Thursday, March 10, 2011

Follow Up on Frontier Resources

As posted in a previous note, the main question for Frontier Resources (ASX: FNT.AX) is whether the deposit on New Britain has a reasonable chance of proving to be a large scale, economically producing, high grade mine. This is significant because the initial exploratory data was reported to be very positive (could this be a major deposit of Gold in a new territory, relatively unexplored New Britain of Papua New Guinea? -- similar to Lihir of Newcrest Gold (the 7th largest gold deposit in the world, discovered in the past 5 years?)

We won't answer this out with 100% certainty, but it seems we can be able at least shed some light on this main question, by asking few sub-questions first: 1. Does the management team have the connections and experience to at least get the ball rolling on development, if reserves are economic?

Second, are there high grade deposits nearby (in Papua New Guinea?). Mineral deposits are formed by geological processes, and these processes can be similar in nearby locations.

Third, what are the (known) geological processes for forming gold? This might sound too esoteric, but really this helps a lot, at least in the case of oil, in looking for new reserves (really many analysts won't even speculate on this, but for example, I know a bit about oil formation theory, and so for example, took a look at Petrobras of Brazil, looked at their producing wells, and saw huge territories unexplored plus offshore areas next to rivers -- good signs of future oil discoveries and Petrobras subsequently has announced very large

First question -- actually this is probably the best question -- management experience. The Chairman and CEO Peter McNeil is also CEO of another PNG based gold mining firm in addition to Frontier -- New Guinea Gold Corporation. Frontier Resources has only 2 full time employees in management, it appears, the CEO and a co secretary. (this data is really hard to find, is not in the Annual Report -- have to infer since they don't state how many employees).

New Guinea Gold is also mainly on New Britain, same management structure, just McNeil and a secretary and non-exec directors (so essentially it is a twin of Frontier except drills different prospects) has drilled 12 projects, got good exploration results (grades of over 2 g/ton, but hasn't been able to develop these projects, one problem was that crushing the ore turned out to be a problem, so gold production has been disappointing. The stock has been down a lot -- stock price on the Venture Exchange of Canada of New Guinea Gold has gone from .6 in 2007 to 0.1 currently -- the market has lost confidence that management will bring any projects into production and/or sell deposits.

Frontier Resources is also a vehicle to explore New Britain, is up a lot with the recent report of grades but -- really reading the reports from New Guinea Gold Corporation they sound sort of similar in terms of grade (some reports of very high grade 30-60 g/ton then most of above 2 g/ton) -- but New Guinea Gold hasn't been able to bring these online.

I've seen a small management team be CEO's of more than one mining co before --example New Gold and Silver Bear Resources -- both headed by the same management team -- note New Gold is doing great while Silver Bear isn't. So this isn't a bad sign necessarily -- what you do want to see is proven experience getting mines to production and building value. New Guinea Gold isn't this, Frontier so far isn't proven (wondering actually why two co's in the same region for the same type of deposit -- Silver Bear is at least for silver while New Gold is for gold, makes sense -- wondering if Frontier is another vehicle to make investors forget about lack of success at New Guinea Gold).

Anyway -- on the first question overall summary is "iffy."

Second question, yes there are good, relatively recent discoveries is Papua New Guinea. The most publicized is the LIhir Gold discovery on tiny Lihir Island in PNG: Amazingly, this deposit has 28.8M ou of gold reserves at an average grading of 3.5 g/ton (which is extremely high, most grades are 1 g/ton or lower) and ranks #7 on the world's largest gold deposits. In other words, huge! Lihir was bought out by Australia's Newcrest Gold in 2009, and Newcrest states that it wants to produce about half of its production from Lihir going forward (Newcrest is an amazing stock, Australia's largest Gold producer, has rocketed up to a $A30Bn market cap (3rd largest gold mining co in the world). Note that Newcrest's other major producing mine, Cadia East in Western Australia, produces over 1M ou per year of gold but from an average
grade of about 0.5 g/ton (so Lihir is about 7x more concentrated). Cadia East
has reserves of gold of about 18.7M ou, so Lihir has about 50% more gold. (in
other words, Lihir is a world class deposit)

Two other PNG projects appear in the top 200 largest gold deposits. Allied Gold owns Simbiri which is located also on a tiny PNG island (called Simbiri) about 30 km north of Lihir -- average grade is between 1.0-1.5 g/ton with total reserves of 2M ou (so much lower and smaller than Lihir, but LIhir is unusually large and high grade). Harmony Gold and Newcrest co-own Hidden Valley on the main lsland of PNG, with an average grade of 1.7 g/ton and total proven resource of 1.2M ou.

For gold mines in Indonesia, there are three in the top 200 (Indonesia could have similar geology to PNG, both are island countries and actually the main island of PNG is split evenly between Indonesia and PNG). Interestingly, Indonesia's gold deposits are all relatively low grade, below 0.5 g/ton, including the massive Grassberg mine, owned by Freeport (FCX), which has approx 35M ou of gold at an average grade of 0.4 -- note this mine is ranked #3 in terms of reserves of gold, and has already been in production since 1975 so could be depleted in terms of its higher grade ore.

In summary to question 1, there are high grade deposits in PNG and it doesn't appear that PNG has been a major destination of mineral exploration budgets (only a few firms, Newcrest, Harmony, Allied and some minors including Frontier searching so it is possible. Actually the next question is, what did the exploratory mineral info look for Lihir and the other major deposits? Were these close to info coming about concerning Andewa? Will try to find this.

Third question, (this is getting lengthy) gold appears to be formed by three main geological processes. First process, the Witwatersrand deposit in South Africa (largest in the world, produced approx 40% of the world's gold, but now is largely depleted except for underground mining, was in production since the 1910's) was formed approx 3 bn years ago -- the earth is 4.5 bn years old so South Africa is one of the few areas with surface areas formed during this time. Almost all other areas (with the exception of parts of Australia) have been reformed by more recent geological processes. The best theory is that during this period of the earth's history (3 bn years ago) heavier metals were flowing from the magma to the surface (gold, platinum) and the earth was in a different phase of history -- the gold is left over from this period, but not covered in vast amounts of overbuden unlike almost all other areas. This process is probably unique to S. Africa, won't explain Papua New Guinea gold.

Second process Carlin type deposits, found in Nevada -- gold is completely dissolved in minerals -- unique (I thnk) to mainly North America -- won't go into detail.

The journal Science explains a process of gold formation unique to Pacific Islands
-- water flow accumilates gold over relatively short periods (couple 100,000 years). Will reference for this (getting tired) -- anyway, need a lot of flowing water and a trap, can be a good source for PNG, for New Britain -- was how Lihir gold was formed.

Anyway so the summary would be management -- medium to negative, close-by deposits -- moderately positive, gold formation -- positive. Overall however probably question 1 is the most indicative and so overall I would say "iffy."

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