It is often said that good management can get the absolute best out of an operation, whereas bad or poor management can seriously "stuff up" or ruin a good operation. An indication of the changes that have occurred since FML acquired CRE was given in FML's June 2012 quarterly report with Laverton's cash costs down to $1203/oz from the $1554/oz in SQ 2011 after which FML took full control. (It should be noted that FML couldn't completely acquire CRE because a Chinese company bought almost 15% (the FIRB limit) on market above FML's offer).

However in the June quarter 2012 : reduction from 4 diggers to 2 diggers (hence less personnel and contractors and fly-in / fly-out costs), improvement in mining rates from 400BCM (bank cubic metre)/hr to 600BCM/hr, reduction in mining costs from $9/BCM  to $7/BCM which included a 33% reduction in unit drill and blast costs from $1.83/t to $1.23/t. Unit costs in the month of June were 26% lower than what they were in the March Qtr 2012........(following a change in the site resident manager). And further expected costs reductions were reported as coming in the September quarter 2012.

But take the last financial year under full CRE management control to June 2011, cashflow reads as sale of ore $111.5m, suppliers/employees $161.6m - what they lost $50m !! in the FY to June 2011 as the gold price stayed about the same in A$ terms from A$1481 (US$1240/oz @ 0.837/US$) on 1 July 2010 to US$1460/oz (US$1553/oz @ 1.063/US$) on 22 June 2011....but they survived through an oversubscribed rights issue that raised a net $47.8m, so the borrowings were borrowed $15m repaid $15m - or was it that simple ?

However, I am getting ahead of myself here and need to go back a bit. We / ERA wrote up CRE ahead of its mill conversion at Laverton having taken over the old Sons of Gwalia Laverton assets,  when things still looked rosy with interests in China and uranium in the Rum Jungle region of NT, and completed our report in April 2006, after the  TSX listing in February 2006.

In August 2006 $25m was raised (A$5m cash and a 25,478oz gold loan @ A$785/oz, plus 90,000oz sold @ $850/oz and 100,000oz in forwards @ $860/oz) to repair the old plant in a gold and cash loan, followed by a cornerstone Canadian investor acquiring 42m shares @ 35c for almost $15m, $6m being from key stakeholders in CRE, so actually only almost $9m to CRE. By December 2006, two North American based directors had joined the board.

The plant was refurbished, commissioned and poured its first gold on 21 March 2007 and reported an upgrade from 1mtpa to 1.5mtpa with key components to be completed in April 2007.

Also in March 2007 as part of the growth strategy CRE entered into an alliance with Deutsche Bank (DB) in which DB took a majority holding for injecting $120m into CRE (almost 316m shares @ 38c, it actually became 321m shares and $122.5m when completed in June 2007). And in March 2007, $5m in convertible notes @ 9%pa were issued.

In June 2007, the plant was treating 1mtpa, although production was a bit lower than the 90,000ozpa expected, being closer to ~2,000oz per month. A second ball mill was commissioned in September 2007 along with a 3-stage crusher from Malaysia, replacing the hired crusher, and production improved with grade to ~4,000oz in September 2007. For SQ 2007, net cash outflow was $7.3m being revenue $9.2m less $16.4m production costs. In Dec 2007, the original resident manager resigned.

A change of MD also occurred in October 2007 with the original MD leaving to run the intended uranium (Uranium West) spin-off (which fell through). The plant was upgraded to 1.5mtpa but gold production was still ~4,000ozpa. In May 2008, CRE closed out the original $20m gold and $5m cash loan. An alternate crusher was introduced in May 2008 with production improving to ~6,400oz per month in June 2008. However, realised revenue for JQ 2008 was $15.3m against production costs of $25.2m or about a $10m loss, which with the loan repayments/close-out resulted in a $36.9m loss for JQ 2008.

At the end of June 2008, CRE had cash of $50m, having apparently burnt over $70m in the past FY2008. Depending on your viewpoint, it was not actually that bad, net cash in June 2007 was $64.1m, which had become $32.6m in June 2008, with a net $15.7m lost in FY 2008 due to purchasing gold at spot to deliver into hedged options. In July 2008, CRE temporarily suspended its Laverton mining operations.

In February 2009, CRE entered into an MOU with Barrick and subsequently an OPA (ore purchase agreement) in June 2009 to deliver its ore at 450,000t/qtr or ~1.8mtpa to Barrick's Granny Smith operation. In August 2009, CRE purchased the 50% of the JV that Barrick had with CNX (Carbon Energy - which came out of Metex [MEE] over MEE's Chatterbox Shear), plus the other Laverton tenements that MEE had over Lancefield etc.

Metex acquired Lancefield, and Beasley Creek (West Laverton) etc from WMC in 1995 and after unsuccessful exploration in a number of areas discovered the Chatterbox Shear in SQ 1996, but were unable to treat it as they had locked themselves into an agreement with then Placer Pacific (who were taken over by their parent Placer Dome and later Barrick)'s Granny Smith operation.

It always remained something of an enigma as to why the Chatterbox Shear ore was never treated for so long, but perhaps it was due to the agreement that Metex entered into with WMC over the tenements it acquired, involving a gold price based royalty that started at A$525/oz and became worse as the gold price rose. Not necessarily too onerous, but still a penalty.

You have to hand it to WMC, when it came to establishing royalties, they were masters. As shown by the treatment costs that the nickel companies still pay to use the WMC nickel concentrator (that for many years has been the most profitable unit in BHP's Nickel West), and the SIG (St Ives Gold) royalty that Alacer pays over some of its Higginsville tenements and was based on a gold price of  A$600/oz.

Anyway, the OPA that CRE signed with Barrick also (unfortunately for CRE) had an additional cost associated with the gold price, aside from various penalties, agreed throughput, treatment time limitations etc. So the first ore in the OPA was treated in October 2009. In January 2010, CRE placed 26.6m shares at 20c and raised $5.3m, to aid the $5m purchase of tenements from CNX and Barrick that was reported in November 2009.

Also in March 2010, $5m of convertible notes were extinguished, such that at the end of June 2010, the net cash of $7.1m at the end of June 2009, had become net debt of $23.1m with cash of $0.3m, or in other words another $30m had been lost/burnt in FY2010. CRE reported in April 2010 with its MQ 2010 report that it had "a strong, debt-free balance sheet".

Clearly finances were tight, so CRE borrowed $15m from Indago Resources on the 1 July 2010 to be repaid within 12 months by 30 June 2011. Interest was to be paid at 10%pa paid quarterly in advance plus $24/oz on 75,000oz of gold production, or $1.5m plus $1.8m plus the $15m.

However, it would appear that although CRE sold its non-core manganese assets for $3m in August 2010, CRE seems to have missed a quarterly interest payment or something, because the Indago loan was renegotiated in November 2010 to become a $5m immediate repayment from the CRE rights issue, the $24/oz on the 75,000oz and a 2% royalty on all CRE tenements after the 75,000oz gold-royalty like payment had been made (ie the one-off interest payment over a year had become a 2% mineral royalty in perpetuity...understandably Indago subsequently consolidated and then bought back its shares and had delisted by August 2011).

CRE announced a rights issue to raise $45m in November 2010 to re-open the old Lancefield gold mine for ~$33m and produce 50,000ozpa to 70,000ozpa based on initial studies. The rights issue was a success, resulting in it being oversubscribed and raising $48.1m in January 2011. In March 2011, CRE announced it was debt-free having repaid its outstanding loan to Indago (...apart from the agreed 2% royalty).

In May 2011, CRE raised a further $8.84m in convertible 7%pa debt (the $8m original offer was oversubscribed - you have to give the CRE board credit, they could raise money).

However, it would appear from a recent site visit that hardly anything was spent on Lancefield, let alone re-opening it. There is a huge earthquake-like crack in the ramp (visible in Google Earth) ahead of the portal, where the ramp fell the stope width of the non-refractory West lode (which had been mined by room-and-pillar on an ultramafic floor and WMC had robbed the pillars on retreat before selling it to Metex). The other lode at Lancefield is the sulphide refractory Main lode with a stiff, stressed, blocky basalt hangingwall.

CRE blamed losing part of the funds it raised on excess rainfall in the March Qtr, temporarily restricting its ore deliveries to the Granny Smith mill.

So, we come to the $50m lost in 2011, or the net debt improving from net debt of $23.1m in June 2010 to net debt of $6.8m as at 30 June 2011, despite having raised / sold $59m and borrowed and repaid $15m. Receipts from the sale of ore increased from $65.8m on 73.5koz in FY2010 to $111.5m on 88.6koz in FY2011, while the payments to suppliers and employees increased from $63.1m to $161.6m, turning the ~$2.2m operating profit in FY 2010 to a $53.9m operating loss in FY 2011.

Now if the total CRE directors' salaries (excluding options) had not doubled from ~$434,000 to ~$871,000 (total remuneration for the directors and exec officers rose from $1.7m in FY 2010 to $4.3m in FY 2011, with employee benefits rising from $2.4m to $7.2m) then they may have been able to meet the Indago interest payment and not incur that 2% royalty.

The irony is that CRE had sufficient funds to have its own almost new fully functioning 2mtpa plant, yet alone fixing the defunct crushing circuit, but instead burnt its way through at least $193m for no profit.

FML launched their takeover offer for CRE in June 2011, and CRE must have thought we have scored our "get out of jail free" card.

However, FML is in the gradual process of "sweeping clean" or "dusting out the cobwebs" at Laverton initially focusing on production from the non-WMC royalty Burtville at Laverton and potentially establishing 5 to 10-year life operations at both Coolgardie and Laverton as part of its transformation from an ugly duckling into a swan -  more of which is expected to be contained in next months' column - being Focus part 2.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.

Figure 1. Visible Gold from Focus Minerals' Dreadnought Open-cut at Coolgardie