Southland's output black gold for Gympie

Staff Reporter

After a long period dragging its heels on the share market, Gympie Gold Ltd looks like it has finally slipped into top gear.

For the past few years, shares in the Sydney-based gold and coal miner have hovered in a price range of roughly 30-40c, steadfastly refusing to break out. But last September, a group of central European bankers did Gympie a favour. They agreed to limit lending of bullion, putting a rocket under world gold prices. Bullion quickly shot from around $US250 to $US327.30/oz, its highest level in nearly two years.

That price increase was enough to get investors excited about Gympie, which produces around 35,000 ounces of gold each year from its Gympie Eldorado mine in Queensland.

Gympie’s shares barged through the 40c barrier and - apart from the odd market fluctuation - haven’t looked back since.

But it wasn’t just higher gold prices that revived interest in the stock. Gympie also announced a net profit of $5.9 million for 1998-99, a 158% increase on the previous year. Revenue climbed steeply to $46.2 million, up from $19.2 million previously.

The dramatic improvement was due to the start of longwall coal production at the recently acquired Southland operation in New South Wales. In a difficult year for coal due to the Asian economic crisis, Southland pumped out $27 million and turned in a profit of $6 million. Gympie described the mine’s performance as "particularly satisfying", given the scepticism in some quarters about the ability of a gold miner to revive what had been a troubled operation in the strife-torn Hunter Valley region.

Suddenly, Gympie assumed the glint of a stock on the move. In November, clients of stockbroker PG Intercapital forked out $5.9 million through an issue of shares at 38c each. Those canny investors would have been well pleased to see the stock touch 50c in late December/early January, amid buy recommendations from a couple of brokers.

The company has good growth appeal, and management is betting on a further appreciation in the share price, based on the terms of a recent option issue. The options have a strike price of 80c, exercisable by June 30, 2001. "If we accomplish the milestones we have set ourselves at Southland and Gympie, then we’d expect the share price to be above 80c by June 2001," said Harry Adams, Gympie’s managing director.

"Southland is part-way through extracting its first longwall panel and developing its second," he said. "It is expected to continue to expand production as development goes out further. And Gympie is completing feasibility studies for a new mine. With both of those things going ahead, you would expect the share market capitalisation of the company to reflect that."

In reality, Gympie Gold is a rare beast on the ASX - a junior miner that has proved it can juggle coal and gold on one balance sheet without scaring off the punters. However, Gympie has made no secret of the fact that it plans to eventually split up the two businesses, giving shareholders the choice of either a pure coal or gold company.

"Our intention is to separate the businesses in the next two years, but there is no commitment to do so," Adams said. "The only reason we would separate them is if we felt the market would put a higher value on the two parts. From time to time, we also get other ideas put to us in terms of merging one or other business with another company, but so far none of those proposal have been worth pursuing."

For the time being, Gympie’s growth plans revolve around expanding both gold and coal production, while continuing to lower costs. Adams predicts a net profit of $8 million in the fiscal year ending June 30, 2000, with Southland expected to contribute the bulk of that figure. Plans are already in motion to double Southland’s production to 2 million tonnes per year by 2002. "The infrastructure capacity is already there," Adams said. "So the doubling over the next few years is really a matter of ensuring that development gets out far enough ahead of production for output to increase, and secondly to expand our sales."

Gympie has shown that Southland can make good money in a bear market. There should be good upside if coal prices increase, though that might not be for some time yet. At press time, Gympie and other coal producers were in the midst of the annual contract negotiations with Japanese steel mills. Some analysts were tipping another price fall, but Adams was more optimistic. "I'd be surprised if we had to swallow a price cut," he said.

He points out that local producers have cut their operating costs sharply over the past couple of years, a move which has "assisted customers in Japan".

"Moreover, the economic downturn in Japan has turned out to be nowhere near as hard as was foreshadowed a year ago. So, on the balance, the circumstances no longer point to a price reduction for coking coal." Gympie also expects healthy demand for its Southland product. "Our semi-hard coal is a cheaper substitute for more expensive coals during this downturn. So however tough the market is on hard coking coals, it is a little less tough on semi-hard coal because it is a cheap substitute."

Meanwhile, the company is set to embark on a major revamp of its Gympie Eldorado underground gold operations in Queensland. Final feasibility studies on a $35 million underground decline development are progressing well and Adams is confident of a go-ahead by June. The capital cost includes the price of expanding the processing plant to handle the extra ore, and driving a decline to 550m vertical depth. "But the bulk of that ($35 million cost) will be self-funded out of production from the shallower parts of the orebody on the way down," Adams said. "The first phase is to drive down to the top of the Inglewood lode at about 200-odd metres vertical depth. And while we continue declining down, we’ll be producing gold. So the up-front net outlay might only be around $10 million."

The aim is to boost Gympie's annual production to 100,000oz by 2002. Due to the better economies of scale, and the ability to get bigger mining equipment down the hole, cash production costs are expected to fall by roughly $100 per ounce to $250/oz. Exploration has also given the company encouragement. "The most significant thing that happened in 1999, was we proved that the goldfield persists beyond the (Inglewood) system that we are currently mining," Adams said.

First-pass drilling on a new prospect yielded immediate results. "We found mineralisation just below the alluvial cover of the Mary River. It is quite plausible that we have found the surface expression of the next major system along in the gold field. If so, it would be a serious proposal for another development with potential for a couple of million ounces."

It is still early days, and much more drilling needs to be done to confirm the early success. "But it is the same rock type, and all the scout drill holes we put down hit mineralisation. So clearly we are not fluking - we’re onto something, and none of the drilling is below 80m. So there is a lot of follow-up to do." Importantly from a mining point of view, the nearest prospect is only 400m away from the path of the proposed decline. "It will allow us to branch over to the new discovery zone to test whether it is a major system or not," Adams said.

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