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Dalradian Resources (DNA.to) and ore sorting (from IKN436)

This was one of the sections in The IKN Weekly IKN436, sent to subscribers Sunday evening. Since then (one and a half trading days ago) DNA has lost another 3.4%, which makes the chart a a couple of the lines dated by the market 48 hours. But the rest is fine.


Resources (DNA.to) and ore sorting
A word or three are needed on the
short post I stuck on the blog Monday (23) regarding the news out of Dalradian
Resources (DNA.to) that morning (24) on its “ore sorting” study that purported
to be a positive development for its Curraghinalt project in Northern Ireland.
Although not in the usual geographical zone for The IKN weekly we have covered
and this stock and traded it before (for a reasonable profit, way back when) so
it’s one I keep on the radar.  Here’s
what I wrote (it was a very short post):
I’m surprised
Dalradian (DNA.to) isn’t down a lot more today…
…after its NR this morning. Maybe the market doesn’t get how negative
this ore sorting news is, what with the company dressing it up to make it look
like a positive.
I got feedback from several people,
including mining engineers and investment pros, who tended to say basically the
same thing (paraphrased); “But it IS a positive!”. However, as this five day
chart comparing DNA to the XAU index shows…

…as the week wore on the market
decided to side with me on this one, rather than my correspondents or DNA
management (and to be really pedantic, when that post went public DNA was
trading at $1.62, so from then to Friday’s close it lost 15c, or 9.3%).
Therefore this note today.
First let’s consider the headline,
Ore Sorting Increases Grade of a Bulk
Sample by 55% at Dalradian’s Curraghinalt Project
”, which certainly looks
good splashy at the top of the document. Then we get to read how DNA can start
with mineral grade from 9.52 g/t gold, then, “Using x-ray and laser technology, plus additional screening prior to
processing, the amount of non-mineralized (waste) material that would be sent
to the mill in an operating mine was reduced by 35.8% and the grade increased
by 54.6% to 14.72 g/t Au with a gold recovery of 99.3%”,
and that, “Similar results would be expected if
implemented into a mine scale situation
.” Now that sounds nice, but when
you keep reading you find that the theory DNA is running with on this
technology means that, “Using the base
case feasibility cost estimate of US$27.8/tonne for milling, this could result
in savings of US$52 million against a revenue loss of approximately US$12.6
million (at 1,250 US$/oz) due to recovery being reduced by 0.7%
Ah but wait up, that’s on the DNA
Feasibility Study (FS) of a 10 year mine life, i.e. 40 quarters, and the opex
saving is nearly $40m. Wait, I can do that math! Then we need to consider that
DNA has 280.26m shares outstanding, so if we divide the quarterly cost saving
into that we’re talking about a difference of 0.35c per share per quarter…or
1.4c per share per year. And this company’s share price jumped 4c at the Monday
bell while the rest of the sector had a bad hair day? Does not compute. And we
haven’t even figured in the extra capex for the required machinery yet. So, two
brief paragraphs we’ve gone from a headline of 55% higher grade to less than a
third of a cent per share of extra earnings per quarter.
So far so mediocre, but all that
doesn’t even take into account the real negative. One highly experienced mining
engineer was quick to pick up on the news and his comment to me (I’ll leave out
the lines with the Anglo-Saxon vocab, he’s a mining guy after all) was, “Ore sorting is a very
desperate sign”. Agreed. Curraghinalt is a project that has had the spectre of
excess mine dilution hanging over it for as long as I can remember. What we got
from the company last week was an admission that “yes, this is a problem”
because the whole concept of ore sorting isn’t to turn robustly economic
grading ore into wonderstuff (the spin on the NR), but marginal grade into
economic grade. In so many words, the optics on this NR are poor, DNA is
flagging its major technical issue to the world and instead of coming up with
something that dramatically improves the theoretical economics, gives us
something that in per share terms is as close to a wash as you can get.
And by the way, why did this
company jump straight from doing a PEA on the project to a FS without producing
a pre-feasibility study, then straight after the FS is published start coming
up with adjustments? Isn’t the FS the document that sells the project to the
highest bidder? And don’t get me started on the Northern Ireland local community
and national Brexit risk to this project. At its current C$412m market cap,
this one is an easy pass.

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