MCO: Zoning in on Targets

TRENT ALLEN, Resource Capital Research (04/01/2010)
"MCO's Morning Star mine is located 120km ENE of Melbourne, in the Eastern Goldfields which is one of the most significant historical goldfields in Australia, with ~6moz produced since the 1860's gold rush days. MCO is recommencing production for the first time in nearly 50 years.

MCO's Strategic Position: MCO has developed a tenement position of over 220km2 giving it control over the historically rich production ground in the Woods Point dyke swarm, known to have historical production of around 2moz of gold. MCO's vision is that a gravity mill at Woods Point could become a hub processing facility from other regional mining operations developed by MCO in the future.

Mine Rehabilitation: Since 1993 the Morning Star mine has been totally rehabilitated and rebuilt by MCO from surface to Level 10 (310m underground) for a total cost exeeding A$28m. This has allowed resource definition and access to several key underground targets for initial production.

Resource Status: In 2Q08 MCO confirmed a 910koz resource at 6.3g/t Au for Morning Star mine.

Production Strategy: MCO re-commenced mining at Morning Star in August 2009, initially 40t/day increasing to 80t/day in 1Q10. Current development is along the 0.15m-0.6m thick Maxwell Reef, above 9 level, with assays returning up to 137.4g/t Au. In 4Q09, development samples averaged 10.77g/t Au and reef samples 22.95g/t Au – more recent sample groups have averaged 44.4g/t Au and 75.2g/t. These are well above resource grades. Other targets are Dickenson and Shamrock reefs between 3 and 4 levels, and Burns Reef (6 sub level). Ore is being stockpiled. MCO is building a stand-alone treatment plant at Morning Star. Capacity initially ~80ktpa (10tph). Mining will be between 30ktpa and 50ktpa in CY10, est. production 15-25kozpa in 2010. Metallurgical testing in 4Q09 found gravity concentration and a leach circuit gave recoveries of ~95%-99%, or ~92% from gravity alone at a 300μm coarse crush. Currently, the plan is to use gravity to produce a saleable concentrate for CIL processing. Construction has commenced (by Gekko Systems): operation is expected in Jun '10.

Comparison with Ballarat Goldfields: The disaster that befell Lihir Gold (ASX:LGL) at Ballarat after the purchase of Ballarat Goldfields NL for A$350m has naturally made investors wary about historical high grade mines being re-started in Victoria. It is, however, important to note that the geology at Ballarat (sedimentary/saddle reefs) is less homogenous and more nuggety than Woods Point (igneous dyke-hosted reefs) and LGL's large scale 'bulk mining' mining approach was unsuited to the ore body and very different to MCO's planned small scale selective mining of reef veins.

Regional Exploration: Excellent potential for a 3-4moz resource base, Regional drilling is expected in 1H10, focusing on the historic Reliance Dyke (chip assays to 12g/t Au). MCO is managing a JV with Hong Kong's Ample Rise Investments, which will invest A$4.5m over 2 years to earn 51% of regional Mining Licences MIN5299 and MIN5241.

Corporate: Outstanding options (MCOOB), exercisable by March 2010 and currently well in the money at A$0.10/share, should provide a cash injection of A$12.3m—conversion is underwritten by BBY Ltd.

Investment Comment: Mining grades from Maxwell Reef are well in excess of the Morning Star resource. Gearing up to a 30-50ktpa operation in 2H10 should see gold output in the range 15- 25kozpa, or higher. Opex should be ~A$600/oz giving solid margins. If MCO can continue to achieve predicted grades and commence milling on schedule, a share price re-rating is expected. There is excellent resource upside and the JV with Ample should fast-track development of regional holdings."

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