Capricorn reported its Karlawinda operation in Western Australia had received 150 millimetres of rain over several days, following 133mm of rain in January.
The weather events resulted in the loss of eight days of mining.
Gold production in the March 2024 quarter is now expected to be around 26,000 ounces of gold and Capricorn said it still expected to achieve the lower end of FY24 guidance of 115,000-125,000oz at the upper end of all-in sustaining cost guidance of A$1270-1370 an ounce.
Even taking into account the impact, Karlawinda’s low costs make it one of the most cash-generative assets in the ASX mining space.
“While this is clearly a negative update, resulting in the loss of about 5000oz of gold production (and circa A$15 million revenue) compared with our prior forecasts, it illustrates the strength and profitability of Capricorn’s operations,” Bell Potter Securities analyst David Coates said.
“Earnings downgrades as a result of this interruption to operations are just 7% for FY24, thanks to Capricorn’s low operating costs, which provide a significant buffer in these events.
“Low costs also mitigate Capricorn’s single mine risk and are part of why it carries a premium rating in the market compared with peers.
“There is little impact to Capricorn’s attractive investment metrics.”
Jarden analyst Jon Bishop described the release as having a “negligible” bearing on his valuation or investment thesis and questioned if it was even material.
“Thus, we think the announcement can be viewed as good corporate disclosure but equally construed that risks (as with any mining operation) remain that could result in Capricorn missing the low end of guidance,” he said.
Perhaps the caution and disclosure are a result of past experience.
Capricorn’s management is no stranger to a severe flooding event. A decade ago, the same team ran Regis Resources and were forced to suspend mining at the Duketon operations for weeks after receiving 165mm of rain in 48 hours.
Bishop also pointed to Capricorn’s strong recovery after Karlawinda was suspended for 20 days in late 2022 due to a contractor death.
Management premium
Capricorn has long enjoyed a management premium.
Its team, led by Mark Clark, previously ran West African miner Equigold and then successfully turned Regis from a penny dreadful into ASX 200 producer.
Prior to Capricorn, the team built five projects but raised just A$120 million in equity.
Those efforts created more than A$3 billion in equity value and resulted in the payment of more than $400 million in dividends.
The team is considered to be the master of developing large, low-grade open pit gold assets (Karlawinda’s reserve grade is just 0.8 grams per tonne gold) and they manage it all in-house with no contingency built into capital costs.
It was proved once again when Karlawinda was delivered on-time and on-budget in 2021 at the height of COVID-19 border closures.
Mt Gibson
As well as being a low-cost, high-margin producer, Capricorn is one of the few ASX 200 gold producers with a genuine organic growth option.
Capricorn acquired the ‘forgotten’ Mt Gibson gold project in mid-2021 for just A$40 million, an acquisition that earned the company the Dealer Award at Diggers & Dealers 2022.
Clark has described it as a Karlawinda lookalike though the early numbers show that it could be even better.
An April 2023 prefeasibility study outlined capital costs of A$339 million for an operation that will produce 1.34Moz of gold over 10 years, based only on current reserves.
Average annual production in the first 7.5 years is forecast at 152,000ozpa at AISC of $1420/oz.
The maiden reserve of 1.45Moz at 0.9g/t, reported earlier in 2023, was based on the previous resource of 2.76Moz.
The company recently boosted the resource at Mt Gibson to 3.2Moz at 0.8g/t gold, while the reserve was based on a conservative gold price of just A$1900/oz, providing further upside.
Capricorn is aiming to start construction later this year, funding the project via Karlawinda cashflow.
Successful execution of Mt Gibson means Capricorn’s annual production should more than double from 2026.
“All mining companies face operational risks and current labour efficiency, permitting delays and inflationary environment are far from over,” Bishop said.
“However, we believe a record of execution and cost management should ensure Capricorn outperforms its peers over the medium-to-long term.”
Both Jarden and Bell Potter retained buy ratings. Jarden reduced its price target by A2c to A$4.75, below current trading levels. Bell Potter’s price target dropped A5c to A$5.95. Argonaut analyst Hayden Bairstow actually lifted his price target from A$6 to A$6.20, as he believes the strength in the gold price offsets the downgrade.
