Investigating the KSZ’s Olympic Dam potential

As readers will likely be aware, we recently released the results of a conceptual economic viability report for the iron oxide-copper-gold (“IOCG”) target we have at our Kalahari Suture Zone (“KSZ”) project.

We put a lot of thought into what this work could tell us before commissioning it. After all, most projects are drilled first and then get an economic study wrapped around them afterwards, assuming that attractive enough mineralisation is encountered.

But in the end, we came to the conclusion that the IOCG target at the KSZ merits a different, and perhaps more unconventional, approach.

The results of the study go a long way towards explaining why.

First off, the IOCG target at the KSZ is deep.

It’s true that the data sets exhibit striking similarities to the ones that were used in taking the original decision to drill the mother of all IOCGs, Olympic Dam, back in the 1970s.

But there’s also a crucial difference: the coincidence of the geophysical and the magnetic anomalies in the Great Red Spot portion of the KSZ lead us to suspect the presence of an IOCG deposit is a great deal deeper than the corresponding anomalies were at Olympic Dam.

IOCG mineralisation at Olympic Dam starts at depths of around 300 metres, whereas in our model of the KSZ, IOCG mineralisation would likely start at around 900 metres.

That’s a big difference for a small company like Kavango, especially when we’ve already got prospective nickel targets to focus on at comparatively shallower depths.

Our hope is that when we come to set our drill rigs turning once more, we can target both potential orebodies with the same set of holes.

But before we do that, we have to have a very clear idea that it really would be worth going down those extra three or four hundred metres.

Hence, we commissioned the study to examine the potential viability of an IOCG orebody at that location in Botswana, and at that depth.

Weighing up the risks and potential rewards

In creating the report, we selected various standard pricing assumptions such as US$1,600/oz gold, US$18/oz silver, US$3.50 copper/lb and US$28/lb uranium, and began to crunch the numbers from there. In choosing these prices we aimed for what we consider to be a conservative approach.

Three different scenarios that used various grades and assumed a 30-year life based on the discovery of 300mln tonnes of mineable ore delivered net present values (using a discount rate of 10%) of US$3bn, US$4.13bn and US$8.05bn for the project respectively. The lower number assumed a higher capex, and accordingly also delivered a lower internal rate of return, at 17%.

But the IRR for the project when modelled as an Olympic Dam lookalike ran up as high as 31% on that US$8.05bn NPV number.

And that is a big deal for a company the size of Kavango.

At this stage all these figures are conceptual only; there is no guarantee yet, for example, of what grade, if any, we might hit. However, the answer to the question as to whether the IOCG target is worth drilling looks like an emphatic yes for the time being.

But before we can say that with certainty, there is more work to be done.

We need to see if we can indeed drill both the nickel target and the IOCG as part of the same programme, we need to work out exactly how big we’d want the programme to be, and we need to work out how much it would cost.

Given the potential rewards on offer, the temptation might be to get back down there on the ground with the drills and get going as fast as possible. But geophysics-led exploration is a pain-staking business. We’d rather take our time and get it right.

For now, we know that the conceptual target is well worth it, and we are moving forward with renewed confidence.