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Westgold works to bring Starlight underground mine online sooner

Westgold Resources Ltd.'s planned acquisition of private underground mining contractor Australian Contract Mining Pty. Ltd. could see the Starlight underground mine in Western Australia come into production earlier than expected.

The Australian miner has begun commissioning the processing plant at the Fortnum project, and while Westgold is currently reviewing its full-year guidance for the project, Managing Director Peter Cook believes the Starlight mine could come into production sooner to help meet the company's previously announced guidance for the operation.

"Our guidance was 37,000 ounces. I think we're still capable of achieving that," the executive said June 8 in an interview on the sidelines of the Association of Mining and Exploration Companies Convention in Perth, Australia.

"We're reviewing it, but I think there's a lot of options at Fortnum. The key one is bringing our Starlight underground mine, which can be the core feed source, on earlier, and of course this move to own [Australian Contract Mining] just makes it a hell of a lot easier.

"The whole process of contracting and tendering and all of that is now shrunk into a very short [time frame] around the boardroom table decision."

Westgold is continuing to dewater Starlight, with access likely to be re-established early in the September quarter.

The company, which was spun out of Metals X Ltd. in late 2016, expects its first substantial gold pour at Fortnum to happen in the week of June 12 and the company is just weeks away from reaching full production.

"Certainly next quarter will be a full quarter from Fortnum and it should be at its expected level of an annualized rate in the 70,000-ounce- to 80,000-ounce range next quarter," Cook said.

Westgold is targeting 340,000 ounces this year and is aiming to boost that to over 400,000 ounces per annum by the end of 2019.

Meanwhile, the company expects to realize immediate savings from the acquisition of Australian Contract Mining.

"We're always looking at our costs," Cook said. "So when you mature your projects to the point that they become operational again, you've got to focus on lowering costs. So the next A$100 [per ounce] we're going to lower out of costs is going to come in mining."

Westgold's average cash operating costs are between A$1,100 per ounce and A$1,150 per ounce and all-in sustaining costs are between A$1,200 per ounce to A$1,250 per ounce.

Somers & Partners analyst Duncan Hughes said in a same-day client note that the acquisition looks like a good decision and will enable Westgold to remove the contractor margin at three of its operations.

The bulk of the purchase price of around A$28.5 million is off the balance sheet, with Westgold to issue 14 million shares and pay only A$2.5 million in cash.

"This makes sense when the equipment book value for the mining equipment alone is likely significantly higher than this," Hughes noted. "The transaction avoids the disruption of swapping out the workforce and equipment to become owner operator."

Somers & Partners estimates the company could save around A$75 per ounce on operating costs, which would equate to about A$12 million in the 2018 financial year alone.

Westgold was Australian Contract Mining's dominant client and the tie-up made sense, according to Cook.

"We see it as an opportunity to aggregate all of our mining and all of our service provision into a separate subset company, which is a service provider, and give [Australian Contract Mining], which was a private company, the resources and the capacity to expand and do work for other people as well," he told S&P Global Market Intelligence.

Cook, who used to head Metals X, also hinted that another demerger could be on the cards.

"Who knows, in the future there is potentially an opportunity to demerge that again as a mining service provider," he said. "We've got to make it bigger and we've got to make it stronger."