ‘over-capitalisation’ problem is to use unrealistically low capital expenditure estimations in a PEA. And this is exactly what has happened - the PEA capital estimates are too low.
Beyond benchmarking, how can we be sure that the numbers are worng? Well, now that the plant is actually built we can see that the budget was met, but that the size of the plant is very different. The PEA assumed a plant with a capacity of 1,000 tonne per day (“tpd”), whereas the constructed plant has a capacity of less than one-third of this (300 tpd). Oh dear. Shinkflation in action. To make matters worse, we note that the PEA also used unrealistically low cash operating cost estimations.
The Crux Investor valuation rejects many of the PEA assumptions. Our valuation includes substantial dilution for LHOS and increased cost factors based on a prior benchmarking exercise carried out by Crux Investor on narrow vein mines in Canada. In addition, the production rate was brought down by half given what is realistically possible when mining such narrow lodes. The lower rate combined with the dilution resulted in a life of mine of ten years for the Crux Investor valuation. Despite these very much more onerous assumptions Crux Investor still arrives at a positive NPV8 of US$47 million due to the much higher prevailing gold price of US$2,031/oz.
Crux Investor concedes that many of our assumptions are generic, but we stand by the view that these are more applicable than the assumptions used in the PEA. For example, Lion One has already moved away from the plan in the PEA in two crucial areas. Firstly, it has reverted to Shinkage Mining for stoping. And secondly, it has reduced the initial production rate to 300 tpd from the 1,000 tpd in the PEA. Remember that the plant was only built to a capacity of 300 tpd.
In Crux Investor’s opinion, Lion One would do exceedingly well if it achieves the expansion to 500 tpd from 2025 onwards modelled in the Crux Investor valuation.
There is a degree of blue-sky potential to the Tuvatu project based on the down dip extension drilled below the main lode structures. It, however, requires a tremendous amount of additional drilling before these can be converted to resources. Meanwhile, early indications are that the first production from Tuvatu has a disappointingly low grade.
On 31 December 2023, Lion One had almost C$13.5 million in cash, something it was not comfortable with given the recently completed equity funding raise of C$12 million. Treatment of small amounts of material at low grade combined with the need to fund the plant expansion will burn remaining cash resource quickly and more equity placements must be expected. Even if the extensions at depth prove to be attractive, the company may well hit a brick wall before reaching these.
On 23 February 2024, the Enterprise value of Lion One was almost US$108 million, more than 2.3 the calculated NPV8, which is based on assumptions that have already proven too optimistic. Oh dear! Run away.
Introduction
Lion One Metals (“Lion One”) (TSX:LIO) (ASX:LLO) is a company that acquired mineral rights in Fiji in January 2011 through the reverse takeover of American Eagle Resources (“American Eagle”). These rights were previously owned by Emperor Gold Mining Company of Australia (“Emperor”). Through this transaction, Lion One became the owner of the Tuvatu Gold Project (“Tuvatu”) on the main island of Viti Levu in Fiji. Tuvatu had been advanced by previous owners, mainly Emperor, through underground exploration and development from 1997 onwards with a feasibility study planned for 2000, which was however suspended because of a general cost-cutting exercise.
The latest available mineral resource estimation at the time of the takeover was carried out in the year 2000 arriving at 0.21 million ounces (“Moz”) grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category.
In November 2017 Lion One added the Navilawa exploration tenement directly north of the Tuvatu gold project substantially adding to its exploration target area.
In June 2019 the company also acquired Avocet Resources Limited (“Avocet”) in an all-paper transaction.
Figure 1_1 shows the share price history of Lion One on the Toronto Stock Exchange since acquiring Tuvatu in January 2011.
After initial enthusiasm about the acquisition, the share price saw a long slide only to end for a short period of excitement during 2016. The highest-ever price of around C$2.40 was achieved in June 2022, which seems to be the result of announcements by the company of having identified a high-grade feeder zone below its most important lode structures. At the time four drills were actively exploring targets the dip extensions at Tuvatu, a prospect 2 km north of Tuvatu and the Banana Creek prospect and the Kingston gold anomaly at the newly acquired Navilawa tenement.
When the company used the excellent price to undertake a sizeable capital raise of almost C$40 million at placement prices of between C$1.70 and C$2.05, the share price fell. The release of a preliminary economic assessment (“PEA”) in September with an after-tax NPV5 of C$121 million at a gold price of US$1,400/oz must not have helped much. At the time of the report, the number of issued shares were almost 145 million shares trading at C$1.60, which made the market capitalisation almost C$240 million.
There was another sharp drop in price to C$0.69 reached in October 2022 following the start of mine development a few months earlier.
Despite completion of construction at the end of 2023 the share price has continued its downward trend.
This report will investigate whether or not the negative attitude of the market is warranted.
Valuation of the Tuvatu Project
Background
The technical information in Section 2 of this report has been dominantly extracted from a NI.43-101 compliant report entitled “Technical Report and Preliminary Economic Assessment Update for the Tuvatu Gold Project, The Republic of Fiji”, dated 29 April 2022, by Tetra Tech Canada Incorporated (“Tetra Tech”).
The Tuvatu project is located in the upper reaches of Sabeto Valley, approximately 24 km northeast of the town of Nadi on the west coast of Viti Levu and 17 km from the Nadi International Airport (see Figure 2.1_1). The map also shows that a deep-water port is located only 35 km away.
The tenement area comprises four special prospecting licences (“SPL’s”) covering 20,786 ha and one special mining licence (“SML”) covering almost 385 ha (see Figure 2.1_2 for the outline of the tenement area with the yellow outline for the mining licence).
According to the PEA report, in the discussion on mineral rights, it is mentioned that these are not encumbered or subject to royalties to private parties, but the government is entitled to a 5% royalty on the gross value of precious metal exported. However, under Section 22.2.3 (“Royalties”) it mentions that there is a “Laimes Global Inc. royalty” of 1.5% of the gold revenue.
Geology and Mineralisation
The mineralisation at Tuvatu is presumed to be associated with a volcanic core, present in narrow lodes and zones of veining that have developed when the intrusive was in the final stages of crystallisation and early stages of cooling. Mineralisation is structurally controlled by an episode of northeast-southwest shearing and is intimately related to, but postdates, the emplacement of the intrusive. As the stress regimes within intrusion systems can be quite complex, the resulting veins and stockwork zones will pinch and swell along various strike orientations.
The mineralisation occurs as sets and networks of narrow veins and cracks, with individual veins generally ranging from 1 mm to 200 mm wide. Zones of veining, which comprise the lodes, may be up to 5 m wide. The main mineralised zone (referred to as Upper Ridges) comprises eleven principal lodes with a strike length in excess of 500 m and a vertical extent of more than 300 m. Another major zone of mineralisation (referred to as Murau) strikes east–west and consists of two major lodes with a mapped strike length in excess of 400 m.
Figure 2.2_1 shows a plan view with the various lode structures with the Upper Ridges Lodes furthest from the adit entrance in the north.
The technical report observes:
- the grades of individual lodes vary considerably due to the “spotty” nature of the gold and the variability in width of the host structures. Average grades for the lodes range from 2.0 to 10.0 g/t.
- This style of emplacement will always result in a risk to the tonnes and grades of any model developed.
From the above description it is evident that it is not easy to prove up considerable resources as the individual lodes are narrow and very variable. It explains the very long development period of the Tuvatu mine.
A very high proportion of the gold occurs as either free gold or is contained in quartz or pyrite composite particles. Free gold present is both fine and coarse grained. Mineralisation is clean with respect to deleterious elements such as arsenic, selenium and uranium.
Mineral Resources and Mineable Inventory
Resource Estimation
The resource was estimated by Mining Associates Pty Ltd (“MA”) with an effective date 8 January 2018. The large gap between the PEA effective date of April 2022 and the latest resource estimation is noteworthy.
The database includes 1,841 collar points, which Crux Investor assumes are associated with unique drillholes, and 83,324 assays, which include an unknown number of channel samples. The drill hole spacing is 20 m above 50 m reduced level (“RL”), but without the report providing the reference point, and 50 m below 50 m RL. For the type of deposit, narrow lodes with highly variable width, this drill density is sparse. The drill density is particularly sparse considering the large number of deposits included in the resources: a total of 47 structures were identified, including 11 lodes in the Upper Ridges area, seven lodes in the Murau area, seven lodes in the West area, seven lodes associated with Snake and Nasivi lodes, four lodes in the Tuvatu area, and nine stockwork veins in the SKL area. The implication is that many of these structures are defined based on a very limited number of intersections. Four lodes had less than 25 samples and the largest number of samples are 184 recorded for the Upper Ridge 2 lode.
As the lodes are narrow, generally less than 1 m (up to 7 m), the interpretation of individual structures is not simple and involves selection based on, firstly, a grade above a threshold of 0.5 g/t Au, but with “internal waste of less than 0.5 g/t Au intervals and/or geologically continuous intervals just below cut-off may be included”. Then, secondly, waste (less than 0.5 g/t Au) values in the projected plane of continuity of a particular vein modelled as that vein. Finally, where “vein” lithology was modelled in the expected location this was included. Furthermore, networks of narrow veins (1 to 200 mm wide) had to be “bulked” into substantial vein intersections.
Compositing of grades was not carried out as MA used the assayed grade of the full vein intersection for modelling purposes. Where veins had been defined by more than 50 intercepts, outliers were established via log probability plots. The minimum width assumed was set at only 0.3125 m to “reflect the minimum mining width”. This width assumed the application of shrinkage mining. Crux Investor considers this width as wholly impractical as a miner who is supposed to drill by hand the back (the roof of the stope) will not have enough space to manoeuvre.
According to MA the variography showed that the “nugget effects for gold were generally low to moderate, ranging from 0.11 to 0.69 and the range (A2) of the variograms varied from 12 m to 95 m for gold variogram models”. However, Table 14-9 of the technical reports shows much higher nugget effects with C0 (the code of nugget effect) being 0.90 (90% of the total variance) for Murau 1 (M1), 0.87 for Upper Ridge 1 (UR1) and Upper Ridge 3 (UR3) and 0.85 for Upper Ridge 2 (UR2). These are some of the most important contributors to resources with number of drill intersections of 45 for M1, 47 for UR1, 65 for UR3 and 184 for UR2. It places a big question about the validity of the whole estimation exercise.
Grade estimation was based on the gold accumulation concept, using values for grade multiplied by width: metres x g/t. Using ordinary kriging the block values were determined and the block grade back calculated by dividing by the width.
The block model used a block size of 10 m x 10 m x 10 m, with sub-blocks of 0.3125 m x 0.3125 m x 0.3125 m to accurately measure the volume of resources.
Table 2.3.1_1 gives the Indicated and Inferred mineral resources effective 18 January 2018 for a number of cut-off grades with declared resources assuming a cut-off grade of 3.0 g/t Au
The categorisation shows the uncertainty MA itself awards to the estimation with more gold in Inferred resources than in Indicated. Also evident from the table is that total contained gold is insensitive to the cut-off grade assumed. Figure 2.3.1_1 shows the relationship graphically.
The relationship is almost linear, which is surprising, with every 1 g/t Au increase in the cut-off grade dropping out almost 52,000 oz gold.
The implication from the above is that resource additions must come almost exclusively from additional exploration and that gold price rises will be immaterial to the total amount of mineral resources.
The technical report also includes illustrations shown in Figure 2.3.1_2 through the block models for three vein structures to compare block grades against intersection grades.
Whereas Crux Investor finds the correlation between block grade and intercepted grade less than convincing, the illustrations do show the limited extent within the veins where the grade is above 3 g/t Au.
With reference to the Introduction of this report, it is amazing how little Lion One has to show for 13 years of work since acquiring Tuvatu. At takeover the declared mineral resource effective in year 2000 arriving was 0.21 Moz grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category. It means that less than 0.21 Moz were added by Lion One, a tremendously low return on all investments made.
Mineable Inventory
With the very small proportion of gold in Indicated resources it made no sense for Lion One to motivate the construction of a mine on the basis of a feasibility study. It therefore chose a PEA, which allows inclusion of Inferred resources, to motivate the development of the project.
There is no formal derivation of the mineable inventory in the technical report, which goes straight into discussing the mining method. The contracted consultants quickly rejected the shrinkage method assumed in the resource estimation as impractical and chose LHOS as the preferred method after a comparative analysis which heavily loads the assumptions in favour of LHOS. For a discussion on both methods, and Appendix has been provided.
The discussion ignores the geological description of lodes that are variable in grade and width over short distances and assumes that LHOS will give lower dilution than shrinkage and cut-and-fill mining. This is a great leap of faith for lodes that are narrow and variable and, most importantly, have been defined at a low level of confidence. To plan stope outlines based on Inferred Resources is outright reckless. Whereas the rock wall conditions are supposedly very good, which will reduce scaling, the attitude of the lodes along strike and dip are far from regular as is evident from illustrations with underground infrastructure. The shrinkage and cut-and-fill methods give a level of geological control during mining and allow a degree of selectivity which LHOS does not.
The discussion on LHOS does not touch upon risks for unplanned dilution and hang-ups of badly blasted rock in narrow stopes that can have dips as low as 67 degrees.
In estimating the cut-off grade it uses incremental mining cost (i.e. excluding development cost), which is a risky approach as such cost should be an integral part of extracting a block of ground. Worse, assumed cost are only US$51/t, which is very low for LHOS over such narrow width and with a mining rate that has terrible economies of scale. It comes to an incremental cut-off grade of 2.66 g/t Au and fully costed cut-off grade of 3.95 g/t Au assuming a gold price of US$1,350/oz, which is at least very low compared to the current gold price. It should be noted that these numbers are for undiluted grades. In Crux Investor’s opinion, dilution of at least 20% should be expected. This based on stope width of 1.0 m. However, Tetra Tech ignores that the resource block model uses grades based on a minimum width of 0.3125 m. It is a major inconsistency between PEA and resource estimation.
Table 2.3.2_1 gives the Mineable Inventory, effective 29 April 2022, below which are presented the calculated conversion rates from the mineral resources statistics.
The conversion rates have been calculated by first estimating mineral resources at a cut-off grade of 4 g/t Au using the cut-off grade – contained gold relationship in Figure 2.3.1_1. At this cut-off grade Crux Investor estimates total resources to be 1.9 Mt at 9.95 g/t Au for 0.61 Moz.
The above conversion rates are deemed very high by Crux Investor considering:
- The patchy nature of high-grade blocks within veins (refer to Figure 2.3.1_2)
- The impact that increasing the minimum mining width from 0.3125 m to 1.00 m will have on resources block grades.
- The high dilution associated with LHOS for very narrow stopes.
- Hidden in the text is the assumption that mill feed of stoped material has an average grade of 9.10 g/t, which would make the grade conversion 91.5%.
Lion One should expect some very unpleasant surprises in terms of grade during mining. Crux Investor records that 10,513 tonnes of mineralised material were reported mined in the six months until 31 December 2023 at a grade of 4.1 g/t Au. Even taking into consideration this was extracted from development within ore and not from stopes, this points to a grade that is well below forecast. The PEA assumed an average grade of 6.9 g/t Au for the mill feed from development.
Blue Sky Upside
Lion One has continued to drill aggressively since the 2018 resource estimation with up to seven rigs operating at a time. Whereas certain drill results were highlighted as promising, it was the drilling of the extensions at depth below the Upper Ridges lodes that received the most attention. Confusingly, Lion One has started referring to certain areas by other names. In the Upper Ridges area, it now distinguishes Zone 2 which seems to include lodes UNW1 and UNW2 and Zone 5 which seems to include UR1, UR2, URW3, UR4 and UR5. The reason why this is important is that Lion One believes that it has identified high-grade feeder zones below these zones. Figure 2.4_1 is from a slide in the latest corporate presentation showing the substantial vertical extent of mineralisation below Zone 2 and Zone 5.
The slide includes some very impressive “representative results”. It is impossible for Crux Investor to verify whether or not these results are representative as not a full set of results are given and no cross sections are presented. The isometric views included in reports do not give the reader a proper understanding of how material the intersections are. Moreover, based on the large gaps in drillhole numbering, it seems that only some were highlighted. It should be noted that the impressively long intervals are not true widths as the holes intersect the lodes under a very oblique angle along dip and possibly also along strike.
Anyway, the “representativeness” of results is an issue at Tuvatu judging from the very dense drilling currently being carried out at shallower levels. Apart from the present exploration drilling, Lion One also has a programme of surface infill drilling and an underground grade control drilling programme targeting areas of planned early production from Zones 2 and 5. The initial grade control drill holes are spaced on 20 m centres. This will be followed up by additional grade control drilling to increase drill density to 10 m centres in advance of mining. This confirms the observation under the resource estimation section about the very variable nature of the lodes. Unless demonstrated otherwise by Lion One Crux Investor interprets this to indicate that the variability does not change with depth.
A lot more drilling will be required to convert the Zone 500 and Deep Feeder Zone into mineral resources.
Mining Operations
Mining Method as per PEA
Access to the underground workings is planned via two decline portals: the existing exploration decline and the proposed main decline to the west (see Figure 2.5_1). The main decline will become the primary haulage route, and the exploration decline will be used as a haulage route at the start of the project. Once a link is established between the declines, the exploration decline will be used as a second means of egress and a secondary haulage route. Both declines will serve as intake positions for ventilation purposes.
To make the exploration drive suitable for production purposes it will be enlarged from its current 3.0 m x 3.0 m to 4.5 m x 4.5 m.
The vertical level interval is planned at 15 m and stopes are accessed by reducing the decline dimensions after 25 m level development from 4.5 m x 4.5 m to 2.0 m wide by 3.0 m high, which accommodates load haul dump (“LHD”) loaders. The production drives developed within the stopes will have the same dimensions. At 2 m width it will result in planned dilution in areas where the vein width is less, something the PEA ignores.
From the mineralised drives 1.2 m x 1.2 raises will be developed as slots and escape ways and 3.0 m x 3.0 m raises will be mined for return air circulation. This will be carried out by a combination of mechanical and handheld excavation (more than 81%).
It should be noted that “conceptual” models have been used for heat and dewatering heat balance due to lack of data. This adds risks to the suggested mine design. In particular the assumption of a lower geothermal gradient than at the historical Vatukoula mine is reckless.
In a press release dated 18 January 2024 it was disclosed that first production material was extracted on 13 December 2023. Much of the update warned that early production would be of sources that were relatively poorly mineralised. This raises many red flags, even despite management putting a gloss on it as being “material (that) is ideal for use as feed stock to test the different gold recovery circuits during the initial stages of plant operation.”
Also apparent from the news release is that the company has reverted to handheld mining as “ideal for narrow vein mining as it is precise and enables the effective development of narrow drives, thereby minimizing dilution”. The company just does not stick to the plan as set out in the PEA.
Processing Operations
Metallurgical Testwork
Given the long history of the Tuvatu project, it is not surprising that it has a very long history of metallurgical test work involving 18 programmes between 1997 and 2020, not counting eight mineralogical studies. The mineralogy was found to be complex with many different sulphide minerals, very fine gold (average circular diameter of 7.7 μm) and the great majority of gold associated with calaverite (AuTe2).
The technical document summarises six comminution tests without specifically concluding that the samples were hard, but which is evident from bond indices that are high, typically between 18 and 20 kWh/t.
The discussion in the PEA report on test work is of a terrible standard. The discussion just lists what work has been carried out, but does not draw any conclusions nor inform how test results guided subsequent work to clarify issues.
Three process routes were investigated over time: whole ore leaching alone, gravity concentration followed by leaching and gravity concentration, and flotation followed by leaching. The discussion does not come to any definite conclusion but indicates a preference for including flotation. In the words of the technical expert: “The gold recovery tests indicate that the gold in the Tuvatu mineralization responded reasonably well to the process consisting of gravity concentration followed by further gold recovery by flotation and cyanidation. However, some metallurgical performance variations were observed in the test programs. Further test work should be conducted to optimize process flowsheet and conditions.”
It does not give much confidence about the forecast 87.5% metallurgical recovery.
From the 18 January 2024 press release it is apparent that management is not very confident about metallurgical performance as it states that the current 300 tpd “pilot plant phase” is on: “determining the best methods and parameters required to maximize gold recovery from each type of gold mineralization at Tuvatu. Mill operations to date have consisted of a start-up period and a campaign period with feed from different areas within Zone 2 and Zone 5.” Predominantly low-grade material has been put through the mill. In the December 2023 quarter, actual metallurgical recovery was only 75.7%.
Process Plant
The PEA assumed a plant with a capacity of 1,000 tonne per day (“tpd”), whereas the constructed plant has a capacity of less than one-third of this.
The process flow is relatively complicated including three stage crushing to 80% passing (“P80”) 10 mm followed by grinding to P80 60-65 μm. Integrated in the grinding circuit is a gravity separation circuit receiving one-third of the hydrocyclone underflow to recover coarse gold grains using centrifugal concentrators and a shaking table. The hydrocyclone overflow is subjected to flotation to produce a gold-bearing sulphide concentrate. This concentrate is ground in a vertical mill to P80 20 μm. Both concentrate and tailings are leached separately followed by a common carbon-in-pulp (“CIP”) leach circuit. The loaded carbon from the CIP circuit is eluded and the gold recovered through electrowinning and smelting to a doré.
Considering the complicated process and lack of economies of scale high processing costs must be expected.
Economic Valuation – Tuvatu Project
Metal Prices and Marketing Terms Assumed
This study has considered two price cases. One case uses the gold price of US$1,400/oz in the PEA study and another case uses the spot price of US$2,031/oz on 23 February 2024 as Base Case for this valuation cash flow model. The PEA cash flow model was recreated to determine whether the taxation model used is valid by giving the same overall tax amount as per PEA.
This valuation has ignored doré transportation, smelting terms and refining charges as having a negligible impact.
Production Schedule
The PEA assumes a very aggressive ramp-up in mine production for an underground mine that extracts its mill feed from numerous, very narrow deposits. The mine schedule assumes that the plant needs to be fed around 1,000 tpd, which is much higher than the current plant capacity. It results in a very short LOM with production shutting down in 2028 if the company does not substantially add to resources. When applying Taylor’s rule of thumb for capacity selection, depleting the mineable inventory of 1.4 Mt would optimally require a daily rate of 550 tpd, which is way lower than suggested in the PEA.
Crux Investor has drawn up its own schedule assuming a much more realistic ramp-up with plant capacity increasing from the current 300 tpd to 500 tpd in 2025. As plant expansion has not yet started, this ramp-up may well prove too optimistic. Moreover, Crux Investor has included a dilution of 20% to account for the much wider minimum width than modelled for mineral resources plus a degree of unplanned dilution. The dilution number is a guestimate and may well prove far too optimistic.
Figure 2.7.2_1 shows the difference between PEA and valuation production over the LOM.
Whereas Crux Investor could be accused of grabbing numbers out of thin air, the PEA schedule is definitely wrong as company execution substantially differs from plan. Considering the latest information Crux Investor is most probably erring on the optimistic side in terms of grade.
Operating Expenditure
Table 2.7.3_1 shows the cost structure suggested in the PEA study and used by Crux Investor for this valuation.
The PEA suggests that the total operating cost rate for Tuvatu is less than US$130/t milled, which is far below what a benchmarking exercise by Crux Investor on underground Canadian mines indicates. The discrepancy is aggravated by the costly processing cost of the hard and complex mineralisation that requires fine grinding to achieve proper liberation of the gold. Crux Investor records that the fixed cost component is very low with 10.7% for manpower and 4.8% for Others. For a small plant fixed cost should be a relatively large component, typically 30% or more.
Figure 2.7.3_1 shows the graphical relationship between annual treatment rate and total unit operating cost as blue dots. This is Crux Investor data collated from a large number of Canadian underground operations.
At 0.18 Mtpa total operating cost of between US$150/t milled and US$200/t milled can be expected. The rates used by Crux Investor convert to total unit cost of US$188/t over the LOM.
Annualised corporate office cash expenditure for the six months ending 31 December 2023 was US$2.9 million. Crux Investor has adopted this rate for its cash flow model as this valuation is of Lion One and not the Tuvatu operation alone.
The financial statements for the quarter ending 31 December 2023 shows that cost of sales relating to sales amounted to sales was C$2.5 million and relating to inventory C$3.1 million. Consolidated Statements of Cash Flows shows that only C$57,000 depreciation was included in the operating costs. This means that cash cost was almost US$400/t milled if the book entry to allocate expenses to inventory is ignored.
Capital Expenditure
Table 2.7.4_1 shows the capital cost estimates in the PEA study. The table has lost much relevance given that plant construction started on 28 September 2022 and the mine is essentially fully constructed (with a 300 tpd “pilot plant”) and first processing started.
The provisions all seem very low. For example for the small, complex processing plant the estimate for direct cost translates to less than US$500 per monthly tonne capacity. An estimate that is 50% higher would be more realistic.
Obvious omissions are provisions for underground drilling to firm up on the lode outlines for stope design purposes and closure cost. The PEA states that closure cost (unspecified) have been included in the model, but this is not evident from the summary table.
Lion One avoids giving updates on mine construction and development costs compared to estimates. Without having declared Commercial Production the fact that revenue and operating cost are recognised (i.e. not capitalised) indicates that the company considers itself as being in the operating stage. Yet, no total development cost has been disclosed.
When referring to the financial statements, the company invested in the financial year ending 30 June 2023 a total of C$55.5 million and in the six months to 31 December 2023 quarter C$27.9 million. Converted to US Dollars this amounts to US$62 million. This means that the initial provision has almost been fully spent, except that the operation has a capacity of 300 tpd instead of 1,000 tpd.
With reference to Figure 2.7.3_1 Crux Investor has included sustaining capital expenditure of US$100 per tonne milled except for the last production year. During production Year 1 an additional investment of US$10 million has been included to expand the plant to 500 tpd.
Royalties and Taxes
The PEA report gives the following details on the Fiji tax regime.
Corporate income taxes are levied at 20%. Income tax losses can only be carried forward for a period of four years, and there is no provision for carryback of tax losses. The carry forward of income tax losses has two tests: continuity of ownership and continuity of business.
Allowed for taxes is amortisation/depreciation of the cost of the asset on the basis of either a straight-line basis (at a lower rate) of on declining balance (at a higher rate). These rates are:
The cost of the acquisition of a mining lease or tenement and the cost of development of mines may also be written off in equal instalments in any five of the first eight years, commencing with the year in which the expenditure was incurred.
From the modelling it is apparent that the PEA only considered the initial and sustaining capital expenditure, ignoring the book value of the considerable historical investments made. Crux Investor has taken these into account. Unfortunately, the categorisation of the type of assets for which book values are given does not correspond with the categorisation of assets in terms of allowed depreciation. Crux Investor has used an overall straight-line depreciation of 20% for all categories.
Results
Table 2.7.6_1 summarises the LOM results for the PEA scenario and Crux Investor valuation for the base case gold price and the input parameters set out above.
Using the PEA parameters the project has an impressive operating margin of almost 65%. It however benefits only slightly more than four years of this to generate the funds to reimburse the shareholders. It should be noted that the tax model of Crux Investor arrives at US$2.4 million higher taxes than the PEA, indicating that Lion One has included slightly higher tax allowances. The NPV5 of US$120 million derived by Crux Investor is very close to the PEA’s US$122 million.
With the much longer LOM, lower average grade after adding dilution and substantially higher cash operating cost the Crux Model arrives at almost the same amount of operating cash flow, even US$1.3 million higher than for the PEA.
When accounting for the tax allowances on the existing book value of assets and much higher sustaining capital expenditure in the Crux Investor model, the company will have tax losses in the first five production years that will not even have been redeemed at the end of LOM. Lion One will pay no income taxes in Fiji.
Crux Investor estimates that net free cash flow will be just short of US$107 million at a gold price of US$2,031/oz. The NPV8 value of this is US$47 million.
Table 2.7.6_2 expresses the sensitivity of the project value as the change in Net Present Value per percentage point change in the main parameters: metal prices, operating expenditure and capital expenditure.
The sensitivity analysis demonstrates the very marginal nature of the Tuvatu project with the NPV8 increasing by 7.9% (US$3.7 million) for every percentage point increase in the gold price (i.e. US20/oz) and dropping by 4.4% (US$2.1 million) for every percentage point increase in operating cost (i.e. US$18.8/t milled).
Should additional resources be found of a similar quality to existing resources to extend the LOM by one year, the NPV8 will increase by around US$7 million.
The Enterprise Value of Lion One Metals at 23 February 2024
At the share price of C$0.47 on 23 February 2024, the market capitalisation for the 230.6 million shares is C$108.4 million, or US$80.3 million.
At 31 December 2023 the company had 38.7 million warrants outstanding, which are at a lowest exercise price of C$1.05 all well out of the money, and 8.7 million options which are all out of the money as well. The 2.8 million “compensation options” are also out of the money.
At 31 December 2023 the company had net current assets of C$19.0 million, but these can be considered fully committed to complete the mine and get to commercial production. In fact, the company has just completed a share placement of 24.15 units comprising one share and one warrant (exercisable at C$0.65) that has raised C$12 million gross. The company states that “the net proceeds received by the Company from the sale of the Units will be used for development and ramp up expenses at the Tuvatu Gold project located in Fiji, as well as for general corporate expenses & purposes.” In other words these proceeds are fully committed and can be ignored for the calculation of Enterprise Value.
At 31 December 2023 loan principal and accrued interest was C$37.2 million
Based on the above an Enterprise Value on a diluted basis for Lion One of C$145.5 million (US$108 million) is derived as shown in Table 3_1
This Enterprise Value is 2.3 times the NPV8 calculated by Crux Investor.
Appendix - Comparison Between Longhole Open Stoping and Shrinkage Mining Methods
Shrinkage Mining
Shrinkage mining is conducted in a vertical or near-vertical plane, and at an angle greater than the angle of repose of the broken ore.
After the vein is accessed a tunnel (called drift) is blasted along the strike of the vein for a predetermined strike distance. At each end of the stope a raise is developed upwards to the next level. This raise serves to give access to man and equipment at higher levels. In shrinkage stoping the ore is mined in successive flat or inclined slices, working upward from the level or the bottom of the block of ore. After each slice or cut, enough broken ore is drawn off from below to provide a working space between the top of the pile of broken ore and the back of the stope. Usually about 35%-40% of the ore will be drawn off during active mining in the stope. The drawing of excess broken rock was known as shrinking and hence the name associated with this method: shrinkage stoping.
The shrinkage stoping is shown schematically in Figure 4_1.
The illustration shows numerous draw points along the length of the vein. Another option is to scrape the broken rock to central draw points and drop it down.
Once the newly drilled holes are drilled and loaded, the miners and equipment will be withdrawn. At that time, an additional portion of ore will be withdrawn to create sufficient space to account for the swell of the ore that will be blasted. Once this has been done, the round will be fired. Then a portion of the ore will be withdrawn to create space for the overhand stoping to continue.
After active mining has been completed to the level above or to the floor pillar, the rest of the broken ore is drawn off from below, leaving the stope empty. It may be filled with waste later to prevent general movement and subsidence or to permit mining of pillars left between stopes during the first mining.
As much of the ore blasted is not directly available for processing, shrinkage mining requires considerable initial investment in developing numerous working places to have sufficient plant feed.
Longhole Open Stoping
The discussion on this mining method has been extracted from a report written about Harte Gold, where a variation called Retreat LHOS was employed, a method that reduces the number of draw points that need to be developed.
Level access drifts are be developed from the ramps at predetermined vertical intervals to intersect the mineralised zone and then branch into sill drifts that will be developed along strike. The difference in level interval is determined by the need to limit dilution, larger distances providing cost benefits at the expense of higher dilution.
Based on the tabular, steep dipping and narrow nature of the deposits longitudinal longhole retreat stoping was selected as mining method. It has the advantage of being a relatively low cost underground mining method, giving good productivity, but at the disadvantage of giving little control to avoid dilution due to geometrical changes in the sidewalls.
Figure 4_2 shows schematically the longitudinal longhole retreat mining method.
Typically, four to five levels will be combined to form a number of mining blocks. Within each mining block a bottom-up stoping sequence will be used, with mining commencing on the lowest level of the block and progressing upward, level by level. The last level will be mined by drilling the blastholes upwards, removing the ore beneath the previously mined out block that was backfilled with paste using extra cement for the lowest level.
This type of stoping requires a regular shape of stopes and ore boundaries with everything inside the drill pattern sent to the plant. When using mechanical equipment the drifts need to accommodate such equipment that can result in considerable dilution where the vein is narrow.
Executive Summary
Lion One Metals (“Lion One”) (TSX:LIO) (ASX:LLO) has been developing the Tuvatu Gold project (“Tuvatu”) on the main island of Viti Levu in Fiji since it was acquired in January 2011. At the time the project had declared mineral resources of 0.21 million ounces (“Moz”) grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category.
Despite continuous exploration and drilling, it has been difficult to grow the resource base. The latest mineral resource estimation dated 2018 showed resource growth of only 0.21 Moz gold. This converts to a rate of addition of less than 30,000 oz per year. The reason for the slow progress is the nature of mineralisation. The mineralisation is in high-grade, but very narrow (generally less than 1 m thick) lode structures that are very variable in both thickness and grade over short distances.
Our review of the resource estimation methodology raises several concerns. The drill density is low and the nugget effect is high. A high proportion of Inferred resources and an impractically narrow minimum width have been used in the mine plan. A review of two longitudinal sections comparing block grade with drill intersection grade is not convincing. The sections show large sections of the lode structure being uneconomical. The uncertainty associated with the resource estimation is evident from the confidence attached to the resource categories with almost 60% of the gold in the Inferred category.
Given the small Indicated resource it did not make sense for Lion One to promote and develop the project based on a pre-feasibility or feasibility study. Inferred resources cannot be included in pre-feasibility or feasibility studies – the resources have not been derisked enough for this level of study. Lion One was therefore obliged to opt for a preliminary economic assessment (“PEA”). PEAs allow the inclusion of Inferred resources in the production schedule.
Worryingly, the PEA completely ignored the uncertain nature of the resources by proposing longhole open stoping (“LHOS”) as a mining method. LHOS is a relatively high production, low-cost mining method. It works well when the ground conditions are good, the structure has a very regular attitude and is relatively wide, and when grades are above the cut-off grade over decent dimensions.
At Tuvatu, although the ground conditions are supposedly good, other factors are not so encouraging. The structure is narrow, highly variable and irregular. Grades above the cut-off grade are not evident over decent dimensions. Oh dear. LHOS is neither a suitable nor realistic choice of mining method.
A more suitable selection of mining method for this kind of orebody is Shrinkage Mining. Shinkage Mining is a relatively low production, high-cost mining method. It works well when the ground conditions are poor, the structure is narrow with an irregular attitude, and when grades are variably distributed above cut-off grade. Shrinkage Mining is much better suited to a Tuvatu-style orebody than LHOS.
Nevertheless, the PEA was published on the basis of LHOS and a very high production rate compared to the total available mill feed. The suggested life of mine (“LOM”) slightly exceeds four years. On paper, this may work, but such a crammed schedule usually involves over-capitalisation in the process plant and in development. One way around the ‘over-capitalisation’ problem is to use unrealistically low capital expenditure estimations in a PEA. And this is exactly what has happened - the PEA capital estimates are too low.
Beyond benchmarking, how can we be sure that the numbers are worng? Well, now that the plant is actually built we can see that the budget was met, but that the size of the plant is very different. The PEA assumed a plant with a capacity of 1,000 tonne per day (“tpd”), whereas the constructed plant has a capacity of less than one-third of this (300 tpd). Oh dear. Shinkflation in action. To make matters worse, we note that the PEA also used unrealistically low cash operating cost estimations.
The Crux Investor valuation rejects many of the PEA assumptions. Our valuation includes substantial dilution for LHOS and increased cost factors based on a prior benchmarking exercise carried out by Crux Investor on narrow vein mines in Canada. In addition, the production rate was brought down by half given what is realistically possible when mining such narrow lodes. The lower rate combined with the dilution resulted in a life of mine of ten years for the Crux Investor valuation. Despite these very much more onerous assumptions Crux Investor still arrives at a positive NPV8 of US$47 million due to the much higher prevailing gold price of US$2,031/oz.
Crux Investor concedes that many of our assumptions are generic, but we stand by the view that these are more applicable than the assumptions used in the PEA. For example, Lion One has already moved away from the plan in the PEA in two crucial areas. Firstly, it has reverted to Shinkage Mining for stoping. And secondly, it has reduced the initial production rate to 300 tpd from the 1,000 tpd in the PEA. Remember that the plant was only built to a capacity of 300 tpd.
In Crux Investor’s opinion, Lion One would do exceedingly well if it achieves the expansion to 500 tpd from 2025 onwards modelled in the Crux Investor valuation.
There is a degree of blue-sky potential to the Tuvatu project based on the down dip extension drilled below the main lode structures. It, however, requires a tremendous amount of additional drilling before these can be converted to resources. Meanwhile, early indications are that the first production from Tuvatu has a disappointingly low grade.
On 31 December 2023, Lion One had almost C$13.5 million in cash, something it was not comfortable with given the recently completed equity funding raise of C$12 million. Treatment of small amounts of material at low grade combined with the need to fund the plant expansion will burn remaining cash resource quickly and more equity placements must be expected. Even if the extensions at depth prove to be attractive, the company may well hit a brick wall before reaching these.
On 23 February 2024, the Enterprise value of Lion One was almost US$108 million, more than 2.3 the calculated NPV8, which is based on assumptions that have already proven too optimistic. Oh dear! Run away.
Introduction
Lion One Metals (“Lion One”) (TSX:LIO) (ASX:LLO) is a company that acquired mineral rights in Fiji in January 2011 through the reverse takeover of American Eagle Resources (“American Eagle”). These rights were previously owned by Emperor Gold Mining Company of Australia (“Emperor”). Through this transaction, Lion One became the owner of the Tuvatu Gold Project (“Tuvatu”) on the main island of Viti Levu in Fiji. Tuvatu had been advanced by previous owners, mainly Emperor, through underground exploration and development from 1997 onwards with a feasibility study planned for 2000, which was however suspended because of a general cost-cutting exercise.
The latest available mineral resource estimation at the time of the takeover was carried out in the year 2000 arriving at 0.21 million ounces (“Moz”) grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category.
In November 2017 Lion One added the Navilawa exploration tenement directly north of the Tuvatu gold project substantially adding to its exploration target area.
In June 2019 the company also acquired Avocet Resources Limited (“Avocet”) in an all-paper transaction.
Figure 1_1 shows the share price history of Lion One on the Toronto Stock Exchange since acquiring Tuvatu in January 2011.
After initial enthusiasm about the acquisition, the share price saw a long slide only to end for a short period of excitement during 2016. The highest-ever price of around C$2.40 was achieved in June 2022, which seems to be the result of announcements by the company of having identified a high-grade feeder zone below its most important lode structures. At the time four drills were actively exploring targets the dip extensions at Tuvatu, a prospect 2 km north of Tuvatu and the Banana Creek prospect and the Kingston gold anomaly at the newly acquired Navilawa tenement.
When the company used the excellent price to undertake a sizeable capital raise of almost C$40 million at placement prices of between C$1.70 and C$2.05, the share price fell. The release of a preliminary economic assessment (“PEA”) in September with an after-tax NPV5 of C$121 million at a gold price of US$1,400/oz must not have helped much. At the time of the report, the number of issued shares were almost 145 million shares trading at C$1.60, which made the market capitalisation almost C$240 million.
There was another sharp drop in price to C$0.69 reached in October 2022 following the start of mine development a few months earlier.
Despite completion of construction at the end of 2023 the share price has continued its downward trend.
This report will investigate whether or not the negative attitude of the market is warranted.
Valuation of the Tuvatu Project
Background
The technical information in Section 2 of this report has been dominantly extracted from a NI.43-101 compliant report entitled “Technical Report and Preliminary Economic Assessment Update for the Tuvatu Gold Project, The Republic of Fiji”, dated 29 April 2022, by Tetra Tech Canada Incorporated (“Tetra Tech”).
The Tuvatu project is located in the upper reaches of Sabeto Valley, approximately 24 km northeast of the town of Nadi on the west coast of Viti Levu and 17 km from the Nadi International Airport (see Figure 2.1_1). The map also shows that a deep-water port is located only 35 km away.
The tenement area comprises four special prospecting licences (“SPL’s”) covering 20,786 ha and one special mining licence (“SML”) covering almost 385 ha (see Figure 2.1_2 for the outline of the tenement area with the yellow outline for the mining licence).
According to the PEA report, in the discussion on mineral rights, it is mentioned that these are not encumbered or subject to royalties to private parties, but the government is entitled to a 5% royalty on the gross value of precious metal exported. However, under Section 22.2.3 (“Royalties”) it mentions that there is a “Laimes Global Inc. royalty” of 1.5% of the gold revenue.
Geology and Mineralisation
The mineralisation at Tuvatu is presumed to be associated with a volcanic core, present in narrow lodes and zones of veining that have developed when the intrusive was in the final stages of crystallisation and early stages of cooling. Mineralisation is structurally controlled by an episode of northeast-southwest shearing and is intimately related to, but postdates, the emplacement of the intrusive. As the stress regimes within intrusion systems can be quite complex, the resulting veins and stockwork zones will pinch and swell along various strike orientations.
The mineralisation occurs as sets and networks of narrow veins and cracks, with individual veins generally ranging from 1 mm to 200 mm wide. Zones of veining, which comprise the lodes, may be up to 5 m wide. The main mineralised zone (referred to as Upper Ridges) comprises eleven principal lodes with a strike length in excess of 500 m and a vertical extent of more than 300 m. Another major zone of mineralisation (referred to as Murau) strikes east–west and consists of two major lodes with a mapped strike length in excess of 400 m.
Figure 2.2_1 shows a plan view with the various lode structures with the Upper Ridges Lodes furthest from the adit entrance in the north.
The technical report observes:
- the grades of individual lodes vary considerably due to the “spotty” nature of the gold and the variability in width of the host structures. Average grades for the lodes range from 2.0 to 10.0 g/t.
- This style of emplacement will always result in a risk to the tonnes and grades of any model developed.
From the above description it is evident that it is not easy to prove up considerable resources as the individual lodes are narrow and very variable. It explains the very long development period of the Tuvatu mine.
A very high proportion of the gold occurs as either free gold or is contained in quartz or pyrite composite particles. Free gold present is both fine and coarse grained. Mineralisation is clean with respect to deleterious elements such as arsenic, selenium and uranium.
Mineral Resources and Mineable Inventory
Resource Estimation
The resource was estimated by Mining Associates Pty Ltd (“MA”) with an effective date 8 January 2018. The large gap between the PEA effective date of April 2022 and the latest resource estimation is noteworthy.
The database includes 1,841 collar points, which Crux Investor assumes are associated with unique drillholes, and 83,324 assays, which include an unknown number of channel samples. The drill hole spacing is 20 m above 50 m reduced level (“RL”), but without the report providing the reference point, and 50 m below 50 m RL. For the type of deposit, narrow lodes with highly variable width, this drill density is sparse. The drill density is particularly sparse considering the large number of deposits included in the resources: a total of 47 structures were identified, including 11 lodes in the Upper Ridges area, seven lodes in the Murau area, seven lodes in the West area, seven lodes associated with Snake and Nasivi lodes, four lodes in the Tuvatu area, and nine stockwork veins in the SKL area. The implication is that many of these structures are defined based on a very limited number of intersections. Four lodes had less than 25 samples and the largest number of samples are 184 recorded for the Upper Ridge 2 lode.
As the lodes are narrow, generally less than 1 m (up to 7 m), the interpretation of individual structures is not simple and involves selection based on, firstly, a grade above a threshold of 0.5 g/t Au, but with “internal waste of less than 0.5 g/t Au intervals and/or geologically continuous intervals just below cut-off may be included”. Then, secondly, waste (less than 0.5 g/t Au) values in the projected plane of continuity of a particular vein modelled as that vein. Finally, where “vein” lithology was modelled in the expected location this was included. Furthermore, networks of narrow veins (1 to 200 mm wide) had to be “bulked” into substantial vein intersections.
Compositing of grades was not carried out as MA used the assayed grade of the full vein intersection for modelling purposes. Where veins had been defined by more than 50 intercepts, outliers were established via log probability plots. The minimum width assumed was set at only 0.3125 m to “reflect the minimum mining width”. This width assumed the application of shrinkage mining. Crux Investor considers this width as wholly impractical as a miner who is supposed to drill by hand the back (the roof of the stope) will not have enough space to manoeuvre.
According to MA the variography showed that the “nugget effects for gold were generally low to moderate, ranging from 0.11 to 0.69 and the range (A2) of the variograms varied from 12 m to 95 m for gold variogram models”. However, Table 14-9 of the technical reports shows much higher nugget effects with C0 (the code of nugget effect) being 0.90 (90% of the total variance) for Murau 1 (M1), 0.87 for Upper Ridge 1 (UR1) and Upper Ridge 3 (UR3) and 0.85 for Upper Ridge 2 (UR2). These are some of the most important contributors to resources with number of drill intersections of 45 for M1, 47 for UR1, 65 for UR3 and 184 for UR2. It places a big question about the validity of the whole estimation exercise.
Grade estimation was based on the gold accumulation concept, using values for grade multiplied by width: metres x g/t. Using ordinary kriging the block values were determined and the block grade back calculated by dividing by the width.
The block model used a block size of 10 m x 10 m x 10 m, with sub-blocks of 0.3125 m x 0.3125 m x 0.3125 m to accurately measure the volume of resources.
Table 2.3.1_1 gives the Indicated and Inferred mineral resources effective 18 January 2018 for a number of cut-off grades with declared resources assuming a cut-off grade of 3.0 g/t Au
The categorisation shows the uncertainty MA itself awards to the estimation with more gold in Inferred resources than in Indicated. Also evident from the table is that total contained gold is insensitive to the cut-off grade assumed. Figure 2.3.1_1 shows the relationship graphically.
The relationship is almost linear, which is surprising, with every 1 g/t Au increase in the cut-off grade dropping out almost 52,000 oz gold.
The implication from the above is that resource additions must come almost exclusively from additional exploration and that gold price rises will be immaterial to the total amount of mineral resources.
The technical report also includes illustrations shown in Figure 2.3.1_2 through the block models for three vein structures to compare block grades against intersection grades.
Whereas Crux Investor finds the correlation between block grade and intercepted grade less than convincing, the illustrations do show the limited extent within the veins where the grade is above 3 g/t Au.
With reference to the Introduction of this report, it is amazing how little Lion One has to show for 13 years of work since acquiring Tuvatu. At takeover the declared mineral resource effective in year 2000 arriving was 0.21 Moz grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category. It means that less than 0.21 Moz were added by Lion One, a tremendously low return on all investments made.
Mineable Inventory
With the very small proportion of gold in Indicated resources it made no sense for Lion One to motivate the construction of a mine on the basis of a feasibility study. It therefore chose a PEA, which allows inclusion of Inferred resources, to motivate the development of the project.
There is no formal derivation of the mineable inventory in the technical report, which goes straight into discussing the mining method. The contracted consultants quickly rejected the shrinkage method assumed in the resource estimation as impractical and chose LHOS as the preferred method after a comparative analysis which heavily loads the assumptions in favour of LHOS. For a discussion on both methods, and Appendix has been provided.
The discussion ignores the geological description of lodes that are variable in grade and width over short distances and assumes that LHOS will give lower dilution than shrinkage and cut-and-fill mining. This is a great leap of faith for lodes that are narrow and variable and, most importantly, have been defined at a low level of confidence. To plan stope outlines based on Inferred Resources is outright reckless. Whereas the rock wall conditions are supposedly very good, which will reduce scaling, the attitude of the lodes along strike and dip are far from regular as is evident from illustrations with underground infrastructure. The shrinkage and cut-and-fill methods give a level of geological control during mining and allow a degree of selectivity which LHOS does not.
The discussion on LHOS does not touch upon risks for unplanned dilution and hang-ups of badly blasted rock in narrow stopes that can have dips as low as 67 degrees.
In estimating the cut-off grade it uses incremental mining cost (i.e. excluding development cost), which is a risky approach as such cost should be an integral part of extracting a block of ground. Worse, assumed cost are only US$51/t, which is very low for LHOS over such narrow width and with a mining rate that has terrible economies of scale. It comes to an incremental cut-off grade of 2.66 g/t Au and fully costed cut-off grade of 3.95 g/t Au assuming a gold price of US$1,350/oz, which is at least very low compared to the current gold price. It should be noted that these numbers are for undiluted grades. In Crux Investor’s opinion, dilution of at least 20% should be expected. This based on stope width of 1.0 m. However, Tetra Tech ignores that the resource block model uses grades based on a minimum width of 0.3125 m. It is a major inconsistency between PEA and resource estimation.
Table 2.3.2_1 gives the Mineable Inventory, effective 29 April 2022, below which are presented the calculated conversion rates from the mineral resources statistics.
The conversion rates have been calculated by first estimating mineral resources at a cut-off grade of 4 g/t Au using the cut-off grade – contained gold relationship in Figure 2.3.1_1. At this cut-off grade Crux Investor estimates total resources to be 1.9 Mt at 9.95 g/t Au for 0.61 Moz.
The above conversion rates are deemed very high by Crux Investor considering:
- The patchy nature of high-grade blocks within veins (refer to Figure 2.3.1_2)
- The impact that increasing the minimum mining width from 0.3125 m to 1.00 m will have on resources block grades.
- The high dilution associated with LHOS for very narrow stopes.
- Hidden in the text is the assumption that mill feed of stoped material has an average grade of 9.10 g/t, which would make the grade conversion 91.5%.
Lion One should expect some very unpleasant surprises in terms of grade during mining. Crux Investor records that 10,513 tonnes of mineralised material were reported mined in the six months until 31 December 2023 at a grade of 4.1 g/t Au. Even taking into consideration this was extracted from development within ore and not from stopes, this points to a grade that is well below forecast. The PEA assumed an average grade of 6.9 g/t Au for the mill feed from development.
Blue Sky Upside
Lion One has continued to drill aggressively since the 2018 resource estimation with up to seven rigs operating at a time. Whereas certain drill results were highlighted as promising, it was the drilling of the extensions at depth below the Upper Ridges lodes that received the most attention. Confusingly, Lion One has started referring to certain areas by other names. In the Upper Ridges area, it now distinguishes Zone 2 which seems to include lodes UNW1 and UNW2 and Zone 5 which seems to include UR1, UR2, URW3, UR4 and UR5. The reason why this is important is that Lion One believes that it has identified high-grade feeder zones below these zones. Figure 2.4_1 is from a slide in the latest corporate presentation showing the substantial vertical extent of mineralisation below Zone 2 and Zone 5.
The slide includes some very impressive “representative results”. It is impossible for Crux Investor to verify whether or not these results are representative as not a full set of results are given and no cross sections are presented. The isometric views included in reports do not give the reader a proper understanding of how material the intersections are. Moreover, based on the large gaps in drillhole numbering, it seems that only some were highlighted. It should be noted that the impressively long intervals are not true widths as the holes intersect the lodes under a very oblique angle along dip and possibly also along strike.
Anyway, the “representativeness” of results is an issue at Tuvatu judging from the very dense drilling currently being carried out at shallower levels. Apart from the present exploration drilling, Lion One also has a programme of surface infill drilling and an underground grade control drilling programme targeting areas of planned early production from Zones 2 and 5. The initial grade control drill holes are spaced on 20 m centres. This will be followed up by additional grade control drilling to increase drill density to 10 m centres in advance of mining. This confirms the observation under the resource estimation section about the very variable nature of the lodes. Unless demonstrated otherwise by Lion One Crux Investor interprets this to indicate that the variability does not change with depth.
A lot more drilling will be required to convert the Zone 500 and Deep Feeder Zone into mineral resources.
Mining Operations
Mining Method as per PEA
Access to the underground workings is planned via two decline portals: the existing exploration decline and the proposed main decline to the west (see Figure 2.5_1). The main decline will become the primary haulage route, and the exploration decline will be used as a haulage route at the start of the project. Once a link is established between the declines, the exploration decline will be used as a second means of egress and a secondary haulage route. Both declines will serve as intake positions for ventilation purposes.
To make the exploration drive suitable for production purposes it will be enlarged from its current 3.0 m x 3.0 m to 4.5 m x 4.5 m.
The vertical level interval is planned at 15 m and stopes are accessed by reducing the decline dimensions after 25 m level development from 4.5 m x 4.5 m to 2.0 m wide by 3.0 m high, which accommodates load haul dump (“LHD”) loaders. The production drives developed within the stopes will have the same dimensions. At 2 m width it will result in planned dilution in areas where the vein width is less, something the PEA ignores.
From the mineralised drives 1.2 m x 1.2 raises will be developed as slots and escape ways and 3.0 m x 3.0 m raises will be mined for return air circulation. This will be carried out by a combination of mechanical and handheld excavation (more than 81%).
It should be noted that “conceptual” models have been used for heat and dewatering heat balance due to lack of data. This adds risks to the suggested mine design. In particular the assumption of a lower geothermal gradient than at the historical Vatukoula mine is reckless.
In a press release dated 18 January 2024 it was disclosed that first production material was extracted on 13 December 2023. Much of the update warned that early production would be of sources that were relatively poorly mineralised. This raises many red flags, even despite management putting a gloss on it as being “material (that) is ideal for use as feed stock to test the different gold recovery circuits during the initial stages of plant operation.”
Also apparent from the news release is that the company has reverted to handheld mining as “ideal for narrow vein mining as it is precise and enables the effective development of narrow drives, thereby minimizing dilution”. The company just does not stick to the plan as set out in the PEA.
Processing Operations
Metallurgical Testwork
Given the long history of the Tuvatu project, it is not surprising that it has a very long history of metallurgical test work involving 18 programmes between 1997 and 2020, not counting eight mineralogical studies. The mineralogy was found to be complex with many different sulphide minerals, very fine gold (average circular diameter of 7.7 μm) and the great majority of gold associated with calaverite (AuTe2).
The technical document summarises six comminution tests without specifically concluding that the samples were hard, but which is evident from bond indices that are high, typically between 18 and 20 kWh/t.
The discussion in the PEA report on test work is of a terrible standard. The discussion just lists what work has been carried out, but does not draw any conclusions nor inform how test results guided subsequent work to clarify issues.
Three process routes were investigated over time: whole ore leaching alone, gravity concentration followed by leaching and gravity concentration, and flotation followed by leaching. The discussion does not come to any definite conclusion but indicates a preference for including flotation. In the words of the technical expert: “The gold recovery tests indicate that the gold in the Tuvatu mineralization responded reasonably well to the process consisting of gravity concentration followed by further gold recovery by flotation and cyanidation. However, some metallurgical performance variations were observed in the test programs. Further test work should be conducted to optimize process flowsheet and conditions.”
It does not give much confidence about the forecast 87.5% metallurgical recovery.
From the 18 January 2024 press release it is apparent that management is not very confident about metallurgical performance as it states that the current 300 tpd “pilot plant phase” is on: “determining the best methods and parameters required to maximize gold recovery from each type of gold mineralization at Tuvatu. Mill operations to date have consisted of a start-up period and a campaign period with feed from different areas within Zone 2 and Zone 5.” Predominantly low-grade material has been put through the mill. In the December 2023 quarter, actual metallurgical recovery was only 75.7%.
Process Plant
The PEA assumed a plant with a capacity of 1,000 tonne per day (“tpd”), whereas the constructed plant has a capacity of less than one-third of this.
The process flow is relatively complicated including three stage crushing to 80% passing (“P80”) 10 mm followed by grinding to P80 60-65 μm. Integrated in the grinding circuit is a gravity separation circuit receiving one-third of the hydrocyclone underflow to recover coarse gold grains using centrifugal concentrators and a shaking table. The hydrocyclone overflow is subjected to flotation to produce a gold-bearing sulphide concentrate. This concentrate is ground in a vertical mill to P80 20 μm. Both concentrate and tailings are leached separately followed by a common carbon-in-pulp (“CIP”) leach circuit. The loaded carbon from the CIP circuit is eluded and the gold recovered through electrowinning and smelting to a doré.
Considering the complicated process and lack of economies of scale high processing costs must be expected.
Economic Valuation – Tuvatu Project
Metal Prices and Marketing Terms Assumed
This study has considered two price cases. One case uses the gold price of US$1,400/oz in the PEA study and another case uses the spot price of US$2,031/oz on 23 February 2024 as Base Case for this valuation cash flow model. The PEA cash flow model was recreated to determine whether the taxation model used is valid by giving the same overall tax amount as per PEA.
This valuation has ignored doré transportation, smelting terms and refining charges as having a negligible impact.
Production Schedule
The PEA assumes a very aggressive ramp-up in mine production for an underground mine that extracts its mill feed from numerous, very narrow deposits. The mine schedule assumes that the plant needs to be fed around 1,000 tpd, which is much higher than the current plant capacity. It results in a very short LOM with production shutting down in 2028 if the company does not substantially add to resources. When applying Taylor’s rule of thumb for capacity selection, depleting the mineable inventory of 1.4 Mt would optimally require a daily rate of 550 tpd, which is way lower than suggested in the PEA.
Crux Investor has drawn up its own schedule assuming a much more realistic ramp-up with plant capacity increasing from the current 300 tpd to 500 tpd in 2025. As plant expansion has not yet started, this ramp-up may well prove too optimistic. Moreover, Crux Investor has included a dilution of 20% to account for the much wider minimum width than modelled for mineral resources plus a degree of unplanned dilution. The dilution number is a guestimate and may well prove far too optimistic.
Figure 2.7.2_1 shows the difference between PEA and valuation production over the LOM.
Whereas Crux Investor could be accused of grabbing numbers out of thin air, the PEA schedule is definitely wrong as company execution substantially differs from plan. Considering the latest information Crux Investor is most probably erring on the optimistic side in terms of grade.
Operating Expenditure
Table 2.7.3_1 shows the cost structure suggested in the PEA study and used by Crux Investor for this valuation.
The PEA suggests that the total operating cost rate for Tuvatu is less than US$130/t milled, which is far below what a benchmarking exercise by Crux Investor on underground Canadian mines indicates. The discrepancy is aggravated by the costly processing cost of the hard and complex mineralisation that requires fine grinding to achieve proper liberation of the gold. Crux Investor records that the fixed cost component is very low with 10.7% for manpower and 4.8% for Others. For a small plant fixed cost should be a relatively large component, typically 30% or more.
Figure 2.7.3_1 shows the graphical relationship between annual treatment rate and total unit operating cost as blue dots. This is Crux Investor data collated from a large number of Canadian underground operations.
At 0.18 Mtpa total operating cost of between US$150/t milled and US$200/t milled can be expected. The rates used by Crux Investor convert to total unit cost of US$188/t over the LOM.
Annualised corporate office cash expenditure for the six months ending 31 December 2023 was US$2.9 million. Crux Investor has adopted this rate for its cash flow model as this valuation is of Lion One and not the Tuvatu operation alone.
The financial statements for the quarter ending 31 December 2023 shows that cost of sales relating to sales amounted to sales was C$2.5 million and relating to inventory C$3.1 million. Consolidated Statements of Cash Flows shows that only C$57,000 depreciation was included in the operating costs. This means that cash cost was almost US$400/t milled if the book entry to allocate expenses to inventory is ignored.
Capital Expenditure
Table 2.7.4_1 shows the capital cost estimates in the PEA study. The table has lost much relevance given that plant construction started on 28 September 2022 and the mine is essentially fully constructed (with a 300 tpd “pilot plant”) and first processing started.
The provisions all seem very low. For example for the small, complex processing plant the estimate for direct cost translates to less than US$500 per monthly tonne capacity. An estimate that is 50% higher would be more realistic.
Obvious omissions are provisions for underground drilling to firm up on the lode outlines for stope design purposes and closure cost. The PEA states that closure cost (unspecified) have been included in the model, but this is not evident from the summary table.
Lion One avoids giving updates on mine construction and development costs compared to estimates. Without having declared Commercial Production the fact that revenue and operating cost are recognised (i.e. not capitalised) indicates that the company considers itself as being in the operating stage. Yet, no total development cost has been disclosed.
When referring to the financial statements, the company invested in the financial year ending 30 June 2023 a total of C$55.5 million and in the six months to 31 December 2023 quarter C$27.9 million. Converted to US Dollars this amounts to US$62 million. This means that the initial provision has almost been fully spent, except that the operation has a capacity of 300 tpd instead of 1,000 tpd.
With reference to Figure 2.7.3_1 Crux Investor has included sustaining capital expenditure of US$100 per tonne milled except for the last production year. During production Year 1 an additional investment of US$10 million has been included to expand the plant to 500 tpd.
Royalties and Taxes
The PEA report gives the following details on the Fiji tax regime.
Corporate income taxes are levied at 20%. Income tax losses can only be carried forward for a period of four years, and there is no provision for carryback of tax losses. The carry forward of income tax losses has two tests: continuity of ownership and continuity of business.
Allowed for taxes is amortisation/depreciation of the cost of the asset on the basis of either a straight-line basis (at a lower rate) of on declining balance (at a higher rate). These rates are:
The cost of the acquisition of a mining lease or tenement and the cost of development of mines may also be written off in equal instalments in any five of the first eight years, commencing with the year in which the expenditure was incurred.
From the modelling it is apparent that the PEA only considered the initial and sustaining capital expenditure, ignoring the book value of the considerable historical investments made. Crux Investor has taken these into account. Unfortunately, the categorisation of the type of assets for which book values are given does not correspond with the categorisation of assets in terms of allowed depreciation. Crux Investor has used an overall straight-line depreciation of 20% for all categories.
Results
Table 2.7.6_1 summarises the LOM results for the PEA scenario and Crux Investor valuation for the base case gold price and the input parameters set out above.
Using the PEA parameters the project has an impressive operating margin of almost 65%. It however benefits only slightly more than four years of this to generate the funds to reimburse the shareholders. It should be noted that the tax model of Crux Investor arrives at US$2.4 million higher taxes than the PEA, indicating that Lion One has included slightly higher tax allowances. The NPV5 of US$120 million derived by Crux Investor is very close to the PEA’s US$122 million.
With the much longer LOM, lower average grade after adding dilution and substantially higher cash operating cost the Crux Model arrives at almost the same amount of operating cash flow, even US$1.3 million higher than for the PEA.
When accounting for the tax allowances on the existing book value of assets and much higher sustaining capital expenditure in the Crux Investor model, the company will have tax losses in the first five production years that will not even have been redeemed at the end of LOM. Lion One will pay no income taxes in Fiji.
Crux Investor estimates that net free cash flow will be just short of US$107 million at a gold price of US$2,031/oz. The NPV8 value of this is US$47 million.
Table 2.7.6_2 expresses the sensitivity of the project value as the change in Net Present Value per percentage point change in the main parameters: metal prices, operating expenditure and capital expenditure.
The sensitivity analysis demonstrates the very marginal nature of the Tuvatu project with the NPV8 increasing by 7.9% (US$3.7 million) for every percentage point increase in the gold price (i.e. US20/oz) and dropping by 4.4% (US$2.1 million) for every percentage point increase in operating cost (i.e. US$18.8/t milled).
Should additional resources be found of a similar quality to existing resources to extend the LOM by one year, the NPV8 will increase by around US$7 million.
The Enterprise Value of Lion One Metals at 23 February 2024
At the share price of C$0.47 on 23 February 2024, the market capitalisation for the 230.6 million shares is C$108.4 million, or US$80.3 million.
At 31 December 2023 the company had 38.7 million warrants outstanding, which are at a lowest exercise price of C$1.05 all well out of the money, and 8.7 million options which are all out of the money as well. The 2.8 million “compensation options” are also out of the money.
At 31 December 2023 the company had net current assets of C$19.0 million, but these can be considered fully committed to complete the mine and get to commercial production. In fact, the company has just completed a share placement of 24.15 units comprising one share and one warrant (exercisable at C$0.65) that has raised C$12 million gross. The company states that “the net proceeds received by the Company from the sale of the Units will be used for development and ramp up expenses at the Tuvatu Gold project located in Fiji, as well as for general corporate expenses & purposes.” In other words these proceeds are fully committed and can be ignored for the calculation of Enterprise Value.
At 31 December 2023 loan principal and accrued interest was C$37.2 million
Based on the above an Enterprise Value on a diluted basis for Lion One of C$145.5 million (US$108 million) is derived as shown in Table 3_1
This Enterprise Value is 2.3 times the NPV8 calculated by Crux Investor.
Appendix - Comparison Between Longhole Open Stoping and Shrinkage Mining Methods
Shrinkage Mining
Shrinkage mining is conducted in a vertical or near-vertical plane, and at an angle greater than the angle of repose of the broken ore.
After the vein is accessed a tunnel (called drift) is blasted along the strike of the vein for a predetermined strike distance. At each end of the stope a raise is developed upwards to the next level. This raise serves to give access to man and equipment at higher levels. In shrinkage stoping the ore is mined in successive flat or inclined slices, working upward from the level or the bottom of the block of ore. After each slice or cut, enough broken ore is drawn off from below to provide a working space between the top of the pile of broken ore and the back of the stope. Usually about 35%-40% of the ore will be drawn off during active mining in the stope. The drawing of excess broken rock was known as shrinking and hence the name associated with this method: shrinkage stoping.
The shrinkage stoping is shown schematically in Figure 4_1.
The illustration shows numerous draw points along the length of the vein. Another option is to scrape the broken rock to central draw points and drop it down.
Once the newly drilled holes are drilled and loaded, the miners and equipment will be withdrawn. At that time, an additional portion of ore will be withdrawn to create sufficient space to account for the swell of the ore that will be blasted. Once this has been done, the round will be fired. Then a portion of the ore will be withdrawn to create space for the overhand stoping to continue.
After active mining has been completed to the level above or to the floor pillar, the rest of the broken ore is drawn off from below, leaving the stope empty. It may be filled with waste later to prevent general movement and subsidence or to permit mining of pillars left between stopes during the first mining.
As much of the ore blasted is not directly available for processing, shrinkage mining requires considerable initial investment in developing numerous working places to have sufficient plant feed.
Longhole Open Stoping
The discussion on this mining method has been extracted from a report written about Harte Gold, where a variation called Retreat LHOS was employed, a method that reduces the number of draw points that need to be developed.
Level access drifts are be developed from the ramps at predetermined vertical intervals to intersect the mineralised zone and then branch into sill drifts that will be developed along strike. The difference in level interval is determined by the need to limit dilution, larger distances providing cost benefits at the expense of higher dilution.
Based on the tabular, steep dipping and narrow nature of the deposits longitudinal longhole retreat stoping was selected as mining method. It has the advantage of being a relatively low cost underground mining method, giving good productivity, but at the disadvantage of giving little control to avoid dilution due to geometrical changes in the sidewalls.
Figure 4_2 shows schematically the longitudinal longhole retreat mining method.
Typically, four to five levels will be combined to form a number of mining blocks. Within each mining block a bottom-up stoping sequence will be used, with mining commencing on the lowest level of the block and progressing upward, level by level. The last level will be mined by drilling the blastholes upwards, removing the ore beneath the previously mined out block that was backfilled with paste using extra cement for the lowest level.
This type of stoping requires a regular shape of stopes and ore boundaries with everything inside the drill pattern sent to the plant. When using mechanical equipment the drifts need to accommodate such equipment that can result in considerable dilution where the vein is narrow.
Executive Summary
Lion One Metals (“Lion One”) (TSX:LIO) (ASX:LLO) has been developing the Tuvatu Gold project (“Tuvatu”) on the main island of Viti Levu in Fiji since it was acquired in January 2011. At the time the project had declared mineral resources of 0.21 million ounces (“Moz”) grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category.
Despite continuous exploration and drilling, it has been difficult to grow the resource base. The latest mineral resource estimation dated 2018 showed resource growth of only 0.21 Moz gold. This converts to a rate of addition of less than 30,000 oz per year. The reason for the slow progress is the nature of mineralisation. The mineralisation is in high-grade, but very narrow (generally less than 1 m thick) lode structures that are very variable in both thickness and grade over short distances.
Our review of the resource estimation methodology raises several concerns. The drill density is low and the nugget effect is high. A high proportion of Inferred resources and an impractically narrow minimum width have been used in the mine plan. A review of two longitudinal sections comparing block grade with drill intersection grade is not convincing. The sections show large sections of the lode structure being uneconomical. The uncertainty associated with the resource estimation is evident from the confidence attached to the resource categories with almost 60% of the gold in the Inferred category.
Given the small Indicated resource it did not make sense for Lion One to promote and develop the project based on a pre-feasibility or feasibility study. Inferred resources cannot be included in pre-feasibility or feasibility studies – the resources have not been derisked enough for this level of study. Lion One was therefore obliged to opt for a preliminary economic assessment (“PEA”). PEAs allow the inclusion of Inferred resources in the production schedule.
Worryingly, the PEA completely ignored the uncertain nature of the resources by proposing longhole open stoping (“LHOS”) as a mining method. LHOS is a relatively high production, low-cost mining method. It works well when the ground conditions are good, the structure has a very regular attitude and is relatively wide, and when grades are above the cut-off grade over decent dimensions.
At Tuvatu, although the ground conditions are supposedly good, other factors are not so encouraging. The structure is narrow, highly variable and irregular. Grades above the cut-off grade are not evident over decent dimensions. Oh dear. LHOS is neither a suitable nor realistic choice of mining method.
A more suitable selection of mining method for this kind of orebody is Shrinkage Mining. Shinkage Mining is a relatively low production, high-cost mining method. It works well when the ground conditions are poor, the structure is narrow with an irregular attitude, and when grades are variably distributed above cut-off grade. Shrinkage Mining is much better suited to a Tuvatu-style orebody than LHOS.
Nevertheless, the PEA was published on the basis of LHOS and a very high production rate compared to the total available mill feed. The suggested life of mine (“LOM”) slightly exceeds four years. On paper, this may work, but such a crammed schedule usually involves over-capitalisation in the process plant and in development. One way around the ‘over-capitalisation’ problem is to use unrealistically low capital expenditure estimations in a PEA. And this is exactly what has happened - the PEA capital estimates are too low.
Beyond benchmarking, how can we be sure that the numbers are worng? Well, now that the plant is actually built we can see that the budget was met, but that the size of the plant is very different. The PEA assumed a plant with a capacity of 1,000 tonne per day (“tpd”), whereas the constructed plant has a capacity of less than one-third of this (300 tpd). Oh dear. Shinkflation in action. To make matters worse, we note that the PEA also used unrealistically low cash operating cost estimations.
The Crux Investor valuation rejects many of the PEA assumptions. Our valuation includes substantial dilution for LHOS and increased cost factors based on a prior benchmarking exercise carried out by Crux Investor on narrow vein mines in Canada. In addition, the production rate was brought down by half given what is realistically possible when mining such narrow lodes. The lower rate combined with the dilution resulted in a life of mine of ten years for the Crux Investor valuation. Despite these very much more onerous assumptions Crux Investor still arrives at a positive NPV8 of US$47 million due to the much higher prevailing gold price of US$2,031/oz.
Crux Investor concedes that many of our assumptions are generic, but we stand by the view that these are more applicable than the assumptions used in the PEA. For example, Lion One has already moved away from the plan in the PEA in two crucial areas. Firstly, it has reverted to Shinkage Mining for stoping. And secondly, it has reduced the initial production rate to 300 tpd from the 1,000 tpd in the PEA. Remember that the plant was only built to a capacity of 300 tpd.
In Crux Investor’s opinion, Lion One would do exceedingly well if it achieves the expansion to 500 tpd from 2025 onwards modelled in the Crux Investor valuation.
There is a degree of blue-sky potential to the Tuvatu project based on the down dip extension drilled below the main lode structures. It, however, requires a tremendous amount of additional drilling before these can be converted to resources. Meanwhile, early indications are that the first production from Tuvatu has a disappointingly low grade.
On 31 December 2023, Lion One had almost C$13.5 million in cash, something it was not comfortable with given the recently completed equity funding raise of C$12 million. Treatment of small amounts of material at low grade combined with the need to fund the plant expansion will burn remaining cash resource quickly and more equity placements must be expected. Even if the extensions at depth prove to be attractive, the company may well hit a brick wall before reaching these.
On 23 February 2024, the Enterprise value of Lion One was almost US$108 million, more than 2.3 the calculated NPV8, which is based on assumptions that have already proven too optimistic. Oh dear! Run away.
Introduction
Lion One Metals (“Lion One”) (TSX:LIO) (ASX:LLO) is a company that acquired mineral rights in Fiji in January 2011 through the reverse takeover of American Eagle Resources (“American Eagle”). These rights were previously owned by Emperor Gold Mining Company of Australia (“Emperor”). Through this transaction, Lion One became the owner of the Tuvatu Gold Project (“Tuvatu”) on the main island of Viti Levu in Fiji. Tuvatu had been advanced by previous owners, mainly Emperor, through underground exploration and development from 1997 onwards with a feasibility study planned for 2000, which was however suspended because of a general cost-cutting exercise.
The latest available mineral resource estimation at the time of the takeover was carried out in the year 2000 arriving at 0.21 million ounces (“Moz”) grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category.
In November 2017 Lion One added the Navilawa exploration tenement directly north of the Tuvatu gold project substantially adding to its exploration target area.
In June 2019 the company also acquired Avocet Resources Limited (“Avocet”) in an all-paper transaction.
Figure 1_1 shows the share price history of Lion One on the Toronto Stock Exchange since acquiring Tuvatu in January 2011.
After initial enthusiasm about the acquisition, the share price saw a long slide only to end for a short period of excitement during 2016. The highest-ever price of around C$2.40 was achieved in June 2022, which seems to be the result of announcements by the company of having identified a high-grade feeder zone below its most important lode structures. At the time four drills were actively exploring targets the dip extensions at Tuvatu, a prospect 2 km north of Tuvatu and the Banana Creek prospect and the Kingston gold anomaly at the newly acquired Navilawa tenement.
When the company used the excellent price to undertake a sizeable capital raise of almost C$40 million at placement prices of between C$1.70 and C$2.05, the share price fell. The release of a preliminary economic assessment (“PEA”) in September with an after-tax NPV5 of C$121 million at a gold price of US$1,400/oz must not have helped much. At the time of the report, the number of issued shares were almost 145 million shares trading at C$1.60, which made the market capitalisation almost C$240 million.
There was another sharp drop in price to C$0.69 reached in October 2022 following the start of mine development a few months earlier.
Despite completion of construction at the end of 2023 the share price has continued its downward trend.
This report will investigate whether or not the negative attitude of the market is warranted.
Valuation of the Tuvatu Project
Background
The technical information in Section 2 of this report has been dominantly extracted from a NI.43-101 compliant report entitled “Technical Report and Preliminary Economic Assessment Update for the Tuvatu Gold Project, The Republic of Fiji”, dated 29 April 2022, by Tetra Tech Canada Incorporated (“Tetra Tech”).
The Tuvatu project is located in the upper reaches of Sabeto Valley, approximately 24 km northeast of the town of Nadi on the west coast of Viti Levu and 17 km from the Nadi International Airport (see Figure 2.1_1). The map also shows that a deep-water port is located only 35 km away.
The tenement area comprises four special prospecting licences (“SPL’s”) covering 20,786 ha and one special mining licence (“SML”) covering almost 385 ha (see Figure 2.1_2 for the outline of the tenement area with the yellow outline for the mining licence).
According to the PEA report, in the discussion on mineral rights, it is mentioned that these are not encumbered or subject to royalties to private parties, but the government is entitled to a 5% royalty on the gross value of precious metal exported. However, under Section 22.2.3 (“Royalties”) it mentions that there is a “Laimes Global Inc. royalty” of 1.5% of the gold revenue.
Geology and Mineralisation
The mineralisation at Tuvatu is presumed to be associated with a volcanic core, present in narrow lodes and zones of veining that have developed when the intrusive was in the final stages of crystallisation and early stages of cooling. Mineralisation is structurally controlled by an episode of northeast-southwest shearing and is intimately related to, but postdates, the emplacement of the intrusive. As the stress regimes within intrusion systems can be quite complex, the resulting veins and stockwork zones will pinch and swell along various strike orientations.
The mineralisation occurs as sets and networks of narrow veins and cracks, with individual veins generally ranging from 1 mm to 200 mm wide. Zones of veining, which comprise the lodes, may be up to 5 m wide. The main mineralised zone (referred to as Upper Ridges) comprises eleven principal lodes with a strike length in excess of 500 m and a vertical extent of more than 300 m. Another major zone of mineralisation (referred to as Murau) strikes east–west and consists of two major lodes with a mapped strike length in excess of 400 m.
Figure 2.2_1 shows a plan view with the various lode structures with the Upper Ridges Lodes furthest from the adit entrance in the north.
The technical report observes:
- the grades of individual lodes vary considerably due to the “spotty” nature of the gold and the variability in width of the host structures. Average grades for the lodes range from 2.0 to 10.0 g/t.
- This style of emplacement will always result in a risk to the tonnes and grades of any model developed.
From the above description it is evident that it is not easy to prove up considerable resources as the individual lodes are narrow and very variable. It explains the very long development period of the Tuvatu mine.
A very high proportion of the gold occurs as either free gold or is contained in quartz or pyrite composite particles. Free gold present is both fine and coarse grained. Mineralisation is clean with respect to deleterious elements such as arsenic, selenium and uranium.
Mineral Resources and Mineable Inventory
Resource Estimation
The resource was estimated by Mining Associates Pty Ltd (“MA”) with an effective date 8 January 2018. The large gap between the PEA effective date of April 2022 and the latest resource estimation is noteworthy.
The database includes 1,841 collar points, which Crux Investor assumes are associated with unique drillholes, and 83,324 assays, which include an unknown number of channel samples. The drill hole spacing is 20 m above 50 m reduced level (“RL”), but without the report providing the reference point, and 50 m below 50 m RL. For the type of deposit, narrow lodes with highly variable width, this drill density is sparse. The drill density is particularly sparse considering the large number of deposits included in the resources: a total of 47 structures were identified, including 11 lodes in the Upper Ridges area, seven lodes in the Murau area, seven lodes in the West area, seven lodes associated with Snake and Nasivi lodes, four lodes in the Tuvatu area, and nine stockwork veins in the SKL area. The implication is that many of these structures are defined based on a very limited number of intersections. Four lodes had less than 25 samples and the largest number of samples are 184 recorded for the Upper Ridge 2 lode.
As the lodes are narrow, generally less than 1 m (up to 7 m), the interpretation of individual structures is not simple and involves selection based on, firstly, a grade above a threshold of 0.5 g/t Au, but with “internal waste of less than 0.5 g/t Au intervals and/or geologically continuous intervals just below cut-off may be included”. Then, secondly, waste (less than 0.5 g/t Au) values in the projected plane of continuity of a particular vein modelled as that vein. Finally, where “vein” lithology was modelled in the expected location this was included. Furthermore, networks of narrow veins (1 to 200 mm wide) had to be “bulked” into substantial vein intersections.
Compositing of grades was not carried out as MA used the assayed grade of the full vein intersection for modelling purposes. Where veins had been defined by more than 50 intercepts, outliers were established via log probability plots. The minimum width assumed was set at only 0.3125 m to “reflect the minimum mining width”. This width assumed the application of shrinkage mining. Crux Investor considers this width as wholly impractical as a miner who is supposed to drill by hand the back (the roof of the stope) will not have enough space to manoeuvre.
According to MA the variography showed that the “nugget effects for gold were generally low to moderate, ranging from 0.11 to 0.69 and the range (A2) of the variograms varied from 12 m to 95 m for gold variogram models”. However, Table 14-9 of the technical reports shows much higher nugget effects with C0 (the code of nugget effect) being 0.90 (90% of the total variance) for Murau 1 (M1), 0.87 for Upper Ridge 1 (UR1) and Upper Ridge 3 (UR3) and 0.85 for Upper Ridge 2 (UR2). These are some of the most important contributors to resources with number of drill intersections of 45 for M1, 47 for UR1, 65 for UR3 and 184 for UR2. It places a big question about the validity of the whole estimation exercise.
Grade estimation was based on the gold accumulation concept, using values for grade multiplied by width: metres x g/t. Using ordinary kriging the block values were determined and the block grade back calculated by dividing by the width.
The block model used a block size of 10 m x 10 m x 10 m, with sub-blocks of 0.3125 m x 0.3125 m x 0.3125 m to accurately measure the volume of resources.
Table 2.3.1_1 gives the Indicated and Inferred mineral resources effective 18 January 2018 for a number of cut-off grades with declared resources assuming a cut-off grade of 3.0 g/t Au
The categorisation shows the uncertainty MA itself awards to the estimation with more gold in Inferred resources than in Indicated. Also evident from the table is that total contained gold is insensitive to the cut-off grade assumed. Figure 2.3.1_1 shows the relationship graphically.
The relationship is almost linear, which is surprising, with every 1 g/t Au increase in the cut-off grade dropping out almost 52,000 oz gold.
The implication from the above is that resource additions must come almost exclusively from additional exploration and that gold price rises will be immaterial to the total amount of mineral resources.
The technical report also includes illustrations shown in Figure 2.3.1_2 through the block models for three vein structures to compare block grades against intersection grades.
Whereas Crux Investor finds the correlation between block grade and intercepted grade less than convincing, the illustrations do show the limited extent within the veins where the grade is above 3 g/t Au.
With reference to the Introduction of this report, it is amazing how little Lion One has to show for 13 years of work since acquiring Tuvatu. At takeover the declared mineral resource effective in year 2000 arriving was 0.21 Moz grading 7.9 g/t Au in the Indicated category and 0.24 Moz grading 9.1 g/t Au in the Inferred category. It means that less than 0.21 Moz were added by Lion One, a tremendously low return on all investments made.
Mineable Inventory
With the very small proportion of gold in Indicated resources it made no sense for Lion One to motivate the construction of a mine on the basis of a feasibility study. It therefore chose a PEA, which allows inclusion of Inferred resources, to motivate the development of the project.
There is no formal derivation of the mineable inventory in the technical report, which goes straight into discussing the mining method. The contracted consultants quickly rejected the shrinkage method assumed in the resource estimation as impractical and chose LHOS as the preferred method after a comparative analysis which heavily loads the assumptions in favour of LHOS. For a discussion on both methods, and Appendix has been provided.
The discussion ignores the geological description of lodes that are variable in grade and width over short distances and assumes that LHOS will give lower dilution than shrinkage and cut-and-fill mining. This is a great leap of faith for lodes that are narrow and variable and, most importantly, have been defined at a low level of confidence. To plan stope outlines based on Inferred Resources is outright reckless. Whereas the rock wall conditions are supposedly very good, which will reduce scaling, the attitude of the lodes along strike and dip are far from regular as is evident from illustrations with underground infrastructure. The shrinkage and cut-and-fill methods give a level of geological control during mining and allow a degree of selectivity which LHOS does not.
The discussion on LHOS does not touch upon risks for unplanned dilution and hang-ups of badly blasted rock in narrow stopes that can have dips as low as 67 degrees.
In estimating the cut-off grade it uses incremental mining cost (i.e. excluding development cost), which is a risky approach as such cost should be an integral part of extracting a block of ground. Worse, assumed cost are only US$51/t, which is very low for LHOS over such narrow width and with a mining rate that has terrible economies of scale. It comes to an incremental cut-off grade of 2.66 g/t Au and fully costed cut-off grade of 3.95 g/t Au assuming a gold price of US$1,350/oz, which is at least very low compared to the current gold price. It should be noted that these numbers are for undiluted grades. In Crux Investor’s opinion, dilution of at least 20% should be expected. This based on stope width of 1.0 m. However, Tetra Tech ignores that the resource block model uses grades based on a minimum width of 0.3125 m. It is a major inconsistency between PEA and resource estimation.
Table 2.3.2_1 gives the Mineable Inventory, effective 29 April 2022, below which are presented the calculated conversion rates from the mineral resources statistics.
The conversion rates have been calculated by first estimating mineral resources at a cut-off grade of 4 g/t Au using the cut-off grade – contained gold relationship in Figure 2.3.1_1. At this cut-off grade Crux Investor estimates total resources to be 1.9 Mt at 9.95 g/t Au for 0.61 Moz.
The above conversion rates are deemed very high by Crux Investor considering:
- The patchy nature of high-grade blocks within veins (refer to Figure 2.3.1_2)
- The impact that increasing the minimum mining width from 0.3125 m to 1.00 m will have on resources block grades.
- The high dilution associated with LHOS for very narrow stopes.
- Hidden in the text is the assumption that mill feed of stoped material has an average grade of 9.10 g/t, which would make the grade conversion 91.5%.
Lion One should expect some very unpleasant surprises in terms of grade during mining. Crux Investor records that 10,513 tonnes of mineralised material were reported mined in the six months until 31 December 2023 at a grade of 4.1 g/t Au. Even taking into consideration this was extracted from development within ore and not from stopes, this points to a grade that is well below forecast. The PEA assumed an average grade of 6.9 g/t Au for the mill feed from development.
Blue Sky Upside
Lion One has continued to drill aggressively since the 2018 resource estimation with up to seven rigs operating at a time. Whereas certain drill results were highlighted as promising, it was the drilling of the extensions at depth below the Upper Ridges lodes that received the most attention. Confusingly, Lion One has started referring to certain areas by other names. In the Upper Ridges area, it now distinguishes Zone 2 which seems to include lodes UNW1 and UNW2 and Zone 5 which seems to include UR1, UR2, URW3, UR4 and UR5. The reason why this is important is that Lion One believes that it has identified high-grade feeder zones below these zones. Figure 2.4_1 is from a slide in the latest corporate presentation showing the substantial vertical extent of mineralisation below Zone 2 and Zone 5.
The slide includes some very impressive “representative results”. It is impossible for Crux Investor to verify whether or not these results are representative as not a full set of results are given and no cross sections are presented. The isometric views included in reports do not give the reader a proper understanding of how material the intersections are. Moreover, based on the large gaps in drillhole numbering, it seems that only some were highlighted. It should be noted that the impressively long intervals are not true widths as the holes intersect the lodes under a very oblique angle along dip and possibly also along strike.
Anyway, the “representativeness” of results is an issue at Tuvatu judging from the very dense drilling currently being carried out at shallower levels. Apart from the present exploration drilling, Lion One also has a programme of surface infill drilling and an underground grade control drilling programme targeting areas of planned early production from Zones 2 and 5. The initial grade control drill holes are spaced on 20 m centres. This will be followed up by additional grade control drilling to increase drill density to 10 m centres in advance of mining. This confirms the observation under the resource estimation section about the very variable nature of the lodes. Unless demonstrated otherwise by Lion One Crux Investor interprets this to indicate that the variability does not change with depth.
A lot more drilling will be required to convert the Zone 500 and Deep Feeder Zone into mineral resources.
Mining Operations
Mining Method as per PEA
Access to the underground workings is planned via two decline portals: the existing exploration decline and the proposed main decline to the west (see Figure 2.5_1). The main decline will become the primary haulage route, and the exploration decline will be used as a haulage route at the start of the project. Once a link is established between the declines, the exploration decline will be used as a second means of egress and a secondary haulage route. Both declines will serve as intake positions for ventilation purposes.
To make the exploration drive suitable for production purposes it will be enlarged from its current 3.0 m x 3.0 m to 4.5 m x 4.5 m.
The vertical level interval is planned at 15 m and stopes are accessed by reducing the decline dimensions after 25 m level development from 4.5 m x 4.5 m to 2.0 m wide by 3.0 m high, which accommodates load haul dump (“LHD”) loaders. The production drives developed within the stopes will have the same dimensions. At 2 m width it will result in planned dilution in areas where the vein width is less, something the PEA ignores.
From the mineralised drives 1.2 m x 1.2 raises will be developed as slots and escape ways and 3.0 m x 3.0 m raises will be mined for return air circulation. This will be carried out by a combination of mechanical and handheld excavation (more than 81%).
It should be noted that “conceptual” models have been used for heat and dewatering heat balance due to lack of data. This adds risks to the suggested mine design. In particular the assumption of a lower geothermal gradient than at the historical Vatukoula mine is reckless.
In a press release dated 18 January 2024 it was disclosed that first production material was extracted on 13 December 2023. Much of the update warned that early production would be of sources that were relatively poorly mineralised. This raises many red flags, even despite management putting a gloss on it as being “material (that) is ideal for use as feed stock to test the different gold recovery circuits during the initial stages of plant operation.”
Also apparent from the news release is that the company has reverted to handheld mining as “ideal for narrow vein mining as it is precise and enables the effective development of narrow drives, thereby minimizing dilution”. The company just does not stick to the plan as set out in the PEA.
Processing Operations
Metallurgical Testwork
Given the long history of the Tuvatu project, it is not surprising that it has a very long history of metallurgical test work involving 18 programmes between 1997 and 2020, not counting eight mineralogical studies. The mineralogy was found to be complex with many different sulphide minerals, very fine gold (average circular diameter of 7.7 μm) and the great majority of gold associated with calaverite (AuTe2).
The technical document summarises six comminution tests without specifically concluding that the samples were hard, but which is evident from bond indices that are high, typically between 18 and 20 kWh/t.
The discussion in the PEA report on test work is of a terrible standard. The discussion just lists what work has been carried out, but does not draw any conclusions nor inform how test results guided subsequent work to clarify issues.
Three process routes were investigated over time: whole ore leaching alone, gravity concentration followed by leaching and gravity concentration, and flotation followed by leaching. The discussion does not come to any definite conclusion but indicates a preference for including flotation. In the words of the technical expert: “The gold recovery tests indicate that the gold in the Tuvatu mineralization responded reasonably well to the process consisting of gravity concentration followed by further gold recovery by flotation and cyanidation. However, some metallurgical performance variations were observed in the test programs. Further test work should be conducted to optimize process flowsheet and conditions.”
It does not give much confidence about the forecast 87.5% metallurgical recovery.
From the 18 January 2024 press release it is apparent that management is not very confident about metallurgical performance as it states that the current 300 tpd “pilot plant phase” is on: “determining the best methods and parameters required to maximize gold recovery from each type of gold mineralization at Tuvatu. Mill operations to date have consisted of a start-up period and a campaign period with feed from different areas within Zone 2 and Zone 5.” Predominantly low-grade material has been put through the mill. In the December 2023 quarter, actual metallurgical recovery was only 75.7%.
Process Plant
The PEA assumed a plant with a capacity of 1,000 tonne per day (“tpd”), whereas the constructed plant has a capacity of less than one-third of this.
The process flow is relatively complicated including three stage crushing to 80% passing (“P80”) 10 mm followed by grinding to P80 60-65 μm. Integrated in the grinding circuit is a gravity separation circuit receiving one-third of the hydrocyclone underflow to recover coarse gold grains using centrifugal concentrators and a shaking table. The hydrocyclone overflow is subjected to flotation to produce a gold-bearing sulphide concentrate. This concentrate is ground in a vertical mill to P80 20 μm. Both concentrate and tailings are leached separately followed by a common carbon-in-pulp (“CIP”) leach circuit. The loaded carbon from the CIP circuit is eluded and the gold recovered through electrowinning and smelting to a doré.
Considering the complicated process and lack of economies of scale high processing costs must be expected.
Economic Valuation – Tuvatu Project
Metal Prices and Marketing Terms Assumed
This study has considered two price cases. One case uses the gold price of US$1,400/oz in the PEA study and another case uses the spot price of US$2,031/oz on 23 February 2024 as Base Case for this valuation cash flow model. The PEA cash flow model was recreated to determine whether the taxation model used is valid by giving the same overall tax amount as per PEA.
This valuation has ignored doré transportation, smelting terms and refining charges as having a negligible impact.
Production Schedule
The PEA assumes a very aggressive ramp-up in mine production for an underground mine that extracts its mill feed from numerous, very narrow deposits. The mine schedule assumes that the plant needs to be fed around 1,000 tpd, which is much higher than the current plant capacity. It results in a very short LOM with production shutting down in 2028 if the company does not substantially add to resources. When applying Taylor’s rule of thumb for capacity selection, depleting the mineable inventory of 1.4 Mt would optimally require a daily rate of 550 tpd, which is way lower than suggested in the PEA.
Crux Investor has drawn up its own schedule assuming a much more realistic ramp-up with plant capacity increasing from the current 300 tpd to 500 tpd in 2025. As plant expansion has not yet started, this ramp-up may well prove too optimistic. Moreover, Crux Investor has included a dilution of 20% to account for the much wider minimum width than modelled for mineral resources plus a degree of unplanned dilution. The dilution number is a guestimate and may well prove far too optimistic.
Figure 2.7.2_1 shows the difference between PEA and valuation production over the LOM.
Whereas Crux Investor could be accused of grabbing numbers out of thin air, the PEA schedule is definitely wrong as company execution substantially differs from plan. Considering the latest information Crux Investor is most probably erring on the optimistic side in terms of grade.
Operating Expenditure
Table 2.7.3_1 shows the cost structure suggested in the PEA study and used by Crux Investor for this valuation.
The PEA suggests that the total operating cost rate for Tuvatu is less than US$130/t milled, which is far below what a benchmarking exercise by Crux Investor on underground Canadian mines indicates. The discrepancy is aggravated by the costly processing cost of the hard and complex mineralisation that requires fine grinding to achieve proper liberation of the gold. Crux Investor records that the fixed cost component is very low with 10.7% for manpower and 4.8% for Others. For a small plant fixed cost should be a relatively large component, typically 30% or more.
Figure 2.7.3_1 shows the graphical relationship between annual treatment rate and total unit operating cost as blue dots. This is Crux Investor data collated from a large number of Canadian underground operations.
At 0.18 Mtpa total operating cost of between US$150/t milled and US$200/t milled can be expected. The rates used by Crux Investor convert to total unit cost of US$188/t over the LOM.
Annualised corporate office cash expenditure for the six months ending 31 December 2023 was US$2.9 million. Crux Investor has adopted this rate for its cash flow model as this valuation is of Lion One and not the Tuvatu operation alone.
The financial statements for the quarter ending 31 December 2023 shows that cost of sales relating to sales amounted to sales was C$2.5 million and relating to inventory C$3.1 million. Consolidated Statements of Cash Flows shows that only C$57,000 depreciation was included in the operating costs. This means that cash cost was almost US$400/t milled if the book entry to allocate expenses to inventory is ignored.
Capital Expenditure
Table 2.7.4_1 shows the capital cost estimates in the PEA study. The table has lost much relevance given that plant construction started on 28 September 2022 and the mine is essentially fully constructed (with a 300 tpd “pilot plant”) and first processing started.
The provisions all seem very low. For example for the small, complex processing plant the estimate for direct cost translates to less than US$500 per monthly tonne capacity. An estimate that is 50% higher would be more realistic.
Obvious omissions are provisions for underground drilling to firm up on the lode outlines for stope design purposes and closure cost. The PEA states that closure cost (unspecified) have been included in the model, but this is not evident from the summary table.
Lion One avoids giving updates on mine construction and development costs compared to estimates. Without having declared Commercial Production the fact that revenue and operating cost are recognised (i.e. not capitalised) indicates that the company considers itself as being in the operating stage. Yet, no total development cost has been disclosed.
When referring to the financial statements, the company invested in the financial year ending 30 June 2023 a total of C$55.5 million and in the six months to 31 December 2023 quarter C$27.9 million. Converted to US Dollars this amounts to US$62 million. This means that the initial provision has almost been fully spent, except that the operation has a capacity of 300 tpd instead of 1,000 tpd.
With reference to Figure 2.7.3_1 Crux Investor has included sustaining capital expenditure of US$100 per tonne milled except for the last production year. During production Year 1 an additional investment of US$10 million has been included to expand the plant to 500 tpd.
Royalties and Taxes
The PEA report gives the following details on the Fiji tax regime.
Corporate income taxes are levied at 20%. Income tax losses can only be carried forward for a period of four years, and there is no provision for carryback of tax losses. The carry forward of income tax losses has two tests: continuity of ownership and continuity of business.
Allowed for taxes is amortisation/depreciation of the cost of the asset on the basis of either a straight-line basis (at a lower rate) of on declining balance (at a higher rate). These rates are:
The cost of the acquisition of a mining lease or tenement and the cost of development of mines may also be written off in equal instalments in any five of the first eight years, commencing with the year in which the expenditure was incurred.
From the modelling it is apparent that the PEA only considered the initial and sustaining capital expenditure, ignoring the book value of the considerable historical investments made. Crux Investor has taken these into account. Unfortunately, the categorisation of the type of assets for which book values are given does not correspond with the categorisation of assets in terms of allowed depreciation. Crux Investor has used an overall straight-line depreciation of 20% for all categories.
Results
Table 2.7.6_1 summarises the LOM results for the PEA scenario and Crux Investor valuation for the base case gold price and the input parameters set out above.
Using the PEA parameters the project has an impressive operating margin of almost 65%. It however benefits only slightly more than four years of this to generate the funds to reimburse the shareholders. It should be noted that the tax model of Crux Investor arrives at US$2.4 million higher taxes than the PEA, indicating that Lion One has included slightly higher tax allowances. The NPV5 of US$120 million derived by Crux Investor is very close to the PEA’s US$122 million.
With the much longer LOM, lower average grade after adding dilution and substantially higher cash operating cost the Crux Model arrives at almost the same amount of operating cash flow, even US$1.3 million higher than for the PEA.
When accounting for the tax allowances on the existing book value of assets and much higher sustaining capital expenditure in the Crux Investor model, the company will have tax losses in the first five production years that will not even have been redeemed at the end of LOM. Lion One will pay no income taxes in Fiji.
Crux Investor estimates that net free cash flow will be just short of US$107 million at a gold price of US$2,031/oz. The NPV8 value of this is US$47 million.
Table 2.7.6_2 expresses the sensitivity of the project value as the change in Net Present Value per percentage point change in the main parameters: metal prices, operating expenditure and capital expenditure.
The sensitivity analysis demonstrates the very marginal nature of the Tuvatu project with the NPV8 increasing by 7.9% (US$3.7 million) for every percentage point increase in the gold price (i.e. US20/oz) and dropping by 4.4% (US$2.1 million) for every percentage point increase in operating cost (i.e. US$18.8/t milled).
Should additional resources be found of a similar quality to existing resources to extend the LOM by one year, the NPV8 will increase by around US$7 million.
The Enterprise Value of Lion One Metals at 23 February 2024
At the share price of C$0.47 on 23 February 2024, the market capitalisation for the 230.6 million shares is C$108.4 million, or US$80.3 million.
At 31 December 2023 the company had 38.7 million warrants outstanding, which are at a lowest exercise price of C$1.05 all well out of the money, and 8.7 million options which are all out of the money as well. The 2.8 million “compensation options” are also out of the money.
At 31 December 2023 the company had net current assets of C$19.0 million, but these can be considered fully committed to complete the mine and get to commercial production. In fact, the company has just completed a share placement of 24.15 units comprising one share and one warrant (exercisable at C$0.65) that has raised C$12 million gross. The company states that “the net proceeds received by the Company from the sale of the Units will be used for development and ramp up expenses at the Tuvatu Gold project located in Fiji, as well as for general corporate expenses & purposes.” In other words these proceeds are fully committed and can be ignored for the calculation of Enterprise Value.
At 31 December 2023 loan principal and accrued interest was C$37.2 million
Based on the above an Enterprise Value on a diluted basis for Lion One of C$145.5 million (US$108 million) is derived as shown in Table 3_1
This Enterprise Value is 2.3 times the NPV8 calculated by Crux Investor.
Appendix - Comparison Between Longhole Open Stoping and Shrinkage Mining Methods
Shrinkage Mining
Shrinkage mining is conducted in a vertical or near-vertical plane, and at an angle greater than the angle of repose of the broken ore.
After the vein is accessed a tunnel (called drift) is blasted along the strike of the vein for a predetermined strike distance. At each end of the stope a raise is developed upwards to the next level. This raise serves to give access to man and equipment at higher levels. In shrinkage stoping the ore is mined in successive flat or inclined slices, working upward from the level or the bottom of the block of ore. After each slice or cut, enough broken ore is drawn off from below to provide a working space between the top of the pile of broken ore and the back of the stope. Usually about 35%-40% of the ore will be drawn off during active mining in the stope. The drawing of excess broken rock was known as shrinking and hence the name associated with this method: shrinkage stoping.
The shrinkage stoping is shown schematically in Figure 4_1.
The illustration shows numerous draw points along the length of the vein. Another option is to scrape the broken rock to central draw points and drop it down.
Once the newly drilled holes are drilled and loaded, the miners and equipment will be withdrawn. At that time, an additional portion of ore will be withdrawn to create sufficient space to account for the swell of the ore that will be blasted. Once this has been done, the round will be fired. Then a portion of the ore will be withdrawn to create space for the overhand stoping to continue.
After active mining has been completed to the level above or to the floor pillar, the rest of the broken ore is drawn off from below, leaving the stope empty. It may be filled with waste later to prevent general movement and subsidence or to permit mining of pillars left between stopes during the first mining.
As much of the ore blasted is not directly available for processing, shrinkage mining requires considerable initial investment in developing numerous working places to have sufficient plant feed.
Longhole Open Stoping
The discussion on this mining method has been extracted from a report written about Harte Gold, where a variation called Retreat LHOS was employed, a method that reduces the number of draw points that need to be developed.
Level access drifts are be developed from the ramps at predetermined vertical intervals to intersect the mineralised zone and then branch into sill drifts that will be developed along strike. The difference in level interval is determined by the need to limit dilution, larger distances providing cost benefits at the expense of higher dilution.
Based on the tabular, steep dipping and narrow nature of the deposits longitudinal longhole retreat stoping was selected as mining method. It has the advantage of being a relatively low cost underground mining method, giving good productivity, but at the disadvantage of giving little control to avoid dilution due to geometrical changes in the sidewalls.
Figure 4_2 shows schematically the longitudinal longhole retreat mining method.
Typically, four to five levels will be combined to form a number of mining blocks. Within each mining block a bottom-up stoping sequence will be used, with mining commencing on the lowest level of the block and progressing upward, level by level. The last level will be mined by drilling the blastholes upwards, removing the ore beneath the previously mined out block that was backfilled with paste using extra cement for the lowest level.
This type of stoping requires a regular shape of stopes and ore boundaries with everything inside the drill pattern sent to the plant. When using mechanical equipment the drifts need to accommodate such equipment that can result in considerable dilution where the vein is narrow.
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