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Date: August 24, 2005
Bendigo Mining Tantalises – Only To Disappoint
By Our Man In Oz
In time, the Australian city of Bendigo will reclaim its status as host to a world-class goldmine. With more than 13 million ounces of the stuff under the city’s streets the lure is just too great for investors to resist. But, the latest surprise cost blow-out at Bendigo Mining, the ASX listed the company doing the digging under its namesake city in the state of Victoria, has shaken confidence in a project which has been 20 years in the making, and which has attracted, and repelled, waves of supporters.
Rather than cost A$338 million to develop twin mines at the northern and southern ends of the Bendigo goldfield, the latest estimate is A$375 million. On its own, the A$37 million increase is not of great concern. After all, in a climate of rising commodity prices everyone is being hit for six when it comes to buying fuel, steel, and just about anything else. The problem with Bendigo is that the surprises just keep on coming, and while no-one doubts that the gold is in the ground the worry is that the longer it takes to get out, and the more it costs to get out, the worse the eventual financial return – not to mention the potential call on shareholders for more capital.
Management at Bendigo is putting a brave face on the increased cost, and the market is recovering from the initial shock which sliced A10 cents off the share price, a fall measuring A$25 million in market capitalisation. Since the August 5 drop from A$1.17 to A$1.07 Bendigo shares have bounced back to A$1.14. But, as with a series of earlier setbacks, dating back to the 1990s when noted British financier, the late Sir James Goldsmith, was a believer in Bendigo, the pain was not in the construction cost, it was in the revelation that shareholders may be asked to chip in another A$140 million in equity over the next few years.
The latest plan, and there have been so many variations that direct comparisons are difficult, is to start production at the south mine by the middle of next year at an annual 120,000 ounces, rising to 200,000oz after three years. Work is well advanced on this phase. The bigger north mine is now forecast to come on stream in another six or seven years (2011-to-2012) and produce 400,000oz a year. When both mines are humming the overall project will be producing 600,000oz a year at an estimated cash cost of less than A$200/oz – or, around US$150/oz. Unlike many other short-lived Australian goldmines the big difference is that Bendigo will have a life of at least 25 years, and probably a lot more as exploration expands the known resource.
For Bendigo’s long-serving chief executive, Doug Buerger, it must be a case of wishing he could just go to sleep and wake up tomorrow with everything in place, because the production targets and costs are extremely attractive. It’s the getting there that is proving horribly painful – and explains why South Africa’s Harmony Gold quit its stake in Bendigo last year, and Australia’s richest man, media tycoon, Kerry Packer, also walked away some years ago.
After the latest cost increase was announced Buerger told Melbourne’s Herald-Sun newspaper that he was more confident than ever about the project despite rising costs. “The ore body stands up and looks more and more beautiful,” he said. “It is now simply a case of finishing the decline, drilling out the ore and finding out exactly where the gold is,” he was quoted as saying.
The problem for Buerger, and his blue-chip board of fellow directors, is that by Australian standards their project sometimes seems to be moving in slow motion – as well as routinely changing in size and shape. Elsewhere in Australia, goldmining is a much simpler business which seems to be little more than dig and deliver. Why, some investors might ask, is Bendigo so difficult, and why has it been 20 years in the planning, design and construction? For answers to those questions a little history, geology, geography and demography need to be understood.
. History: Bendigo (the city) is an Australian inland icon. Built on the profits from 865 tonnes (22 million ounces) of gold dug over 103 years of mining between 1851 and 1954 it features some of the grandest Victorian era buildings in Australia, including a magnificent cathedral which stands out on the skyline in a manner similar to Salisbury cathedral in southern England.
. Geology: Bendigo’s gold is “nuggetty” and contained in “ribbons” which repeat themselves at depth. The grade being chased by Bendigo Mining is a rich 12.7 grams a tonne contained in an estimated 33.6 million tonnes of material. The fact that the gold occurs as nuggets makes it easy to process, but the devil’s own job to prove to reserve status because conventional drilling can be a hit and miss affair – hit a few nuggets and you have a bonanza; miss by a millimetre and the area is technically considered barren -- quite wrongly.
. Geography and demography: Bendigo Mining’s south mine is located a stone’s throw from a residential area of the city. Mining will be under the city, at great depth, but with all the issues that come from digging under homes.
When complete, Bendigo has the potential to be regarded as one of the world’s top goldmines. But, right now there are some shareholders who question the old saying about it being better to travel than to arrive. In Bendigo’s case the road to success has been very bumpy, there are still a few miles to go – and the ticket collector is thinking about adding a surcharge to the fare in the form of a fresh share issue.
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