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9/26/17

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.



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Dalradian 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):

...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.