President and CEO of Orezone (TSX-V: ORE), Patrick Downey, is very optimistic about what they have and how they can drive this business going forward. The technical aspect has been de-risked significantly, they have lots of drill data, a much more simplified mine plan from the one they inherited, good jurisdiction to work in, a small CapEx, short time to production, and possible about to re-rate when the imminent debt component is finalised. One we have a lot of comfort with and take great interest in Orezone Gold.
A great West African gold story, with a very simple and effective approach to mining. The management team has a long track record of making shareholders money by creating meaningful mining businesses. They have increased their NPV by $140M since we last spoke to $360M.
Their project in Burkina Faso is surrounded by large Gold companies such as B2 Gold, West African Resources, Endeavour, Semafo. They also have large gold investment funds such as RCF, VanEck, Equinox and Sun Valley invested.
We discuss these topics and more:
- Recent News and Updates: What caused the Share Price to Spike?
- Simplification of Processes
- The Management Team & Remuneration
- Company Financials and CapEx
- Will investors make money and what should they know?
- Managing leaks in to the market
- Debt and Remodelling the Drill Program
Click here to watch the interview.
Matthew Gordon: Hi Patrick, how are you?
Patrick Downey: Very well. How are you?
Matthew Gordon: Not bad. Now we saw each other back in May at the 121 Conference.
Matthew Gordon: And you were doing the rounds there.
Patrick Downey: That’s correct.
Matthew Gordon: One or two things have happened since then. Perhaps we should talk about those.
Patrick Downey: Yeah. I think when we talked at 121, we were just at about the final stages of our updated Feasibility Study. It came out actually better than we originally thought it would. We said in January that we were going to build a 1.2Mt Sulphide plant. It turned out that we were capable of building a 2.2Mt. A little extra capital but significantly better economics.
Matthew Gordon: Well we should talk about that because obviously your share price when we met was at $0.39. It’s now at $0.62, you’ve had a nice bump there. I’d love to take all the credit for that but I think it’s down to the Feasibility. So we better talk about it. So why don’t you give us the highlights there. Because the the NPV is changed significantly. Some great numbers in there.
Patrick Downey: So essentially, in 2018, the NPV was around $220M. What we did was we really planned this on the basis that we could build the Sulphide expansion from the cash flow of the first couple of years of oxide. The oxide in the first 2.5 years are really high cash flow because there’s really no pretty stripping, low strip-ratio. And it’s the highest-grade oxides right out front. So that’s a pretty simple circuit build. So we looked at the Sulphide. We expected to be able to build a 1.2Mt per annum plant there. But once the Reserves started coming together, it became pretty obvious to us that we were going to run out of oxides before we ran out of Sulphide, so we married the two flow sheets together to come up with a 2.2Mt per annum Sulphide circuit. So that comes in in year three, and it adds around about 700,000oz of recovered Gold. So we had about a 1Moz in the first of the oxides, we’re now at 1.7Moz. The margins, as we had in those ounces, are significantly better than the margins of the oxides at that time.
Matthew Gordon: So what’s the additional cost to you for doing that?
Patrick Downey: There’s a small resettlement program at the bottom end, which is an area right to the south. Including that we’re around about $65M. And we could have built this for significantly less, probably $10M or $12M less by integrating the Sulphide circuit into the oxide circuit. But we made the conscious decision to build a separate circuit so that we could operate the oxides fully independently from the Sulphide. So when you crushing Sulphide, grinding them, you’re not interfering with the oxide circuit. They only actually blend once you put them into the CIL circuit.
Matthew Gordon: So that’s getting a wee bit technical. Okay. You could have saved $10M to $12M, but you chose not to because you can keep them separate. That’s got to be an economic decision at some point. It’s not just about what you’re saving?
Patrick Downey: It’s an economic decision from an IRR or an NPV point. And also purely from an operational viewpoint. The oxides are no crushing. So you don’t have any of that. It’s very simple grinding. It’s significantly less cost. You add in a Sulphide mix there and you can have…we believed you could have operational issues going forward. So this just allowed us to completely separate that and make it a much simpler circuit.
Matthew Gordon: That sounds more like what the decision is based on, in terms of it is simpler. Because the IRR hasn’t moved much. You’ve moved 1.2%, you’ve gone from 42.6% to 43.8% so it’s not a significant shift but obviously the NPV, over $140M more. So it’s impressive. You used a phrase with me last time, what you bought was overly complicated and you’ve tried to simplify it. Would you say that’s the secret sauce?
Patrick Downey: That’s the way we want to keep it. We’ve always made this so that…really when you put in a Sulphide, a big SAG mill which we’ve got there, a Semi-Autogenous Grinding mill, you do have periods of time of about a week where you have to do complete re-lining of that SAG. Your plant’s down. And that’s fine. But the way we’ve done this, when that’s happening, the oxides can continue running. We don’t interrupt them. It’s a very simple circuit in places like Africa that’s a real bonus. And we do it because the CapEx for the for the oxide is reasonable. And the CapEx for the Sulphide is very reasonable because we’re not adding CIL, we’re not adding tailings. We’re just adding a bolt on section. And that’s what that’s what really drives the the NPV.
Matthew Gordon: So again I want to talk about a few things. We can talk about the project as a whole, you’re in the right postcode. You’ve got B2Gold, West African Beso, Semafo. Everyone you need to be around to endorse, this is for people new to this story, you’re in the right place. You also talked us last time about de-risking and you spent a lot of time in terms of talking about the de-risking of the project. So why don’t you tell people some of those things. I’m trying to give them a sense of the type of management team that you are.
Patrick Downey: Well, we’re a very operational focused team. Generally when we look at a project, we look at it from ‘how will we will we operate and maintain this and make it simple’. We visited a lot of projects, not just Gold mining projects. For the oxide, we looked at it from the point of view of handling this sort of material. It’s fine grained, it’s got great properties in the sense that you don’t need to crush it, minimal grinding. But it’s Clay, it’s sticky in the rainy season, how do we get around that? So we designed the front end with a little bit more capital to allow us a simpler operation. We visited Nickel laterite projects, we visited Bauxite laterites. And we came up with some great ideas from those operations that we’ve been cooperated into this. On the Sulphides, we looked at it and said ‘well look, this has to be a crushing grinding circuit’. So if we blended in with the oxides, now we’re adding a level of complexity there that we don’t need to add to the oxides. We’re going to need it for the Sulphides. So we looked and said ‘how do we simplify this from an operational point of view’. So we made it totally separate. We can look after it. It’ll only ever deal with Sulphide rock. So when we have to maintain it and line the SAG mill etc. we don’t interfere with any other part of the operation. It can all be done with a small specialist crew that do not have to worry about getting back up in two days or things like that. And when we talked to our operating team about going forward, they loved that aspect of it. Doing this gives them that flexibility.
Matthew Gordon: I just want to point out, your AISC is low. You’re at about $730 you’ve talked about and I’m sure you will refine it over time. You’ve reduced technical risk, you’ve got…the thing that interests me is the small CapEx number. It is a relatively small CapEx number which I suspect you’re going to deal with using debt? You’ve said you’ve had some debt conversations? So how are they going? What’s happening?
Patrick Downey: They are progressing very well. One of the aspects of adding the Sulphide to the project is that you still only have to borrow the money in debt terms for the oxide project. But you’re adding significantly more ounces against that and you’re not having to go to increase your debt load for the Sulphide. So we believe that gives us much more debt carrying capacity on the front end. So it really, essentially reduces the amount of equity we would have to issue at the front end going forward. So that’s a very, very important part of this project. Even when we built this Sulphide project, we never go cash flow negative during that period of time. We’re still cash flow positive. So we can build the Sulphides out of cash flow and we can continue to pay the debt for the oxides right through that. And we have a longer mine life of which to amortise that debt against.
Matthew Gordon: Yeah some really, really interesting, what people call Catalyst moments, hopefully for you. And when we talked last you said once we get this debt in place, I think we’ll get a re-rate, because people will have some sort of level of comfort as to when we’re going to get into production. Do you think, the way the market’s going with obviously being Gold up and you’ve seen a bit of a bump since the Feasibility Study has come out, or maybe partially because Gold is up as well, we don’t know who’s going to take credit there entirely. Do you think you’re going to get this re-rate?
Patrick Downey: Yes. I think when we’re able to announce the quantum of debt that we can carry against the project, and that the project can pay back, then people will know what your equity piece will be and then they’ll know that it’s not one of those equity pieces that will end up crushing you. The NAV per share is is really badly affected.
Matthew Gordon: You’re about $0.2 on your EV/NAV ratio which is obviously quite low. You’d hope to be nearer $1, wouldn’t you?
Patrick Downey: Yeah. So what we want to do there, is go out and in generally August, September, probably September to get the story out more. Get people to recognise the story. I think hopefully we’ll be able to make a few moves to show people where things are going. And at that point we would essentially look at where we put the pin in on the debt at that stage. So the debt is proceeding very well. We’re going through the technical due diligence now. We would expect that to be complete sometime in late August, early September. And then at that point we’ll start to see what level of debt we can carry.
Matthew Gordon: Are you getting any pressure… obviously things are moving along and the share price that has taken a bump recently, going up which is great. Are you getting any pressure from people like RCF, who we talked about them a very technical partner and committed partner. But they came in at $0.80, they must have some degree of comfort as to where this is going. Probably long term players, maybe they were never worried. What are they talking to you about?
Patrick Downey: I would frankly say they really, really like our project. It is one of their key projects. They tell us. They’re a great supporter, we have been very communicative with them, we have monthly updated management meetings with them. They’ve been to the project, they’ve now seen the study. They’re now taking all of the technical data from the study to see what it means for them. But I can tell you, they would be more than happy to add to their ownership at this point. When we sat down with our RCF, and we knew each other from a long time before on other projects. When we sat down with them, had a program and a plan as to how we would execute and I think they’ve seen that we have absolutely executed to that plan. Which doesn’t always happen for various reasons, and that gives them that great degree of comfort.
Matthew Gordon: That’s interesting point, I’m sorry to segue off of your company because we’re here to talk about you and what you’ve done Patrick, but it’s an interesting point. We were talking to a bunch of investors around this component of how do you keep information, reports whether it be an FS or otherwise, secret. How do you stop leaks from happening? As a CEO, how do you manage that process? In my view is, there must between 10 and 100 people touching that before it comes public knowledge. What’s the process?
Patrick Downey: Well the engineers are generally very focused and doing the engineering. They’re not focused about leaks or telling people. And they’re not generally market minded really.
Matthew Gordon: I know that but it just, it gets out you know.
Patrick Downey: Well when we set out to do this, our technical group…internally we did a fair amount of work to figure out was this worthwhile going forward and doing. So we put out a press release in January that was very detailed in what we were doing and how we were going to do it and what we felt it was going to look like et cetera. And it was all based on on technical fact, that was already generally in the market. We weren’t telling anything that we were guessing at or whatever. And then when we walked through it with our shareholders, we generally…if you just give them ‘look we think things are going well, things are on track, we should have the study by Q2’. We think it allowed something in the region of $80M to $100M to our NAV. It obviously turned out to be better than that. And so you’re on track. Generally people can read. When you’re sitting in front of investors and they say ‘well when you when you talked about this a few weeks ago you were saying $80M to $100M, do you still think that?’. If you hesitate they’re going to go ‘oh that’s not good’. If you’re confident and say ‘well at this stage, yes I would believe that’, that’s what we’ve said in the public market. We have no reason to change it, so you keep it in that way. So there is a fine balance between keeping people continually informed, your disclosure and making sure that you’re not saying anything that’s not in the public market. We are generally very conservative about how we go about it, and we take a conservative viewpoint. We generally don’t actively market during the critical phases of the study. We only go out when we’re ready to talk about it as we’re going through it, but not when we’re in the critical phase. We do not market. We do not talk about it..
Matthew Gordon: Would you agree that sometimes in the market it perhaps doesn’t go that way? I appreciate how you manage it.
Patrick Downey: Oh yeah absolutely. There’s times when you go ‘well that wasn’t right or how come you said this’. So things do get leaked out but I would say from our point of view, we were very, very close. I mean even my directors, I kept them informed but until I knew where the numbers were almost absolutely right. It was only then that I said to the directors this is where I believe we’re going to be and we’re going to be ready to put the pin in it in two weeks.
Matthew Gordon: I appreciate that from you, we like your story and we like the way that you run a very tight ship. You’re one of the most active retirees I’ve ever met, as you said last time.
Patrick Downey: My wife says that as well!
Matthew Gordon: Because it touches on one of other subjects which we keep getting asked about, which is around salaries and remuneration and so forth. You guys have put your money where your mouth is and you’re remunerated along with the shareholders. So you are one of the few companies where you say we are aligned with our shareholders and mean it. We have been getting lots of questions about highly paid mining executives. But I think you don’t perhaps fall into that category, which is great. Let’s talk about one last thing if I may. You are going through a resettlement program at the moment, which we think is quite important obviously. Again another thing where you can cut costs, but you haven’t. Want to tell us about that?
Patrick Downey: No. And I think I really have to give a lot of praise or praises to the guys down there on the ground who have been running with it and doing all of the work in the background, they did a fantastic job. We approached this again in a very systematic manner. When you are building a mine, you are upsetting other people’s livelihoods. And generally you have to move and it’s very well controlled and managed in Burkina because there’s been a lot of mines built. But we went about it whereby, we didn’t go cheap on the houses, we got everybody to sign off. But one of the key things that we felt was like, these guys are signing off on drawings and maybe they don’t fully understand. Let’s build sample houses, it is going to cost us a little more. Let’s build sample houses in each village of the type of house we’re building, let the communities come inside, look at the finished product. Give us any changes or issues out there that they’re concerned with. We did that. We did have a couple of changes actually. It was around capturing water and stuff that they were going to use and they were extremely happy. That got out to the authorities in the sense that the mayor, the ministers; we had a wrap opening ceremony in May. Sort of unprecedented in that part of the world. We allowed for a thousand people to attend, three thousand people attended. That’s all of the communities. Everybody turned up. It was a fantastic day, a fantastic celebration. And it goes to show you the work that we’re doing, not just in building houses but in the livelihood restoration that we’re doing, the work that we’ve put into community programs, water, schools, restoration, all of those things. I got to say I’m extremely proud of that. I’m extremely proud of what the guys have done and how well it has been managed and executed on the ground.
Matthew Gordon: It’s very very important. It means a lot to people there for sure. OK. We are going to finish up. Can you tell me, you’ve extended the life of mine, 10 year life of mine. 133,000oz near 134,000oz over that period of time. You’ve done your FS, you are looking at the debt position at the moment. Will get into production. You are $130M market cap today. Something wrong with that picture. What should investors know?
Patrick Downey: Well I think that we had to little bit of the legacy of what occurred in the past, and we were getting out of that as we move forward here. I think also as they see us continuing to develop the project, the confidence level will come back to it. We are getting a lot more inquiries about the project and the company. The other key thing that I think will happen and it would be a catalyst here, we have been drilling reasonably quietly, but we decided that there was a model here that we should focus on particularly in what’s called the hanging wall of the project, the Maga Footwall zone is very continuous. That drilling was very successful, the modelling is coming up, it’s very exciting. Some of the grades that we have there are seven eight times the average grade of the deposit. It’s wide open at depth. So that’s going to be I think a very exciting catalysts going forward. We are going to put aside some money for that over the next year to do more drilling. And I think once that people understand what that means, drilling still gets people excited about a project. And it’s not just building it, it’s also showing that it’s got a long life and it’s got great upside. And so we’re just about to finalise that model and then we go to the board with a proposal to set aside a certain amount of money to drill it over the next 12 to 18 months. And I think that would be another big catalyst for us.
Matthew Gordon: In the short-term?
Patrick Downey: In the short-term, getting the debt in place and showing what the debt carrying capacity is. Maybe some other moves on the debt which we’ve got a lot of irons in the fire here that we’re looking at. That will reduce the level of equity that we have to put in. And as you rightly said, we are in there alongside our shareholders. We are big shareholders of this company. So NAV per share for us as employees and management is extremely important. It’s not building just for the sake of building a project. It’s building a profitable project that returns equity to the investors, and that’s what we’re looking at.
Matthew Gordon: Patrick, I appreciate your time today. It’s a great summary. Great to speak to you again. I think it’s a really, really strong project in West Africa. People should be looking at it. We look forward to speaking to you again soon sir.
Patrick Downey: Yeah. I hope the next time I speak to you, we will have double the share price again.
Matthew Gordon: That would be lovely. That would be lovely.
Patrick Downey: And I will give you credit!
Matthew Gordon: Finally, finally! Well thanks again for your time. We’ll speak to you soon.
Company page: https://orezone.com/
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