John’s Mining Journal: Where next for Xtract Resources?

John Cornford reviews the prospects for Xtract Resources after last week’s stunning rise.

After last week’s Xtract Resources (LON:XTR) excitement (and after my lucky mention) some readers might be wondering if the share’s quadrupling in two days, and subsequent 40% retraction over the next two, was just another of those spikes one often sees in AIM minnows.

I can reassure them! It wasn’t a normal spike, and there’s still time to buy into more excitement. But how long it will last is, of course, the question.

I described the background two weeks ago. Like all mining exploration when drilling starts on an already promising looking target, punters, both knowledgeable and many more less knowledgeable, start to buy.

But even though its first drilling report on January 12^th at Xtract’s Racecourse prospect within its four Bushranger exploration licences seemed good, the shares rose only modestly, on trading volume merely double the normal up to then. That was because the drill was still within what had been estimated as a probable resource body by previous drilling, including by Anglo American in 2014 and 2015. Its results had produced the inferred resource of 350,000 tonnes of copper (including 40,000 tonnes of gold equivalent) that has been known for some time.

That drilling (five holes in total) and resource calculation had enabled the production of a conceptual diagram of the shape of the resource, which was published by Xtract in June. It was in the very approximate shape of a somewhat mangled carrot at a 45% angle, with the thick end at the bottom, at a vertical depth of 500 metres below surface, where it would be relatively easy to mine. 

Up to two weeks ago, drilling had been only across the width of the carrot, four of the five drills being within a very limited span near the top, with only one across the wider part below.  Xtract’s, first drill, reported on Jan 12^th, was the first along the carrot’s length, but at that date was still only within the conceptual thick end of the carrot. In other words, while confirming that copper mineralisation extended all the way along (a very good result on its own) there was nothing as yet to show whether the deposit was any larger than thought so far.

All that changed dramatically on January 15^th when Xtract reported that its drill had reached 100m beyond the conceptual carrot bottom, and was still in copper mineralisation which was getting stronger. And the drama heightened after the weekend when trading volume exploded to 135 million shares, pushing them up to 8.5p, on Xtract reporting that its drill was now 280m beyond the original bottom and still in strong mineralisation.

Only for the shares to retrace sharply over the next two days, on trading whose volume equalled that of the previous two strongly rising days.

With the usual hindsight, that was understandable. The knowledgeable, as well as traders, took their quick and juicy profits after the company, on January 20^th, announced that its drill had reached the (new) bottom of mineralisation at approximately 340m beyond the conceptual one.

And the insiders also knew that Xtract had taken quick advantage of the rise to tap its brokers’ chums for a cool £5m at 4.5p earlier that same day. The shares plummeted 30% immediately on the announcements.

So that is why the shares are where they are today. Probably seriously oversold, because the excitement is almost certainly not yet over, with more drilling planned soon in order to define ‘the carrot’ more precisely, and to check whether it really is bigger than thought.

Apart from the merits of an already measured deposit of 350,000 tonnes of copper at a shallow depth in a highly supportive jurisdiction, only 100 miles west of Sydney, and with infrastructure not far from civilisation, is the chance (although still a long way from reality in my view) for Racecourse to become significant. Investors’ eyes are now turning to the buy-back agreement with Anglo American, where, if Racecourse confirms a copper resource of 2 million tonnes (5.7 time larger than currently) AA has the option to buy back 80% of it at a ‘fair’ market value. (AA can, however, buy back at less than 2Mtonnes if it wants to.)

At today’s $8,000/tonne copper price, and valued at 3% which is probably a conservative margin to pay for what will be a cheap-to-mine resource, that would be worth $384m – or 40p per Xtract shares now in issue after the £5m raise.

But, as I say, only if Racecourse can get to that size. And as to that size, there is now frantic speculation and back-of-the-envelope calculation among the punters, which no doubt will govern how the shares react to drill results over the next few weeks. Which is why I’ll now delve into a little geometry.

So far, all anyone can go on to calculate size, is the ‘carrot’, and a few dimensions, along with the JORC resource estimate. But without knowing how the copper is disseminated throughout the deposit, or the exact shape of the carrot, any such calculation will be very crude indeed. But it is all we have to go on until, as Xtract’s CEO has promised, an ‘expert’ might give out a better estimation – perhaps this week.

On the original ‘carrot’ resource of 71m tonnes of ore/rock, its volume (at 3 tonnes/cu metre) would be 24 million cubic metres. Assuming the resource is a regular cylinder, of the original 600m length as shown in the diagram, it would need to have an average diameter along its length of approximately 225m. That compares with the ‘carrot’ dimensions as estimated from the five drill results across it which (in the diagram) range between about 200m (at the thick end) and 100-150m at the thin end. 

Bearing in mind those five drills would have been very lucky to strike right across the centre of the carrot each time, so may well only have grazed it, those measures seem to be roughly in the right ballpark.

The drills starting now are to be at right angles to Xtract’s first along the carrot’s length – i.e. across its thickness to confirm the five already drilled, and it is their thickness, via reported drill intercepts, which will show whether or not Racecourse might be ‘on course’ to meet AA’s buy-back condition.

At the newly discovered mineralised length of 940m, assuming the thickness is the same, and copper dissemination is the same, one could say that the deposit is already 56% bigger than the JORC estimate. So how much thicker would the width have to be to meet AA’s 2M tonne target?

The answer is an average diameter of 430m – some 2-3 times the ‘intercepts’ already found by the first five drills.

So there you have it. If the upcoming drill results show those sorts of intercepts, then punters will pile into Xtract on the prospect of 40p per share from Anglo American – probably within 2-3 years. 

But I am, of course, only talking of Xtract’s Racecourse prospect, which is side-lining its others. These include its adjacent Bushranger licences (which are not part of the AA buy-back agreement) and its Africa projects which are on the verge of generating cash (though small beer compared with Racecourse’s potential).

There should also be other relevant news over the next few weeks and months. Particularly important will be confirmation from laboratory assays of the copper (and gold) grades, which at the moment are being estimated from less accurate hand-held spectrometers. All this, and particularly the ‘expert’ opinion, will feed in to punters’ actions.