Astral Resources: finding an upside when gold reserves are going down

This article is a sponsored feature from partner Astral Resources Ltd. It is not financial advice. Talk to a registered financial expert before making investment decisions.

When Irish prospector Patrick ‘Paddy’ Hannan made his famous gold discovery in 1893, even the wildest imaginations could not have foretold what that moment would really come to mean.

In the years since, Kalgoorlie’s ‘Golden Mile’ has produced an estimated 60 million ounces of gold, worth an eye-watering $170 billion, and cemented the region as perhaps the most prolific gold mining jurisdiction in the world.

But it’s one of those unpalatable yet unsurprising facts that 130 years of continuous production has taken its toll. The mining operations that have populated Kalgoorlie and its surrounding areas for so long are simply not what they used to be. And while the rate of gold production is still going strong, there are concerns about the extent to which producers are able to maintain their reserves.

In a 2019 interview with the ABC, S&P Global Market Intelligence analyst Chris Galbraith highlighted the disparity between depleting resources and new discoveries.

“There’s a lot of exploration going into Australia and it is bearing fruit,” Galbraith said.

“Unfortunately, it’s simply smaller fruit, so those large deposits that have been identified in the past, they’re simply not materialising.”

But for junior gold explorers in the Kalgoorlie Goldfields region, like Astral Resources (ASX:AAR), this presents a potentially significant opportunity.

The monster asleep at Mandilla

Based in Perth, Astral Resources owns the Feysville Gold Project 14km southeast of Kalgoorlie and 100% of the gold rights at the Carnilya Hill Project, located a further 20km to the southeast.

Both are impressive assets in their own right, but it’s Astral’s Mandilla Gold Project that has Managing Director Marc Ducler all hopped-up.

“Mandilla, that’s our flagship project. And in terms of its scale, it’s probably the biggest project — well, it is the biggest project within a 100km radius of where we are in that Goldfields area,” he says.

“Mandilla, that’s our flagship project. And in terms of its scale, it’s probably the biggest project …within a 100km radius of where we are in that Goldfields”

Located 70km south of Kalgoorlie, the project hosts 4 key deposits: Theia, Iris, Eos, and Hestia — all of which are yet to be fully understood. That’s despite more than 125,000 metres of drilling over the past 3 years and an updated resource estimate delivered in December 2022 that already measures more than 1 million ounces.

Of those million ounces, 878,000 are contained within Theia alone. Iris hosts 111,000 ounces, while Eos and Hestia account for the remaining 32,000 and 12,000 ounces, respectively. All up, Mandilla potentially offers the best rebuttal to Galbraith’s otherwise truthful assertion that large deposits are “simply not materialising”.

But despite Astral’s dominant focus on Mandilla, the next round of drilling will start at Feysville, which boasts a 116,000-ounce resource of its own. Of the 8 targets at the project, 3 — Kamperman, Ethereal, and Hyperno — have been designated as priority areas for drilling in the third quarter of 2023 before the rig rolls on to Mandilla.

“What we see with Feysville is the opportunity to either generate some near-surface, reasonable-grade supergene deposits that’ll easily truck to Mandilla, given it’s only 50km away by road,” Ducler explains.

“The other option is, we actually think there’s potential for some relatively high-grade fresh material as well. Now, whether that’s a small high-grade pit or the ability to demonstrate that there’s going to be a pretty juicy underground, that’s work for us to do.”

As for Carnilya Hill, the nature of Astral’s ownership — 100% gold rights — means it’s a conveniently low-cost project to hold.

“If our neighbours” — including Lefroy Exploration (ASX:LEX) — “do some work in the area that is exciting to us, and we think there’s analogy that will come across to our tenure, then we’ll go test the concept,” Ducler adds.

“But until then, we’re happy just to hold it as a free option and focus on Mandilla first, Feysville second. That’s more than enough to keep us busy.”

Explore or acquire?

Here is the essence of the opportunity; and though it would be remiss to treat it as anything other than a theoretical possibility, it sits firmly in line with a major trend to have emerged in recent years.

If major gold producers are indeed running low on resources; if it makes poor economic sense that their behemoth processing facilities should be firing at anything less than full capacity; if explorers like Astral are uncovering what are likely to be substantial resources only a stone’s throw away, then logic suggests there are probably some deals to be done.

Though he was perhaps speaking from a more global perspective, Harmony Gold (JSE:HAR) CEO Peter Steenkamp blew the lid off earlier this year when he acknowledged that consolidation in the gold mining sector was “inevitable”.

“Exploration has been lacking for such a long time, and for people to replace assets, they will have to look at what their neighbours have and what the opportunities will be,” he told Reuters in March.

“Exploration has been lacking for such a long time, and for people to replace assets, they will have to look at what their neighbours have and what the opportunities will be”

Take, for example, Westgold Resources’ (ASX:WGX) recently rejected $177.3 million bid for Musgrave Minerals (ASX:MGV), which owns projects in the Murchison region of Western Australia — roughly 300km northeast of Geraldton — and in the Musgrave region of northwest South Australia.

“Westgold’s view is that Musgrave’s plan to construct a new, small processing plant within close trucking distance of two established larger processing plants is ambitious,” Westgold Managing Director Wayne Bramwell said in June.

“Their proposed development path costing $121 million in startup capital at a PFS level of certainty materially escalates risk to Musgrave shareholders, as it exposes them to all the uncertainties, challenges and dilution associated with project development. It is a high-risk and inefficient use of their shareholder’s capital at a time when securing capital for small-scale, single-asset companies is becoming more difficult and costly.”

Westgold may have a point. But there is perhaps a more pertinent one in its 2022 Resources and Reserves Statement, which showed ballooning rates of production in stark contrast to steadily declining gold reserves — now down to 2.1 million ounces from 2.62 million in 2019.

The graph below illustrates Westgold’s gold production and ore reserves.

Like many things, gold exploration is a process built on seizing opportunities. It’s about keeping your options open and staying flexible. But you cannot seize what you cannot see. So, for Ducler and the Astral team, it’s a matter of diligence to consider how a similar scenario might play out in its own neighbourhood.

Take, as another example, South African gold mining giant Gold Fields (JSE:GFI) and its St Ives Project, located 80km south of Kalgoorlie and 20km east of Mandilla. It hosts a plant capable of processing 4.7 million tonnes of ore per year, which pumped out a total of 376,000 ounces of gold in 2022 — a 4% drop from the 393,000 ounces it produced in 2021.

In 2015, the project hosted three open-pit mines and one underground mine. By 2022, the operation had transitioned to one open-pit mine and two underground mines. That shift to predominantly underground operations reflects, again, the ugly truth that the age of near-surface gold resources in the Kalgoorlie Goldfields region might be coming to a close. 

As do the numbers. In 2015, St Ives’ open-pit reserves stood at a healthy 1.1 million ounces. By 2022, that figure had sunk to just 242,000 ounces. Even with the addition of underground resources, St Ives — according to its 2022 Resources and Reserves Statement — will run out of reserves by 2030 if Gold Fields can’t get its hands on any more.

And so a decision must be made: pursue organic resource growth at great cost and potentially great risk, or — as Steenkamp suggested — look to your neighbours?

“If you look widely within the gold sector at the moment, there is a lot of discussion about the majors and even the mid-tiers struggling to replace ounces, so they do look to acquire them rather than explore for them,” Ducler says.

“If you look widely within the gold sector at the moment, there is a lot of discussion about the majors and even the mid-tiers struggling to replace ounces…”

“You’ve got Newmont taking over Newcrest, but I think that’s just about scale, they just want to be the biggest and the best. You’ve had Ramelius take over Apollo and Breaker — they’re looking to buy those ounces. And I think that also is an opportunity for us, because people that would potentially look to buy our ounces are buying them to feed into existing processing infrastructure, so they don’t have the capital costs associated with building something new. They can literally grab those ounces and start making money.”

Though he was reluctant to make any bold predictions about how things might play out for Astral, Ducler is well aware of how things could go. He’s been there before.

A proven track record

In August 2016, Ducler, as Managing Director, listed a gold explorer called Egan Street Resources (ASX:EGA) on the ASX. The company’s key asset was its wholly owned Rothsay Gold Project, approximately 300km northeast of Perth, for which the Egan Street team released a Definitive Feasibility Study (DFS) confirming its viability in February 2019.

A mining proposal for the project was approved by Western Australia’s Department of Mines, Industry Regulation and Safety in June 2019, which caught the attention of Silver Lake Resources (ASX:SLR), whose Deflector mine and processing hub sits 85km northwest of Rothsay.

By the end of July 2019, Silver Lake had announced its intention to acquire Egan Street, citing the benefits of a bolstered resource base.

“The acquisition of Egan Street will allow Silver Lake to consolidate an additional JORC Resource of 454,000 ounces and JORC Reserve of 200,000 ounces at the Rothsay Gold Project, and provide a near-term development opportunity to introduce a new high-grade ore source to an upgraded Deflector processing facility,” Silver Lake said at the time.

In December 2019, the all-scrip deal closed, providing Egan Street’s shareholders with a healthy return on their investment and continued exposure to Rothsay through a holding in Silver Lake.

“When that finished, one of the board members from Astral gave us a ring and asked us whether we wanted to take over the keys to the company,” Ducler says.

“We had a look at it, and we had a look specifically at Mandilla, and we thought there was a real opportunity to get some scale here. And if we could get scale at Mandilla, then we were confident in our ability to achieve a successful outcome for shareholders. So, that’s why we jumped in. As a team, we’ve certainly got form, we’ve done it before, successfully made money. And our intention is to make money for our shareholders again this time.”

How that looks remains a matter of speculation. But in any case, the work involved is the same.

Nose, meet grindstone

The ultimate aim, Ducler says, is to maximise value for Astral’s shareholders. For the time being, that means drilling. 

Astral is looking to publish a Scoping Study towards the end of this year, which will inevitably mean converting inferred resources to the indicated category. Drilling is also necessary to deliver another updated resource estimate for Mandilla, which is scheduled for release early next quarter.

“All we can do is advance the project as quickly and as cost-effectively as we can. If we get to a big enough scale where it absolutely makes sense for us to develop it ourselves, then that’s the way we’ll head,” Ducler says.

“And if an opportunity for a takeover presents, at the end of the day, we’ll put it to our shareholders. If our shareholders want to take the money and run, then our job is to represent our shareholders as best we can. Otherwise, we’ll run towards developing this project and turning it into something that’s profitable.”

Either way, Astral is in an enviable position. The company is sitting on what is likely to be a significant gold resource in an industry plagued by a distinct lack of them.

“I mean, we’ve been mining in the Kalgoorlie Goldfields area since the 1890s,” Ducler adds. 

“So, near-surface gold has become more and more difficult to find. And we have it. In my mind, it means that Theia absolutely gets developed. It 100% gets turned into a mine. It’s just who owns it when it does, and how do Astral shareholders make really good money out of it?”

Write to Oliver Gray at 

Images: Astral Resources Ltd
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Written By Oliver Gray
Originally from Perth, Oliver has a keen interest long-form journalism. He has written for a number of publications and was most recently Contributing Editor of The Market Herald’s opinion section, Art of the Essay.