Celtic Resources

Source: Energy Digital

Date :29/08/2007 14:47:05

Production's the priority

Founded in 1996, the mixed mining company Celtic Resources is incorporated in Dublin and trades on London’s AIM market, having moved from the Exploration Securities Market (ESM) of the Irish Stock Exchange in 2002

Written by John O'Hanlon and Produced by Alex Smith

Celtic Resources’ operations are in Russia and Kazakhstan, but while these countries can be politically, geographically and culturally challenging they are no more daunting than anywhere else to someone who, like Celtic’s managing director Kevin Foo, knows the region backwards. Kevin has been in the mining business for 37 years, 17 of them in the Central Asian regions of the Former Soviet Union.

Mining is about production. Like anything else, getting the metal onto the market is crucial. But it’s a long game. With prices hovering around the $675 per ounce mark, gold is doing well considering that five years ago the price was half that. However the chairman of the World Gold Council Pierre Lassonde, who is vice-chairman of one of the bigger players Newmont Mining, has recently said he thinks it will reach $750 before the end of this year. In the longer term Lassonde is talking about the possibility of a four-figure price: "I believe that gold will have three zeros after the first number; I just don't know what the first number will be."

While Lassonde is known for talking up gold futures, we have to take seriously his contention that the gold market will remain bullish for another 20 years. That makes it an attractive investment at present, a good business to be in, and explains why investors are prepared to put their money into companies that don’t even produce gold, but specialise in acquiring assets with potential.

However Celtic Resources is beyond this stage and it intends to concentrate on production from its three operating mines in Kazakhstan: the 100 percent-owned Suzdal and Zherek gold mines and the Shorskoye molybdenum mine, a 50/50 joint venture with local partner KazAtomProm, says Kevin Foo.

Assessing and extracting gold

Gold production involves a lengthy process of exploration, assessment and development of the assets, and the share value of a mining company derives as much from its independently audited reserves as from its current income from production. Celtic’s currently estimated resources – the total amount in the ground – stand at around three million ounces of gold, 1.04 million tonnes of copper and 21.6 million pounds of molybdenum. However as the asset is explored these figures can go up – or down. Celtic has done well here, for example reporting earlier this year that its resources at the Suzdal mine in Kazakhstan had increased by 51,000 oz to 1.4 million – four percent more than in January 2006. “That’s what happens when you find splays of the ore body running off from the main resource: sometimes they lead to a new ore body that we didn’t know was there. Sometimes in mining you don’t even find the ore you are looking for, so it’s good when you find more than you thought you had!”

The strategic goal is to increase this all important resource base to between seven and ten million ounces. However cash flow is also a priority. In 2006 Celtic increased its gold production level by 62 percent to more than 60,000 oz. “This year we are hoping to exceed 90,000 oz from our main Suzdal mine and the Zherek mine,” he says. “Our target is to get to 300,000 oz a year production, and to keep costs below $350 per ounce and preferably below $300. We think this is doable,” he affirms. “I have a general rule that if your operating cost is 50 percent or less than spot price, then you will stay in business. We like to have an actual margin of at least 50 percent on our businesses.”

Celtic had this level of resources until May last year when it completed the sale of its interest in the massive Nezhdaninskoye goldfield in Russia following protracted legal wrangling. Though some may have regretted that the company would no longer have a stake in this large resource, it was a good outcome for the shareholders because it netted over $80 million, a return of three times the original investment, and it enabled Celtic to expand its productive operations in Kazakhstan. Foo proposes to take a long term view of the exploration assets, and concentrate for the time being on growing turnover.

Turnover is of course driven by production. In 2006 turnover was $34.5 million, a 120 percent increase over 2005. This year Foo hopes to double that figure and in 2008 to increase sales to $60 million on gold production alone, with a further $10 to 15 million from molybdenum sales. He would like to maintain net profit in the region of $40 million: “Over the next few years I’m just looking to return a consistent profit for Celtic but at the same time meeting our growth targets. At that level, with a market cap of around $160 to 180 million, and a PE ratio in the region of four to one, I’d say that makes us quite an attractive proposition.”

The BIOX plant

Lucky is the prospector who can pick gold from the ground in the form of nuggets. Many f gold ores are known as ‘refractory’ – like refractory children they are reluctant to give up their goodies. In technical terms a refractory gold ore is one that is naturally resistant to recovery by standard cyanidation and carbon adsorption processes. These refractory ores require pre-treatment for cyanidation to be effective in recovery of the gold.

A refractory ore generally contains sulphide minerals that trap or occlude gold particles, making it difficult for the cyanide leach solution to release the gold. Pre-treatment options for refractory ores include roasting, pressure oxidation, ultra-fine grinding – and bio-oxidation (BIOX) treatment, which involves the use of bacteria that promote oxidation reactions in an aqueous environment.

The technology has been used in Australia and South Africa but not, until Celtic built a plant at Suzdal, in the FSU. The plant was completed in late 2005, as part of an investment of more than $80 million in mine development and plant equipment. “We have made some real headway on the technical side by developing BIOX,” says Foo. “Ferrooxidans bacteria occur naturally in all sulphide ore bodies. All we do is concentrate them and “train” them to digest the sulphides very quickly in stirred tanks. It is a natural process but it does release the gold from the matrix it is locked up in and that in turn allows us to use normal cyanidation on the product. This has been the big move forward at Suzdal.”

The BIOX process has a number of advantages over other treatment methods. It requires neither high temperatures nor high pressure to make it effective, and offers reduced capital cost, simplicity of operation, robustness and low environmental impact. It can also work unaffected by extremes of temperature, an important consideration in this part of Asia where temperatures can vary between +40 °C in summer down to -45 °C in winter. The BIOX reactors are situated outside the building, but an enclosed walkway on the reactors was included in the design. “We have been refining the process over the last couple of years and it is now at the point where it really works brilliantly,” says Kevin Foo. “That in essence is why Suzdal has turned around, and we are confidently predicting 90,000 oz a year production there.”

The BIOX plant is earning its keep by processing third party ores too, he adds. “We also import concentrates from Greece and put them through this plant, which shows you can import concentrates from anywhere, put them through the BIOX process, and both parties make money. We are going to be doing more and more of this, especially with products from Kazakhstan and Russia. The FSU is full of these refractory gold ores and we have the capacity to treat them now.”

Base but not despised

Another of the company’s strategic objectives is to develop base metal properties: “We are not purely a gold producer and subsequent to the Eureka acquisition late last year we are very much into copper and molybdenum, “says Foo. “The assets that we acquired are fantastic and we are looking for more, especially in Russia and Kazakhstan.”

Molybdenum is well known as an additive in lubricants but the main demand comes from the steel industry, which uses about 60 percent of global supply. Because of its extremely high melting point, weldability and anticorrosive properties it is widely used as an alloy, especially in stainless steel and high performance steel used in aeroplanes for example, though even mild steel has a little molybdenum in it these days.

So with a market price currently around $32 a lb and strong world demand it is quite attractive to have a molybdenum mine, says Kevin Foo. “The price is driven by the growth of stainless steel and high corrosion resistance steels prices, as well as by the increasing use of stainless steel in construction and in oil refining, for example. We are planning to produce 1.5 million lb of molybdenum this year and we have capacity to double that with the Shorskoye plant. Unlike a lot of startup companies in molybdenum exploration and early stage development, we are already in production and even if there is some turndown in prices as some of the larger operators get their old molybdenum resources going again we will be well insulated, we feel.”

Celtic acquired the Shorskoye molybdenum asset back in 2000, but relinquished control of it when it floated Eureka Mining Plc on the AIM market in December 2003. However in December last year it acquired the assets of Eureka including Shorskoye, two copper/gold deposits in southern Russia and two exploration projects in Kazakhstan. The Eureka acquisition allowed Celtic to opt for a fast track to molybdenum production. “When Eureka started we had a choice whether to do it in a normal way, develop a mine with feasibility studies, build and operate a plant, spending maybe $100 million capital but we chose a different route. We went into a joint venture with KazAtomProm and split the mine and the plant 50/50, as a result of which we are in production three years earlier than we would have been.” Given the rapidly increasing demand for molybdenum and firm prices, this is a good result for Celtic Resources, he says.

Asian perspectives

Kevin Foo’s experience makes him lean towards the joint venture option in Russia, while retaining 100 percent ownership of the Kazakhstan gold assets. Kazakhstan is a good place to operate, with good infrastructure inherited from its strategic importance in soviet times, and it is politically stable. “President Nursultan Nazarbayev has been in power since 1991 and he has taken the country from a destitute former soviet satellite to an engine house for growth. Kazakhstan’s growth rate has been 10-15 percent in recent years. It is heavily reliant on oil and gas and minerals – but so is Australia if it comes to that!”

Russia too has great potential though life there is more complex. Far from being put off by having had to sell Nezhdaninskoye, Foo is keen to develop the assets in Russia on the basis of its joint venture agreements with AGL, a subsidiary of the Russian industrial group ICT “They have been terrific partners and are very well connected. The deal is that they manage the project through to bankable feasibility study. Once the feasibility study is produced we then look at financing.”

The assets in question were the Miheevskoye and Tominskoye copper/gold projects, both part of the Eureka acquisition. However at the end of July Celtic sold the Miheevskoye mine to the Russian Copper Company (RCC) for $33 million

"We had a choice of trying to develop two major projects in the

Chelyabinsk region and it made sense for us to balance our portfolio and to sell Miheevskoye to RCC as it is very active in the area, is a major copper producer and is very motivated to develop the mine," said Foo. "Our net cash recovery on this deal entirely covers the total cost of the Eureka acquisition and we are left with two excellent projects, Tominskoye in Chelyabinsk, Russia, and the Shorskoye molybdenum operation in Kazakhstan."

Within the parameters he outlined, Kevin Foo is keeping all options open. The company may diversify into nickel ore even uranium, but these are secondary considerations at the moment to his main message that Celtic is firmly in production and that 2007 and 2008 will be its real turnaround years for it to hit its 90,000 ounce target.