Energy Fuels: I need your clothes, your boots, and your uranium mill.

A picture of the face of the Terminator, Arnold Schwarzenegger, who wears sunglasses and holds a gun up.

If, like me, you are a budding investor, you likely spend hours each night scouring the internet for the latest and best opportunities to make money. From economic revolutions instigated by futuristic technology, to trade embargos plummeting the prices of certain commodities, the world of investment is a complex minefield, which incites fear and excitement in equal measure.

In recent days, a commodity that has captured my focus is uranium; certain American economic news regarding it has intrigued me, in addition to the international surge of attention towards climate change. Following national news coverage in the last few weeks, it has been impossible not to notice seething commuters warring with Extinction Rebellion protestors. What could possibly cause smartly dressed commuters to devolve into a primitive mob? The answer is the increasingly intense climate change debate.

A colour photo of a crowd of colourfully dressed Extinction Rebellion protestors holding a large green banner stating: 'REBEL FOR LIFE.'

This event was one of many occurring in England’s capital in recent months. Additionally, Greta Thunberg’s damning climate change speeches have navigated themselves into the centre of international discourse. An individual wouldn’t be nominated for the Nobel Peace Prize unless their cause was especially relevant.   

One of the key components of the raging debate is nuclear energy. Nuclear-based electricity production avoids carbon dioxide and other greenhouse gas emissions. However, it has been suggested radioactive gas can cause health issues to workers and individuals from communities surrounding power plants. Furthermore, the disposal of nuclear waste is an even more controversial subject, and if one so much as utters the words ‘nuclear weapons’ they can expect a flurry of opinions to be launched at them more explosively than the warheads in question.

One of the primary materials involved in nuclear energy production and military use is uranium. In the wake of a tsunami striking a nuclear power station on the shores of Fukishima, Japan, the energy sector held a review on reactor designs and safety procedures. The resulting financial and psychological tidal wave had a detrimental effect on the industry, one which it is only slowly recovering from. As a consequence, despite offering vastly lower energy costs, uranium seems to have reached a political and environmental impasse and demand has plummeted. When combined with a lingering sense of distrust generated by incidents in Chernobyl, Ukraine (1986) and 3 Mile Island, U.S.A. (1979), and its association with nuclear proliferation throughout much of the 20th century, I was beginning to view uranium as a commodity too contentious to consider investing.

A colour photo of the dilapidated Ferris Wheel in Chernobyl's infamous abandoned playground.

However, after conducting my own research, I have concluded it is an area that can bring big returns to patient investors. The macro story is positive and encouraging. There are billions of USD being spent building new reactors across the world. New technologies mean small, more mobile reactors are being commissioned by countries who previously would have found themselves priced out. High profile individuals are vocal in their support, from Bill Gates to Elon Musk, and the vast scientific community adds additional endorsement to nuclear power being critical to the energy solution. Our current energy sources are not sufficient to cope with a rapidly increasing population and I feel nuclear power can be a green, affordable solution. 

…many of the world’s largest uranium mines are in care-and-maintenance mode.

The Uranium Cycle: I’ll be back.

Uranium is fundamental to the production of nuclear energy. However, current uranium spot prices remain far below what is economically viable to mine and produce ($23.90 as of 31/10/2019). Such market activity has depressed investment. Most of the (≈50) remaining uranium companies are struggling to stay afloat; many of the world’s largest uranium mines are in care-and-maintenance mode (1). These cold, hard facts lead prospective investors to one conclusion: why on earth would I want to invest in uranium? The answer remains the same as any other investment: it can make you money if you play your cards right.

I have studied numerous articles detailing different investment approaches to goods experiencing a low equity price. To me, the most attractive attitude towards uranium investment is the contrarian approach. After recognising where uranium is in its cycle, and the potential for an uptake in the future, this method seems prudent.

However, I can’t exactly go out and buy large quantities of uranium for myself; I wouldn’t want MI5 knocking on my door in the early hours of the morning. A wise investment will require choosing the right companies to invest in.

From an investor’s standpoint, there are 3 crucial elements a company requires to instil confidence in me, or any other investor. If any of these aspects are missing, I think the company is likely to falter and investment should be avoided. 

Investing in uranium: the secret recipe

The three ingredients are as follows:

  1. An experienced management team who have a proven track record for every process: mining, refinement and sale.
  2. Sufficient liquid assets to enable the company to survive until prices take an upturn.
  3. A genuine asset(s), not something purported to be an asset (such as a licence) that in reality is more restrictive to a company than beneficial.

Energy Fuels, the leading U.S. producer of uranium and potential producer of vanadium, has all three, but, perhaps most interestingly of all, it has an ace up its sleeve that is likely to be a real game-changer.

An Experienced Management Team

Uranium is an incredibly complicated commodity to work with. From permits, licences, safety, legislation, regulation, transportation to refinement there are numerous difficulties, not to mention the difficulty of mining itself. The sale of uranium is also far from straightforward, because the buyers are utility companies with long buying cycles and complex purchase criteria. If a management team has not already been through this process from start to finish, they are learning on the job with my money.

A colour photo of Energy Fuels CEO, Mark Chalmers.
Energy Fuels CEO, Mark Chalmers

Energy Fuels has a management team with an impressive résumé. Their CEO/President Mark Chalmers has been involved in the uranium industry since 1976. His vast experience would impart confidence to most investors. As a company, Energy Fuels has been operating since the 70s, and has nearly 40 years of experience mining and refining uranium. I find Energy Fuel’s established industry-related relationships and experience with uranium production/sales impressive.

Sufficient Cash

The brutal nature of the current market has created a tough environment for uranium companies. Murmurs from funds surround the need for price discovery: the spot price for uranium will need to start increasing before they will invest meaningful cash into companies again. It seems clear to me that utility companies have complete control of the timescale of any potential uranium price uptake. In the meantime, if a company lacks the cash to maintain their facilities, they will not be able to survive.

Handily, Energy Fuels has $40-45 million to see them through until uranium prices rise.  In a recent interview with Crux investor, Chalmers expressed a reason for investors to be hopeful of a price increase in the near future.  Energy Fuels and Ur-Energy are hopeful their petition to the United States Government under section 232 and the subsequent announcement of a 90-day Working Group may bear fruit.   

If the group’s report is favourable to the nuclear industry, it is possible President Trump could subsidise U.S. uranium companies via tax breaks and other federal financial boosts, thus allowing prices to rise and profit to be made for investors who climb aboard while prices are still low. However, despite Chalmers stating he would be “shocked” if the government doesn’t rule favourably towards the uranium sector, the judgement currently resides in a realm of definitive uncertainty; the group’s report may not be completed this year as other events take centre stage on the U.S. political platform.

Genuine Assets

A company’s assets are an excellent indicator of if my hard-earned cash will be worthily invested. Energy Fuels have a portfolio they regard as ‘truly unique.’ (2). They have ‘more production capacity, licensed mines and processing facilities, and in-ground uranium resources than any other U.S. producer.’ Energy Fuel’s 100% ownership of numerous promising mines across Arizona, Utah, New Mexico and Wyoming gives them an excellent list of valuable assets.

Furthermore, in an interview with Crux Investor at the WNA, Chalmers explained the versatility of Energy Fuels. The company tries to ‘diversify,’ to ‘keep a strong balance sheet’ and ‘protect shareholders.’(3) The quantity of projects being undertaken by Energy Fuels helps reduce the risk of investment, as if one goes horribly wrong, there are plenty of alternative options to steady the ship.

The diversity of Energy Fuels is further exemplified by their status as the largest U.S vanadium producer. Vanadium has a variety of uses in engineering and redox flow batteries to name but a few. They also provide ‘low-cost environmental cleanup and uranium recycling services, including potential involvement in the EPA clean-up of Cold-War-era uranium mines.’ Investors can find their risk reduced because the company is clearly not a one-trick pony. Energy Fuels is not completely reliant on uranium.

The Game-Changer

When first mined, Uranium isn’t functional for nuclear energy or military use; it needs to be enriched to ≈20% for power and ≈85% for military use. The enrichment process requires the mined uranium ore to be processed in a mill. Energy Fuels own the only ‘fully-licensed and operating conventional uranium mill in the United States.’ (4). This means in the event of a uranium price increase they are the only company ready to go into production immediately. It also means that any competitor will be restricted at their leisure; companies will have to pay Energy Fuels for use of their mill, or face expensive shipping expenses to mills in foreign countries. Energy Fuels will also have control of the timescale of other companies’ uranium production. Chalmers has positioned the company strongly with an undeniable leg-up on the competition.

A photo of three nuclear cooling towers in action against the backdrop of a clear blue sky and a woodland area.

An Option I Could Seriously Consider

Upon conclusion of my research into the world of uranium companies, I have reached the conclusion Energy Fuels would be a potentially sensible investment. I don’t think any other American uranium producer comes close when the management team, business model, cash and bonus mill of Energy Fuels places them in such a commanding position. In the near future, I am likely to invest. I feel my money would be much better served waiting to grow with the sleeping giant of uranium than comatose in a bank account with less interest generated than a taxidermist’s dating profile.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.


Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. We provide paid for consultancy services for Energy Fuels. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Base Resources (AIM, ASX: BSE) – Mineral Sands in the Pink

Can Base Resources build on the success of their first project in Kenya without shareholder dilution? We interviewed Tim Carstens, Managing Director of Base Resources to find out.

Their ‘new’ project in Madagascar has a lot of similarities to the first project so a lot of learnings and complementary skill sets. Mineral Sands is little understood by investors as it is small market with few players, but it can have very high-margins. Rutile and Ilmenite are both used in the production of pigment ie: to colour paper, plastics, cosmetics. Plus Zircon is used in ceramics & tiles.

They produced some good numbers last year so we discuss the future for the business and find out where that growth comes from. Carstens tell us what he thinks it is going to take for investors to see a movement in the share price. We discuss their plans for project financing at the new project. They are debt free but there is no movement in the share price. When does the plan kick in for shareholders? Carstens also breaks down the shareholder register and what type of investor he is looking for.

Carstens says East Africa is better for business than West Africa but how is he planning to spend the money they made in Kenya? With no dividends on the horizon, where is the value being created? Lot’s of deliverables in the next year to build this Mineral Sands company in the hope of becoming a mid-tier company with only a few peers.

Interview Highlights:

  • Overview of the Business: What are Mineral Sands?
  • Review of Last Year and Focus on Safety.
  • Madagascar Asset: How Will They Get it Financed?
  • Share Price & Shareholders: What are They Doing to Bring Value to the Company? What’s Their Strategy for Growth?
  • When and Why Should You Invest?
  • Deliverables for Next Year.

Click here to watch the interview.

Matthew Gordon: Thanks for joining us Tim. You’re doing the rounds in London. Are you going anywhere else?

Tim Carstens: No, not on this trip. This is one of our regular visits to support the listing over here.

Matthew Gordon: Let’s start off with a minute summary on the business.

Tim Carstens: We’re a pure play Mineral Sands Company listed in Australia and here in London. We’ve got a highly profitable, successful operation that we developed in Kenya. It was Kenya’s first Large-Scale Mining project, and we’ve now picked up the learnings from that and looking to apply it in a new project we acquired about 18 months ago in Madagascar. A very similar style of mineral sand operation, a little bit bigger in terms of capital and looking to bring that into being and create a pretty unique mineral sands company that’s got a very clear growth path, highly profitable. And, something we think is going to have strategic relevance in the sector.

Matthew Gordon: For people new to mineral sands, please explain what it is.

Tim Carstens: In our terms, mineral sands… we basically produce three products. Rutile is the biggest component of our suite in Kenya. It’s the highest-grade form of Titanium Dioxide. It’s about 95%. We also produce a lot of Ilmenite, which is a lower grade form of the same material – Titanium Dioxide. And the majority of both of those go into the production of pigment. That 95% of all of Titanium Dioxide materials go into production of pigment. So, everything you see with a colour.

Matthew Gordon: So, paints, plastics, paper inks…

Tim Carstens: Food dies, you name it, make-up all has Titanium Dioxide pigment. And so, consumption is very tightly tied to a global GDP. Now it’s more of an urbanization and wealth driver, I guess, than industrialization. And then the third component for us is Zircon, which is quite different, predominantly used in the ceramics industry, in glazes and tiles and the like. Also has some other sort of industrial uses as well.

Matthew Gordon: You’ve said this project’s been going 18 months. How did last year go for you, 2018-2019?

Tim Carstens: Well, there’s two parts of the business – first is Kwale the operating mine in Kenya. We got our first shipment away in February 2014. So, we’ve been going for a while there.

Matthew Gordon: That’s cash producing, profitable

Tim Carstens: Significantly cash producing.

Matthew Gordon: Give us a sense of those numbers.

Tim Carstens: I mean last year was USD$113M. That was a record year, revenue was at USD$209M, so very, very significant producer.

Matthew Gordon: Debt free?

Tim Carstens: Debt free. We have now paid out the original $235M project financing that was used to part fund the construction with net cash of $20M. So, a very strong year last year from an earnings perspective. Another very strong year from a safety perspective. We haven’t had lost time injury since February 2014 right across the business. We haven’t had a medically treated injury for two years. It’s an extremely strong safety culture in our business.

Matthew Gordon: Let’s touch upon that, because most people don’t bother talking about.

Tim Carstens: Ours is a less inherently dangerous form of mining than compared to Hard Rock Underground, for example. But yet there’s still an awful lot of moving parts in our business. You know, road transport, a lot of risks. The reason we focus on it is 1. It’s central to sort of how we want to go about doing business. 2. But it’s also a pretty good window in on the performance culture of the business in general. Because you never find a business or an operation that has really good safety performance and poor operational performance because the management disciplines that drive one, drive the other. The other reason it’s really important for us is we’ve come into a country with no history of mining in Kenya, in terms of no large-scale mining. We’re 98% Kenyan workforce. So roughly 1,000 people on site. So being able to embed that sort of safety culture in an environment that’s not used to it is a significant achievement.

Matthew Gordon: You’re also spending a bit of money on some CSR activity.

Tim Carstens: We do spend a significant amount each year. It was about $3.8M last year on community development and environmental enhancement programs. We’ve actually banned the use of the phrase “corporate social responsibility in the business” largely because it’s the language of obligation. Its what companies feel they need to do to be seen to be corporately socially responsible. We take a slightly more strategic view on it. In that for us, we need to have a community and a government that has a felt fair exchange of benefit, mutual benefit with us so that at one level we have a really proud, happy workforce. We have a community that will defend the project or the mining operation against any sort of political interference. And then at the other end of the extreme, we have a community and a government. They’re a fantastic reference for us when we want to move into somewhere like Madagascar, where we’ve now gone. We’ll be able to point to what happened in Kenya. And you very quickly have a government that recognizes you as someone they want operating in the country.

Matthew Gordon: Let’s talk about Madagascar. That’s a relatively new operation. How are things going?

Tim Carstens: That’s going really well. We bought it as a project, so it’s going through the study phases at the moment. We completed the Pre-Feasibility Study (PFS) in March, which reinforced our view of it being probably the best undeveloped mineral sand asset in the world. We’d looked at a lot of projects before we decided it was the one we wanted to go for. We’re now completing the definitive study, which will be out in December 2019. And that will then form the basis for completing the financing for development.

Matthew Gordon: So how are the conversations on financing are going? What are you looking for?

Tim Carstens: They’re going well. We’re looking at a combination of things at the moment. There will be a fairly significant debt package as part of the funding. We’re pursuing two options. One is a classic project financing, very similar to what we did in Kenya. And in fact, involving a lot of the same banks who had a fantastic experience with us first time round. They like the way we do what we do. They like the project and the way it gives them an entry into Madagascar in ways that probably haven’t had a lot of access to before. So that’s one debt funding option. We’re also pursuing in parallel a Nordic Bond, exploring that possibility and looking to put in place something around $350M debt facility. And in parallel with that, we’re also progressing a few joint venture discussions just to sort of understand what might be possible in with some industry plans.

Matthew Gordon: So, things are obviously going well on that front. The share price though. If I look at the history, in 2016, things took off in Kenya. The share price went screaming all the way up to $0.19. Very nice.

Tim Carstens: It’s been a bit of a wild ride almost from the moment we turned the plant on in Kwale in early 2014, our commodity prices were falling. And so, we actually got to the point in February 2016 of having a market cap of $16M. That was the low point when it was A$0.026 cents. And then we saw commodity prices turn and in about the middle of 2016 and share price shot up. We were up in the $0.30s. But we’ve largely tracked sideways since we acquired Toliyara sort of sat in a channel, $0.24 to $0.30 cents somewhere in that range. And to a certain extent, that’s explained by the market needing some more clarity on exactly how we’re going to fund the project.

Matthew Gordon: And that’s what I want to get into in now. If I look at some of the statements in your PowerPoint, you’ve mined more ore, your numbers are generally positive. You’ve paid down debts, you are net debt free. The share prices continued on a general downward slope. It’s been fairly up and down, but the general trend is slightly down.

Tim Carstens: I disagree with that. It’s been trending up for the last 12 months, but I see it’s exactly where it was twelve months ago.

Matthew Gordon: People can get have a look at the chart and work out how they feel about that statement. What is the go forward strategy here? Where are your loyalties? You’ve got loyalty to employees, loyalty to the community, loyalty to shareholders. But what are you doing for shareholders going forward? What’s the growth component to the story?

Tim Carstens: Well Toliyaras is clearly the growth component.

Matthew Gordon: But when does it kick in?

Tim Carstens: Well, on the sort of timetable we’re on, we’re aiming to be in production by the middle of 2022, which will still see us with overlap with Kwale – two operations running. You’ve got that diversity of earnings and extremely powerful earnings profile. I mentally Toliyara based on the PFS numbers is going to spin off free cash flow each year of around $13M. So significant cash flows across the two. One of the challenges in developing an asset in Kenya or Africa generally is getting full value in a share price sense for the earnings you generate simply because of this perception of risk. And that’s particularly exacerbated when you’re a single asset, single jurisdiction company. So, our strategy had always been to let’s go get Kwale up and moving. Use it to build our business model. Use it to build our capital base, our reputation, our scale with a view to then taking all of that to move to the next asset, to get that diversity happening and build a company with a number of operations that smooths that out and starts to unlock the latent value of the earnings.

Matthew Gordon: Do you think you’re telling that story well at the moment?

Tim Carstens:  We’re telling the story as well as we can at the moment, because the key unknown for people is exactly how we’re going to fund it. And we can’t explain it any more than we are at the moment, because we’ve got all these components that are moving forward sensibly. They can’t move forward any faster because obviously completion of a DFS is central to that. It’s a long-term exercise building a business from scratch.

Matthew Gordon: You are throwing out cash, you are paying down debt, and you’re looking after the administrative side of things. At what point do current investors or new investors get interested in you again. Are they going to wait until you get your debt package in place in the new year? Is that the moment they should really be looking at you?

Tim Carstens: I think people are crazy not getting involved now. But I understand why they aren’t. Because, we’ve got a very clear picture of what the value is in this business. And it’s a question of time before people actually see that. As I keep repeating, for a lot of people the lack of clarity around exactly how we’re going to fund it gives people a sense of maybe they’ll go fund raising and that’s something that we need to dispel. The other part to it is that we have a ridiculously supportive shareholder base where the top 20 hold 91% of the stock. The top three hold 65% of the stock at the current share price. No one’s really interested in letting any stock go.

Matthew Gordon: Isn’t that part of the problem?

Tim Carstens: Well, it is part of the problem, no question. But it’s why we need to be a little bit patient with this, because for someone looking to get in in a meaningful way as an institution, you’ve got to get yourself comfortable with the value proposition. You’ve then got to be able to see a pathway through to acquiring some stock in the first place. And then you’ve got to get yourself comfortable. You can exit if you wanted to. So, this liquidity share price standoff is unquestionably one of their challenges. The catalyst for breaking that is quite clearly getting the DFS out. So, that’s the next level of resolution around the shape of the project. But the critical catalyst, as far as I’m concerned, is when we’re able to go out quite clearly and say, here’s what the debt looks like, here’s what any joint venture looks like, here’s how the rest of the funding comes together. And this is what that means for you shareholders. Now, I think if people sit and wait until that happens, they might find they miss out.

Matthew Gordon: So that says to me that you’re interested in institutional investors, not so much retail?

Tim Carstens: No, not necessarily. We’ve made a concerted effort now to really reach out to retail. We just seem to have been more successful in getting to the institutional side of things, we’ve done quite well there. But the retail is somewhere we need to spend more time focusing on.

Matthew Gordon: Why’s that?

Tim Carstens: When you’ve got limited liquidity, they’re the people that are going to set the share price and then the price becomes the price at which blocks trade. And it’s something we do need to…

Matthew Gordon: And do you find that’s a much harder story to tell to retail? You mentioned the Africa component here. Also, mineral sands being little understood.

Tim Carstens: Yeah one of the challenges with mineral sands is there are so few pure play mineral sands companies in the world. It’s not a story that people get to touch regularly, even amongst institutional investors. They don’t see too many mineral sand companies coming around. It’s a less immediately clear sector in the sense that you don’t get a lot of commentary about it, it’s not like people talk about it like what’s happening in the copper price or nickel or whatever. And then you’ve got the Africa factor as well, which a lot of people just aren’t really quite comfortable with what Africa’s about.

Matthew Gordon: With gold, more so than most other minerals in Africa they might be a little bit more comfortable.

Tim Carstens: I always find it interesting that people seem to be more comfortable with gold in West Africa than super simple mineral sands in East Africa.

Matthew Gordon: Gold’s a very big market in terms of value terms and it’s been around a while. And mineral sands is new and it’s a smaller market.

Tim Carstens: It’s more the nature of the countries you’re talking about. There’s a lot more policy volatility in West Africa than there is in East Africa at the moment, except for Tanzania.

Matthew Gordon: I like Tanzania, I’ve worked there.

Tim Carstens:  It’s a great country, an interesting policy environment. People are waiting to see if there is a knock-on effect.

Matthew Gordon: Shareholders are sitting around patiently waiting for this pop. And you think it’s going to come when there’s clarity on your debt package. What are you going to do for them? Kenya generated a lot of cash. You’re hoping to replicate that in Madagascar. Is there some kind of dividend coming down the line or some share buybacks?

Tim Carstens: Shareholders fall into two categories in our world, the shareholders who would suggest that a dividend to be good. And then there is the vast majority who say, don’t be stupid because we’re looking for that growth. We can see the project coming next year. Why would you issue a dividend now ahead of making a major investment next year? So now, while we have every desire to be a dividend payer and its part of the business that we’re building and the diversity of cashflow we’re building, right now is not the time.

Matthew Gordon: Isn’t that the trap that producers fall into, that they create cash and they go, ‘oh, we need to grow, so we need to make an acquisition’. They spend a lot of money on an acquisition, spend money on the CapEx getting that into production to produce more cash, but they kind of forget about the shareholders along the way.

Tim Carstens: As a generalization, that’s fine. But to suggest that we’ve forgotten about shareholders is not really appropriate. Every company has its own peculiarities and its own circumstances. We started at Kwale with an asset that had to short mine life, it had mine life of 11 years. We’ve built an extremely robust business and business model and team. And, the option that you’re talking about would be for us to run that for cash and close the business and moved on.

Matthew Gordon: It’s not quite…

Tim Carstens: Well yes it is, because, you can’t get too close to the end of the mine life at Kwale when we’re talking about mid-2024 without having somebody to replace it. We’re not making the most of our platform that we’ve built if we’re not applying it to something else. And our shareholders have certainly been encouraging us to go down that path and we can see such significant opportunities in the sector because we had been so profitable during the downturn. Even in a downtime, we were still able to service our debt. We were not financially stressed in the way a lot of our competitors were. Which meant we’re able to grab what we think is the best project to add to the portfolio and get to that next level, at which point we will be a very significant cash generator and a completely different set of options at that point. For us, this was absolutely, unequivocally the clear path.

Matthew Gordon: What I’m saying is for institutions who will sit back and play the long game, that’s one thing. For retail, family office, high net worth looking for quicker return, it’s a very different model, Everyone’s got different investment models. Your focus at the moment is around the institutional guys, because it’s around 90% of the business.

Tim Carstens: Not necessarily. We actually found we have a huge number of very long-term retail. I actually take a different view. A lot of the institutions are actually much more focused on short-term performance. A lot of our retail shareholders understand the long game of building this company and they’re involved in it. And the point I’d make to shareholders who are looking for that short-term hit in the yield in the next two years, we’re probably not the company for you. So, I suggest you go somewhere else.

Matthew Gordon: That’s what I’m hearing loud and clear.

Tim Carstens: People can vote with their feet. I got no problem with that. We’ve been very clear about what we’re doing with this business and we’ve got a very clear path on how we develop it.And the shareholders need to choose whether it’s their profile.

Matthew Gordon: So next year, few things happening; the DFS and the raise.

Tim Carstens: Well the DFS will be in December then the rest of the year will be spent very much on bringing together the funding components, working towards being in a position to make a final investment decision to stop the major construction over the course of next year. Now, we’ve given ourselves a fair bit of runway through until probably the end of the third quarter next year to get all those pieces to come together, because there’s a fair bit of complexity in it and when you’re talking about potential minority joint venture participation, debt facilities, we’ve still got to pin down the final fiscal terms with the government in Madagascar. So, all of those pieces need to come together over next year. The other thing that’s getting a lot of focus for us is mine life extension at Kwale. We announced there is a large resource on a separate dune called the North Dune during the year. I’s very big, 171Mt, but quite low-grade. So, we’re doing a study on that at the moment to see what subset of that could make sense as mine life extension. Then we’ve got another couple of areas around Kwale that we’re exploring to see if we can identify more.

Matthew Gordon: Do you want to give us a little summary for investors looking at this from new as to why they should be investing in you guys?

Tim Carstens: We’re trying to build what is a very unique mineral sand company in terms of being a mid-cap company, heading towards having two operations at the moment. We’ve got one very profitable one we think we can extend. We’ve got another world class development asset. We’ve got a business model that’s been very successful in Africa. We do win quite a lot of awards for our environmental stewardship and community engagement. And the whole team that brought Kwale together is still with us. So, the whole team that did it the first time around is there to do it again. We’ve got a very robust financial platform to be able to build that business. But the long term aim here is to create something pretty unique, because in our sector, there is really only Aluca at $3Bn – $4Bn market cap. And then you drop down to Kenmare and ourselves around the USD$200M-$300M market cap. And we’re trying to create something quite unique in that space with a multi-asset sort of business with a growth profile.

Company website:

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Energy Fuels (NYSE: UUUU) – Picking Winners & Identifying Losers

A conversation with Mark Chalmers, CEO of Energy Fuels (NYSE: UUUU) about what Uranium investment targets are going to need to have to make it in this cycle. Without contracts in place some Uranium companies will not get funded. So price discovery is important but that does not equate to immediate financial relief for some. Don’t be left holding that Uranium stock.

There is lots of money to be made if investors focus on the fundamentals and are not distracted by rhetoric by Uranium company’s that won’t make money even at $100 a pound. Pick companies with the right business model. Management teams experienced in bringing Uranium companies in to production and selling in to a contract market.

We discuss our investment thesis with several Uranium CEO’s. If you believe in the macro story of the Supply Demand story for Uranium then you need to know how to pick winners in this section. Not all boats will float on this high tide.

What is clear is that if the management team has not worked in mining Uranium before and produced and sold uranium in to the market, they don’t know what they don’t know. Cash is King – In a market short on institutional funding, some companies are running on vapour and struggling to find money and if they can, it is expensive and dilutory. Quality assets – the basics of mining are the same. Companies that can get Uranium out of the ground cheaply will do better than others. Investors need to understand a company’s ability to mine economically.

If you buy in to the macro story, we encourage Uranium investors to start looking at which companies are most likely to make it. It is apparent to industry insiders and veterans which companies and which assets will find it more difficult than others. We are listening to them and forming our thoughts.

Interview Highlights:

  • 90 Day Working Group Announcement Expectations
  • Importance of Management
  • Cash is King: Who Won’t Survive?
  • Who Should I Consider as an Investor?
  • Energy Fuels: Rebuilding the Share Price, and The Mill – A Means of Standing Out
  • The Market: When Will it Change and What’s The Plan if it Doesn’t?

Click here to watch the interview.

Matthew Gordon: Good to see you, albeit online. We caught up at the WNA Symposium in London last month. What was your take on it?

Mark Chalmers: Well it’s a good event. I really enjoyed being there again. And I caught up with a lot of people.

Matthew Gordon: There was a lot of excitement around the WNA Fuel Report as possibly being a catalyst for change. And we agreed at the time that it wouldn’t be. But the next catalyst for change is President Trump’s Nuclear Energy Working Group. It’s a week or so before that is due to announce.

Mark Chalmers: We don’t know exactly what timeframe the president will act on the report. Or what announcements will be made.

Matthew Gordon: There’s been various speculation as to what it could entail. But you’re not expecting it to focus necessarily on the uranium market, but the nuclear market as a whole. It’s hard to forecast what the impact could be for US uranium companies.

Mark Chalmers: There’s no guarantees, but I believe the working group gets it. I think they get it. I would be absolutely shocked if we get nothing here. The question is what will be proposed and what will the President decide is appropriate. It’s not very often you get on the President’s desk twice in 90 days. And I’m very proud that we’re able to do that. We’ve got this focus on the front end, the fuel cycle. The focus is absolutely required by the United States government, the largest consumer of uranium in the world, the United States of America is one quarter of the world’s uranium. We cannot go to zero.

Matthew Gordon: done a lot of interviews now with uranium CEOs over the last 3-4 months. As an investor, we’re starting to build up a picture of what the market looks like. I am a believer in the macro story in terms of the supply / demand story and what those numbers look like. I don’t have a sense of timing. I don’t think many people do. I’ve heard from 3 months to 24 months in terms of timing from people. I wanted to speak to you about some of the thoughts that we’ve had, and get some affirmation of some of those thoughts, if indeed you agree. There are lots of different companies at different stages and different positions financially, who may or may not make it, depending on how long this goes on for. But it was clear to me that you need three things. 1. You need a management team who’s been there and done it before. And I don’t mean mining. I mean getting uranium out of the ground, getting it to where it needs to be in terms of being able to process it and sell it and to market – that’s one. 2. Cash, because a lot of companies are running out of cash. And 3. Fundamentals of the asset itself, you’ve got to come back to that, because mining is mining. Start off with the management component with you first?

Mark Chalmers: Oh, absolutely.

Matthew Gordon: You is because you have been through a couple of cycles. You have produced. What would you say to investors about the importance of why the experience of having been through, not only a couple of cycles, but you’ve actually produced product and got it into market. Why do you think that’s important?

Mark Chalmers: Uranium is very unique. And it has a number of dynamics. When you start looking at uranium projects, it has the mining risk, and processing risk. It also has a lot of risk because it is uranium and that is obviously connected to the nuclear fuel cycle. A lot of people underestimate how all those things meld together and how one of those elements can really throw a monkey wrench into any project. When you look at other mining industries like gold and copper, silver, zinc, whatnot. They’ve had a lot more continuous operations over the years. They haven’t had the hiatuses that the uranium market has had. We go through these peaks and valleys. And the valleys, often are very pronounced and very long lived. And you lose a lot of that expertise and the knowledge. So there are similarities, but also many differences.

Matthew Gordon: Your last point about a lot of the expertise has been lost, because the sector has been in the doldrums for a while. People have got to make a living and they go off and do other things. I’ve spoken to only four CEOs who have ever managed to get companies into production. The rest are learning on the job. And as an investor, my problem is I don’t necessarily want them to learn with my money, because things can go wrong if you don’t know what is coming down the line. To coin your phrase, “you don’t know what you don’t know”. And that’s fine with someone else’s money, but not with mine. I just thought it was interesting with some of the conversation’s that we’ve had, it became obvious that these companies were just hoping that the market would come back and there would be enough money sloshing around. And some of these mistakes would get hidden by all the money that would be thrown at them for investment. But when things are tight, like they are now, if you don’t have the cash to be able to cope with this market, you’re in trouble.

Mark Chalmers: It’s pretty hard when these companies get to the point where they’ve gone to the equity markets multiple times. The share price continues to decline. The market just gets tired of the story. And so that’s why it’s important to maintain a healthy cash balance. And I think the one thing that is really a problem for a lot of these really small mining companies, juniors, micro caps, and it is pretty chronic in the entire industry, is that people get down to that last $100,000, or $1M and then they go out and try and raise money. It’s expensive or impossible to do. We’re not in that position. We’re a lot more complicated than a lot of these other companies. Other companies may have one project or it’s not constructed. So, the holding costs may be lower. But you just don’t want to get against the rope, because when you’re against the rope, people know you’re against the rope.

Matthew Gordon: I’ve gone through a period of learning about Uranium equities, speaking to some great influencers in the market, some fund managers. I’ve managed to speak to a couple of the utility companies. And I had a conversation a couple of weeks ago. It made me really nervous, actually, for the first time in this space. And it comes back to that line, ‘not all boats will float on a high tide’. They just won’t. I’ve been approached by a couple of groups to ask for my advice on a couple of junior uranium companies, who are struggling for cash and who are speaking to these finance groups to take them out. It’s like they’ve had enough. They’ve fought their fight and don’t want to go on, or don’t know how to go on. And that made me nervous, because it reinforced my thoughts. I’m a buyer of the macro, there’s going to be winners, but not everyone’s a winner. It’s clear because there are people struggling right now. And the longer this goes on, the more problematic it becomes. So, if this thing goes on another 6 months, I can see more than a couple of companies struggling because they don’t have the cash, or the ability to persuade a generalist fund to put money in. And the specialist funds have made their bets and they can probably see better than some of generalist funds, as to who is going to make it and who’s not.

Mark Chalmers: With a lot of these companies. Not only do they have no money, but they also have projects that are not proven. And in many of those projects need hundreds and hundreds of millions of dollars of capital investment, if not billions of dollars.

Matthew Gordon: When you start talking about things like getting some debt into the company to be able to be in a position to build out whatever it is that they’ve got, or be able to even pay for the Feasibility Studies (FS). Again, there’s no real plan there. Mark, you’ve been around the block. You’ve seen a few things and some of the companies I’m probably talking about. What’s your take on the market?

Mark Chalmers: I don’t envy them. I don’t envy them, because when you’re at the bottom of the bucket and there’s no water coming in to fill up your bucket, what do you do? And it goes back to, ‘there’s no shortage of uranium’. Uranium deposits out there in the world have not all been created equal. And if they don’t have any money for just daily operating expenses… In a lot of cases, those projects are not proven yet, they’ve never been commercialized. So, there’s a lot of technical risk for those projects. In most cases, it’s going to be far, far more difficult, costlier and take more time than they expect. And then you throw on top of that a new project. It’s going to cost hundreds of millions of dollars. In most cases hundreds of millions of dollars, if not billions of dollars. It’s a hole hard to crawl out of. And so, I don’t envy these folks at all. You’re at a huge disadvantage if you don’t already have proven projects, if you don’t already have projects that have the capital investments made. You’re way back in the back of the bus and when you’re in the back of the bus, and you don’t have any money, you’re not going to get up to first class.

Matthew Gordon: What I’m hearing is that exploration companies are some ways away. Certainly, not in this cycle from getting into production. So as an investor, do I put my money into those now because money’s cheap, but risk is high. There’re some companies with a possibility of being funded to get into production. But again, they’re not going to get into production anytime soon. The next 2-3 years, maybe if they’re ready to go today. But not many are. Would you talk to producers who are armed and ready to go?

Mark Chalmers: If you’re playing a sector like uranium, your safest bet is to play probably 2, 3, 4 of the better, more established companies, and you can do that in a way that manages your risk. We’ve seen the damage, or collateral damage, that’s happened to a lot of people back in about 2010/11 after Fukushima. With the deterioration in share prices. That hit us all. That hit Cameco, that hit Energy Fuels and everybody else. So, there is not such thing as no risk, but there is such thing as having less risk. And there is a saying, if you believe in a macro, which I agree a 100%, that you can play certain companies that have less risk and have probably the same upside as a lot of these riskier plays.

Matthew Gordon: You guys got hit, July 11th/12th with the Section 232 announcement. You guys got hit big time on your share price. You dropped off a cliff. You’ve recovered about $0.45 – $0.50 cents since then. What should that tell investors?

Mark Chalmers: That’s an example that certain events can clobber these stocks. I believe that there people were certain of a positive outcome on the Section 232. We thought, as well as many others, even that we talked to the government, that there was a high-likelihood that that was going to happen. It didn’t happen. We got hit, as did most others, particularly those in the United States. It’s a sector that in the up markets, it’s multiple bagger. In a down market, it can be a multiple bagger in the opposite direction. It is a tricky sector, but it still goes back to sophistication in how you make your investment. It shocks me sometimes that people come to me and say “oh, I’m getting in the uranium business and I picked X, Y and Z” and those are exactly the products that I would never have recommended to these people. Now, even in some of those cases, in the right circumstances, people can make money on those stocks. I don’t think there’s any absolute 100% the best plan. But I also think that a lot of people making these investments, they don’t like the super high volatility. And that there are just different elements of risk. And what people do, what percentage of their assets that they’ve invest in high risk returns, compared to what their ultimate horizon is and how they’re diversified, that is down to them.

Matthew Gordon: Can I just talk about your mill, because this the other bit, which it’s not one of my tick boxes, but it’s definitely a massive plus for you guys. It’s one of the only operating mill in the US. Is that right?

Mark Chalmers: Correct. If you go back like 30 years, there were like 35 mills, And White Mesa has basically been in good standing, has been completely operable since that point in time. There are two other mills. There’s a Shooter Canyon mill that ran for a few months or something back in 1979/80 or something, then shut down. And then there’s the Sweetwater Mill in Wyoming that ran for maybe was a year or two, also shut down 30, 35 years ago and hasn’t operated since.

Matthew Gordon: Looking at your mill, it gives you certainly optionality in terms of what you do. But for people without a mill, what are their options? How do they go about processing their ore?

Mark Chalmers: Well, they either have to build their own mill, or if in the region, they have to basically strike a deal with us to have access to our mill. And there are some examples of work that’s been done in the past with toll milling agreements or joint ventures. So, if you don’t have the mill, and you’re a conventional miner, you don’t have any options, you have to make some choices. I’ve had people tell me they don’t need to mill. They can ship it to China or to Brazil or somewhere like that. That’s farcical. It’s farcical. You’ve got the costs of transportation. The mill was correctly positioned for sustainability. And that’s a big issue that investors should feel comfortable that our mill has been around nearly 40 years and has survived these peaks and these valleys because of its flexibility. And, it’s been able to cash flow, and many times, even though the uranium price were too low to run it just for uranium production.

Matthew Gordon: What are your plans for the next 6 months if nothing happens in terms of the price discovery in the market or 12 months?

Mark Chalmers: If we don’t get relief through this government working group we will manage our expenses as tightly as we can. We’ll continue on with the macro environment we think is alive and well. We’ll continue pushing these different parts of our business that are less uranium price dependent like the alternate feed and the clean-up of abandoned uranium mines. Everybody needs higher uranium prices. This is really a critical crossroads that we’re at with the working group. We’ve survived the test of time. We’ll continue to survive the test of time. But it will be more difficult until uranium prices recover.

Matthew Gordon: And I keep asking every time I see you because I’m not quite sure what the answer is going to be each time.

Mark Chalmers: Well, I liked your comment that a lot of people have quit speculating on that. And I think that’s one of the reasons that these uranium share prices have been suffering. I think a lot of people are tired of speculating, including investors. Everybody seems to be wrong. You know, like you said, six months or two years or one year or whatnot, people been saying that…

Matthew Gordon: If you’re a fund manager, you don’t care if it’s one year, two years or three years. You’re getting paid your 2% and 20%. It’s okay. You can afford to be wrong for another three years, If you’re an investor like a Joe Schmo like me, where you’re putting your own cash into this stuff and you’re underwater and you don’t know what’s coming, you’re unsure. People have been telling the macro story for so long that you’re beginning to doubt whether that’s true or not. You jump up and down and go, hurrah, every time you hear someone talk about the macro story. But maybe you start having doubts. So, getting some sense of timing is important because it’s our hard-earned cash here we’re talking about.

Mark Chalmers: Absolutely. And I always say that whenever people have the most doubts, as is when you should be investing more. People like Rick Rule, it’s quite interesting to listen to some of his discussions and when he started getting interested in uranium. And it was the late ’90s. And he’ll tell you how many doubts he had. But then he will also tell you that he had multiple investments. So, I think the worst was like a 20 bagger or something. So, it is a very unique sector and frustrating. But when it comes, it comes and it comes big. And, there are there a lot of people that made a lot of money in this over the years and there is going to be a lot of money made again.

Matthew Gordon: I just want to make sure that people aren’t being misled and that they focus on the fundamentals, what’s important with regards to the company, assuming the macro is true. I want investors to make the right bets in the right companies rather than have their money frittered away by companies perhaps that are just struggling with G&A, let alone getting into production.

Mark Chalmers: There are companies out there, I won’t name names, that even if the uranium price goes to $100 dollars, they will not be successful. And I think that’s what you’re alluding to. You don’t want people to get in investments that will have no possibility of ever really making it. They might get a bit of a bounce off of an up market. But investing in broken business models isn’t a really good long-term strategy.

Matthew Gordon: I’m not alluding to, I’m trying to shout from the rooftops that in our assessment, having looked at these companies, looked at the numbers, done the analysis. I agree with you, whether $100 bucks or $70 bucks, there are uranium companies which are just not going to make it. They’re not designed to make it. They don’t have the people on board to show them how to make it. People need to ask the right questions.

Mark Chalmers: Being in the space, I have to be a little more careful when it comes to pointing out some of the shortcomings.

Matthew Gordon: I wanted to speak to bounce our thoughts off you. I’m not sensing any pushback. Appreciate your time and taking the call as well.

Mark Chalmers: It’s always a pleasure, Matt. I enjoy talking to you.

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Serabi Gold (LSE: SRB, TSX: SBI) – Steady Growth for Shareholders. At Last.

Having flatlined for 4 years, Serabi Gold are looking to double their production and get to 80,000oz by getting their recent acquisition to market. High grade selective mining. It’s an old story which is looking to getting going again and like most junior Gold miners for the last 4-5 years, the only thing holding them back was access to money. They have had their head down focusing on producing at 40,000oz at a steady state for the last several years. That is not an exciting level. Most small institutional funders are looking for 100,000oz per annum. So what has Serabi done to change things and make this story relevant again for investors? We get the back story and find out how they plan to sweat their current assets and more importantly how they intend to fund it.

With Gold above $1,500 they are finally making a reasonable margin, even for an underground operator. We find out how they have structured their debt and what happens next. What do you think of their plan?

Retail investors have started to get interested again. And a couple industry strategic players involved. It feels like a new story as shares have started moving in the right direction. That said what we like is that they appear to be sticking to what they know and are targeting growth from very similar assets. Existing greenfield and brownfield also look promising.

A very open and confident pitch by the CEO. They have always had a plan, and now with the cash and cash flow and they seem to know how to deliver it. We follow with great interest.

Interview Highlights:

  • Overview of The Company
  • Team Experience: Have They Got What it Takes?
  • Share Price and Shareholders
  • Company Strategy and Assets: How Are The Projects Coming Along?
  • Update on Coringa and M&A Plans
  • Market Conditions: How Will Free Cashflow Affect Their Chances?

Click here to watch the interview.

Matthew Gordon: Let’s kick off for the one-minute summary for people who haven’t heard the story before.

Mike Hodgson: 40,000 ounces, high-grade gold production in Northern Brazil. Para state. It’s a big artisanal gold field. We are the first operator in that part of the world. We’ve got great local relationships. We’ve actually put a mine into production. It’s taken a while. The company did it many years ago. The mine actually closed. We actually started it up as brownfield site we’re mining high-grade gold, 8g/t. Which really, I think sets us apart from the rest. People have got so used to 1g/t, 2g/t. We are 8g/t. We are underground high-grade, selective mining. And we’ve acquired about 18 months ago the Coringa asset, which is essentially a carbon copy of our current Polito operation. We’re going to put Coringa to production, make it 80,000 ounces. We’re growing organically, but certainly in a very controlled way.

Matthew Gordon: I’m interested in this story, because you guys have been in South America for a while. I’d love to understand a little bit about the team’s experience in mining in South America. What’s everyone done?

Mike Hodgson: Brazil is a country that probably is very dominated by large enormous surface deposits. I won’t pretend to say it’s been easy. We’ve actually had to address the fact that there aren’t very many small underground mines in Brazil. Therefore, there’s a people skill shortage. I suppose we’ve cheated a little bit. We actually are next door to Peru and Bolivia and we’ve got a very key people that come from there. I was the COO of Ovando Minerals in Bolivia before this job. I’ve spent much of my career working in the Cornish Tin Mines. So I’m very specialized in small underground mines and I worked for TVX before on a small underground mine. I can’t escape it, but clearly, I’m probably moderately successful at it. So we built a team, which involved key management in the mine, which came from Bolivia. And we brought over a Peruvian contractor to help us with the selective mining. Our ore body at Polito and the ore body that will be developed and put into production at Coringa, are high-grade subvertical narrow veins. Quality ounces is what it’s all about. Controlling dilution is what it’s all about.

Matthew Gordon: Apart from yourself, who on the team experience has that level of experience?

Mike Hodgson: Well, on the board itself is a gentleman called Eduardo Rosselot, an older colleague of mine. A mining engineer, a Chilanian guy. He’s been very important in terms of actually helping us with our funding. And the rest of the team in Brazil, we’ve got key Bolivian mine management. The Mine Superintendent is Bolivian and all the technical team are Bolivian. The key to our success is really this team of mining expertise and we have actually boots on the ground. That works very well. The Peruvian contractor we’ve now actually nationalized. They are now all Brazilian paid and on the Brazilian payroll. It’s a very important point because, there’s no real problem in terms of these people working in Brazil language wise, which certainly was something which concerned us at the very beginning. But just going back a step, probably people may or may not know that Serabi did put Polito in production 2003. It started probably the correct way. But back in the 2000s in London, where company originally listed, there was, let’s say a lot of people in the stock, who perhaps shouldn’t have been in the stock. They did really understand with junior mining. And I think the company did two things. 1. It chase scale to try to meet shareholder expectation. 2. It also changed the mining method because it was very difficult to find the right people for the job. So when we actually restarted this mine back in 2012/13, we got the right team in and the formula for success has been the mining. My saying always is ‘grade pays, toness cost’.

Matthew Gordon: You raise interesting point. There have been, and possibly still are, some people have been in this a long time, long suffering. The share price has been flat for a couple of years, but it’s recently picked up again. You must be quite pleased?

Mike Hodgson: We’re delighted. A little bit of brief history on that. It comes back to some of the people that I’ve been around with, like Eduardo Rousselot one of our Chilean directors. He was really instrumental back in 2012 when we want to reopen this mine. The markets were terrible. There was no money out there for exploration. There was no money for resource growth. There was only money for cash flow. And it was hard to find. Eduardo introduced us to the Fratelli Group, one of our biggest shareholders. These guys put money in at risk where nobody else would. And they backed us.

Matthew Gordon: And they’re still there?

Mike Hodgson: They’re still there. A big shareholder. They basically went through 50% because they did want trading freedom. But frankly, there was no one else coming in any way. So that’s where they were. We reopened the mine very successfully, got up to 40,000 ounces pretty quickly, were we’ve now been for about 3 years. They underwrote the entire financing, took all the risk. The problem with that was our stock was incredibly tightly held. We had no retail.

Matthew Gordon: Not no retail. Not enough retail.

Mike Hodgson: Very little retail. There’s no liquidity. Everything was great about our company except the capital structure in a way. And we thought, well, we’ll fix that.

Matthew Gordon: What have you done about that, because I note Greenstone are now in there.

Mike Hodgson: There were ticking along quite nicely, doing 40,000 ounces. Operationally terrific. Corporately still with some problems. But back in 2017, we actually acquired the Coringa asset. Now the Coringa asset was from a company called Anfield, which has now been rolled into Equinox, one of Ross Beaty’s companies. Before that, it was actually in the hands of a company called Magellan. And we’ve been trying to buy this asset for a long time, because it’s a carbon copy of Polito. We’ve been mining Palito for a number of years. We know we’ve got all the relations in the region, we’ve got the methodology, the formula…

Matthew Gordon: Before we get into the project, because I do want to come on and cover that. I just want to stay with the shareholder component and what the thinking is.

Mike Hodgson: The buying of Coringa actually was a catalyst to do another capital raise. We bought Coringa for $22M and we funded $5M out of cash flow, but then we obviously got to find another $5M and then the final payment. $22M in total. We did a capital raise in March 2018. And that point Greenstone came on board. And River & Mercantile in London.

Matthew Gordon: Just explain to people don’t know Greenstone, because they are pretty well known in the industry…

Mike Hodgson: Greenstone are a private equity fund, London based, they’re invested in probably 10 or so stories. Pretty much a multi-commodity.

Matthew Gordon: A very technical team.

Mike Hodgson: They whey work with us very well. They obviously liked Clive and myself for a long time. They’ve been trying to get into Serabi for a long time. And they’ve been looking for the opportunity and acquiring Coringa was the opportunity for them to come in.

Matthew Gordon: They know what they like. And they are very selective. It’s a very strong team.

Mike Hodgson: They came in around that financing in April 2008. A group called City Financial came in. And also we had a Swiss family office that was still actually in the story. Now this year, obviously, we know the City Financial ran into some problems. And the Swiss Family Office also wanted to liquidate their position, which at the time wasn’t welcome news. So, 6% of our stock was just basically dumped on the market in the Spring of this year. And our price went £0.40 to £0.23. And we thought that was a bit of a nightmare. Turned out to be an absolute blessing in disguise, because that stock just got picked up by retail guys. So, for once, and you’ve seen our graph of our liquidity, it’s amazing. We’ve just flatlined for about 4 years, doing all the right things, but not getting any love. No appreciation. And then all of sudden, retail guys get a hold of it. We’ve gone from like 9% retail in London to probably 16%-17%. And it’s happy days.

Matthew Gordon: It helps. It is really important for new people coming in to look at the corporate structure of a business before they invest. We’ve talked in the past about the paralysis that can come with too much institutional investors. Either one individual or multiple institutions who sit and hold, and don’t trade.

Mike Hodgson: With Greenstone, in that financing in 2018 didn’t really do a lot for liquidity. I liked this expression, ‘it gave us an amount of democracy at least’.

Matthew Gordon: What does that mean?

Mike Hodgson: These days, I don’t know. At least we had two big shareholders on the Board now. So there was a natural balance now. We got three shareholders now over 10%. And two of them sit on the Board. So there was a bit more democracy there. Fratelli came down from 52% to 32%. So that was good. That raise didn’t bring in liquidity really. But obviously, the selling of this stock in the summer helped.

Matthew Gordon: So you now recognise the importance of retail, family office and HNWIs?

Mike Hodgson: We have tried so hard to get retail into this company. It’s just been institutions coming in. We’ve only done two raises.

Matthew Gordon: So now you got a better retail in there. I want to spend some time with you and understand what’s going on in terms of the business plan, the strategy, how you’re going to deliver it, where you’re going and who’s going to actually deliver that? So describe if you can, what is the plan? We know where you’ve come from, you’ve done a great job describing that. So today you’ve got a couple of assets. So you got to deliver those.

Mike Hodgson: Technically, on their current operation, Polito. Basically is one plant, which is plant-constrained, which is actually pretty unusual these days. Because most companies of mine-constrained. Now, the good thing about being plant-constrained is it brings discipline. You’re always treating it with the highest-grade possible.

Matthew Gordon: Just be clear to people what you mean by that.

Mike Hodgson: Well, grade is king. We’ve now had a head grade around 8g/t for ever. So that’s what we work with. And being plant-constrained means we’re not just throwing tonnes at the plant. We’re actually throwing quality ounces at the plant. That’s the important thing. Palito is in a very steady state of production. Two ore bodies feeding a central plant. 500t per day between 7-8g/t. That’s what we do. And we’re kind of limited at the moment. We don’t really want to expand the plant, because our ore bodies, as you can see from the presentation, they are high-grade, narrow veins. So all our business is to actually mine these veins as well as we possibly can, minimizing dilution as much as we can, to get quality out of the mine. And then basically through the plant. Inevitably even doing this where the best possible way we can, we still get some dilution into the into the system. Over the last 18 months we’ve actually been testing ‘ore sorting’. I know this is a big buzzword these days. I’ve just come back from Beaver Creek and it is all the rage. It won’t solve all our problems, but certainly help a lot.

Matthew Gordon: What is that going to help with?

Mike Hodgson: There’s ores and waste. The gold is inside the sulfides and outside that is just pure waste granite. The ore sorter is actually a waste remover. It sorts on either color, or on density. The difference is really, really good. The intention is to pass our lower-grade material through the ore sorter. And it’ll screen out waste. First of all, it’ll take waste out of the system. That will save us about $1M a year. But more importantly, it actually liberates about 20% of space in the plant. We can actually add more high-grade ore and make a little plant go from 40,000 ounces per year to 50,000.

Matthew Gordon: And very low cost presumably.

Virtually no cost. That almost goes straight to the bottom line. From today we’re 40,000-ounce operation probably making about $4M-$5M a year.  It’s positive cash flow. We put in the ore sorter.

Matthew Gordon: It doesn’t cost a lot. Comes out of cash flow.

Mike Hodgson: $1M

Matthew Gordon: So no dilution. And improve efficiency and productivity.

Mike Hodgson: That’s the first thing that we’re doing at Palito. Down in Coringa, our other new asset, which we are developing. That is actually build ready. When we bought that asset, Anfield did a terrific amount of work there. They spent a lot of money. And they built camp. They bought a process plant. They bought all the toys. A lot of the mining equipment. They did a lot of work. They did the studies, which is great. People ask me all time, why did Equinox sell the asset. Scale! Too small for them.  At the time they probably thought the asset was going to be a lot bigger and was going to be their platform to build a gold mining company in Brazil. And they were looking for something a lot bigger than Coringa could be. Although it’s a very tiny deposit, it doesn’t really work for anybody else except us. We’re in Tapajos. We’re the only hard rock producer. Coringa’s 200km down the road from Palito. There’s little point two companies having to 50,000 ounce mines, in the same region where there’s very little else. They belong in the same stable. So the marriage occurred. We bought the asset. We’re now working our way through the permitting process. We’ve just submitted our new Environmental Impact Assessment (EIA) or statement yesterday. We should get a public hearing in around well, after that’s been protocoled and approved, which hopefully will take about less than a month. We will get a public hearing when we actually go to the local community, and hopefully get approval. And I think because we have been in the region for 10 years with the same authorities. We’re not exactly the new kids on the block.

Matthew Gordon: So just on that. We’re starting to build a picture of the types of facilities, mines, operations that you are comfortable with. And they are similar in profile.

Mike Hodgson: Very similar. I don’t think you can actually have a deposit more similar.

Matthew Gordon: Sorry I did mean to ask, in terms of the ore sorter, what’s the timing of that and more important what is the timing of when the benefits of that start flowing through?

Mike Hodgson: The sorter has taken a while to get. But it’s now at site. It’s being all the infrastructure around. It’s now being fabricated and installed. We will switch it on probably in November 2019. We hope to be doing its job in January 2020.

Matthew Gordon: So imminently it will start to contribute towards the bottom line?

Mike Hodgson: We’re going on guidance. We’re about to close Q3/19. It’s been just the same as Q1/19 and Q2/19. Another 10,000-ounce quarter. So we’re bang on guidance to do our 40,000 ounces for the year. And I think next year we’ll hopefully be making a hole in 50,000 ounces because of the ore sorter.

Matthew Gordon: So that that’s going to hit the bottom line from Q1/20?

Mike Hodgson: Yes, it will. And we’re sitting here today, 40,000 ounces making about $4M – $5M. That’s going to go up very handsomely with the ore sorter. 10,000 ounces of very little incremental cost. With just a little bit more process cost.

Matthew Gordon: Something to look forward to end of Q1/20. So now we’re going to talk about Coringa, because it meets the profile, it’s a similar looking system. More of the same. You know what you’re about. So tell us about what’s happening at Coringa.

Mike Hodgson: Repeat the formula. Coringa, obviously, our big news recently was the publication of our PEA, which was great. It really just demonstrated what we absolutely expected.

Matthew Gordon: You made a few tweaks to it?

Mike Hodgson: Yes, it’s going to be a 40,000-ounce deposit. The process plant is there. A little different to Polito. This process plant was bought from a mine in Para. It’s actually much bigger, so there’s no capacity issue with this plant. It’s a very similar deposit to Polito. We are just working our way through the permitting process at the moment. One thing that we do have already is we have the mining license, which is something Equinox never got to. We can start the mine tomorrow, subject to funding. We are going to start going underground. Why is this important? It’s important because we want to first of all, we want to establish the continuity, because Coringa degree is a greenfield site. It’s drill holes. 1. We actually want to establish that continuity. 2. The indications are in a lot of the drill holes that actually the widths at Coringa are probably a little better than Polito. And I think there’s an opportunity to maybe semi-mechanise this deposit, which would be great. Great for cost per ounce. And 3. we want to take a nice big bulk sample because Copringa is 200km away from Polito. We will truck that bulk sample up to our ore sorter at Polito. And we will let you run it through and see how it performs. I would suspect that the ore sorting is going to work very well and therefore, although we don’t need the ore sorter from a capacity issue at Coringa. Why process granite? Why not put an ore sorter in there? Again, it’s all about grade, grade, grade. Get that grade up as high as we can and the get the ounces from processing as little material as possible.

Matthew Gordon: What was the timing on all of this?

Mike Hodgson: We want to actually start the underground development in before the end of the year. In Q1/20. Now, we can start the mine. What we cannot state at Coringa yet is the process plant and the construction. We’ve got to work our way through the process. Now, that’s why the EIA has gone in. We hopefully will get what’s called the Preliminary Licence by the end of the year. That is basically the Environmental Impact Assessment (EIA) followed by the positive public hearing by the end of the year. If all that happens, that will be great. Then we can actually launch into what’s called the construction licence. We then bring in an engineering company to come and do the basic engineering, which is basically the design work for the erection of the process plant. That will probably take around 6 months. So we would like to think we’ve got the construction licence by early Q3/20 next year. Which means that we can start building.

Matthew Gordon: Construction towards the end of next year is what you are aiming for?

Mike Hodgson: I would like to think we’ll start August time we will be starting to build. And having just done it at Polito.

Matthew Gordon: You are talking to the same departments and government bodies. You have established relationships. The track record. You expect those sorts of timings based on what you previously experienced.

Mike Hodgson: Exactly. These are the guys that gave all of this for Polito five years ago. We’re just doing it again with Coringa. So they’re very comfortable with us as being the only game in town really. But the good thing if we do start the mine first to actually assess and maybe improve the mining, optimize the mine plan by this underground development. And maybe optimize the flow sheet by adding in an ore sorter. We’re just going to improve those PEA numbers even more. And the good thing about that is I think people will note that in the PEA, we’re talking about a CapEx number of $25M, there’s 20% contingency as well. And let’s face it, that study was completely based on Polito. It’s the one thing we have 100% confidence in is costs.

Matthew Gordon: True. I’d say you more than most. Because most PEAs have a variance of +/-30%. You’ve based it on what you’ve done previously.

Mike Hodgson: I thought that the consultants were being rather penal. 20% contingency on costs on a mine that’s just up the road is identical to the one we’re going to do. So we’re pretty confident that the $25M, we can chip into that. And there’s also the All In Sustaining Cost (AISC) is coming in at about $850 and this 20% contingency on that. So, we’re looking forward to Coringa really bringing our costs down.

Matthew Gordon: Now, that’s because most of your costs are staying at Polito.

Mike Hodgson: So that’s why it’s loaded.

Matthew Gordon: The blended number?

Mike Hodgson: $900-$950.

Matthew Gordon: A nice number. Is there much you can do about that? I know you’ve got various fixed costs which you can’t affect.

Mike Hodgson: The gains are basically if we can actually get some mechanised mining in there. The gains are going to be will an ore sorter work at Coringa too? These are the real nice little gains.

Matthew Gordon: Is there a number you’re chasing?

Mike Hodgson: I think we’re pretty tough to do underground mining much less than much less than $900, maybe high $800s. That’s gonna throw off a nice bit because it wasn’t so quick.

Matthew Gordon: We’ve got three locations. What’s that combined number look like? You’re heading up towards original size production.

Mike Hodgson: So the two are the two mines, Polito and Coringa. They’ll both be doing about 40,000 ounces each now as well as that. The other thing that we’ve been doing is basically on mine site exploration in and around the Polito and Sao Chico ore bodies. One of the use of proceeds of the capital raise that we did in 2018, when Greenstone came on board, was we flew an airborne geophysical survey, over the whole tenement. 40,000 hectares of that wasn’t cheap, but the results it threw off were great. The thing lit up like a Christmas tree. Again, what we’re looking for is, are these sulphides which show up with airborne geophysics very well. And we have artisanal mines all in our property. They’re not a problem. They only mine that top 10m They are their exploration tools. They’re great. So a combination of those and anomalies etc are really important. We use the airborne geophysics as a high-level filter. And then wherever we have anomalies, we go on the ground to do follow up ground geophysics and geochemistry, and just basically this risk reduction before we actually drill. And we’ve actually got some fabulous anomalies, both in geochemistry and ground geophysics in and around Sao Chico, which is our satellite ore body. And where we are now drilling at Sao Chico in the immediate mine site area looking for strike extensions, which is going very well. And then we’re going to move on to these discovery drill programs on these anomalies, which are only 3-4km away from the actual Sao Chico deposit itself. We can turn exploration success into production growth very quickly, particularly at Sao Chico. So the third part of our our strategy is to continue Polito as it is, add the ore sorter. Develop Coringa, advance the permitting and actually get underground at the same time. Finally, on the organic growth, its mine site exploration and maybe a little bit more in and around our current producing assets Polito and Sao Chico. So all in all, base case 80,000 ounces, we think we can with a bit of exploration success in and around our backyard’s, we can get to 100,000 ounces in the next 2-3 years.

Matthew Gordon: Well that’s the magic number.

Mike Hodgson: It is but it frustrates me a little bit because, I think the most important thing is cash flow. Free cash flow. Everyone’s obsessed with 100,000 ounces.

Matthew Gordon: It’s more an indicator of scale and opportunity. I think the picture you’ve painted today is an interesting one, in the sense that, you know the type of structures that you’re after and the types of projects that you are comfortable with and have the knowledge of developing. You’ve got to get Coringa going. But it also says potentially future M&A is we know what we’re looking for. We’re very, very specific. I know you’ve got the organic stuff. Is there much M&A thinking going on?

Mike Hodgson: I just think we recognize that we’re not ready for that yet. I think I think at 40,000 hours it’s hard. You have really got the currency, and we’ve got a project to build already. So that’s where our focus lies. I think once we’ve got Coringa permitted and we’ve got the funding in place, and we’re building it, we’re really on our way to 80,000 ounces. I think at that point we’ve probably got the firepower to have some serious conversations. And, you alluded to our costs. At the end of the day, it’s underground mining. It’s not the cheapest mining on the planet. Open pit brings that. So, I would like to think our next acquisition would be if we do one, or merger it’s a blend of underground high-grade with some scale to get our costs down.

Matthew Gordon: is there much of that in Brazil.

Mike Hodgson: Yes, there’s more of that than there is the underground. I think we’re the best small underground miner in Brazil.

Matthew Gordon: I’m a buyer of that.

Mike Hodgson: We won’t do a deal for the sake of doing the deal.

Matthew Gordon: That’s what I mean. There’s dilution in that. It’s a new type of mining for you. And there are many carcasses on the side of the road in Brazil. Step forward with caution.

Mike Hodgson: Our ex-chairman always says to me, sometimes the best deals you do are the ones you don’t do.

Matthew Gordon: Keep your money in your back pocket. But I like sweating your own assets with this organic growth. If you’re in an area that’s prolific and well-known, why not.

Mike Hodgson: The area has seen 30Moz of artisanal gold mined. There’s been no systematic exploration in this part of Brazil, which scares a lot of people off. But for us, it’s a blank canvas. And I really do think the ore sorting, and our approach is going to be a bit of a paradigm shift to this part of the world. We do not market ourselves as a Brazilian mining company. We market ourselves as Para mining company. Because Brazil is a collection of 26 states. State government rules over Federal government big time. You’re not going to solve any problems in Brasilia. It’s all in Bélem in the State capital. And again, we’re in Polito. We’re going to try to develop Coringa using that relationship. This is a great place to be.

Matthew Gordon: So let’s talk about the market. Obviously you are producer, so you’re seeing the benefits of the gold price, which is great. Explorers and developers are not seeing it. Most of them aren’t seeing it. You are. Which is great news for the bottom line. More free cash flow. But you’ve got things to spend it on?

Mike Hodgson: We always have. We’re saving as much cash at the moment. We have a final payment to actually fully acquire Coringa at the end of the year. We’ve just got the cash. We’ve basically got that in the bank. Which is good. So we’re just trying to build as much as cash as we possibly can through the end of the year. So make sure Coringa is 100% ours. Which it will be and then we derive forward.

Matthew Gordon: You’ve got the cash to acquire the asset. You’ve got incremental free cash flow in with gold as it is today, long may that continue. Is that enough to allow to do the things that you want to do. Certainly around growth organic, for instance?

Mike Hodgson: It’ll be tight. It all depends on where the gold price is going to be. I look at Coringa and we’ve got we’ve actually got we’ve had it we’ve got a great relationship with Sprott Asset Lending. The only equity raises we’ve done the last 5, 6 years, have been the equity raise to put Polito back in production. And obviously the what we did last year to get Coringa. In the meantime, we’ve just taken on some debt.

Matthew Gordon: So that’s Sprott?

Mike Hodgson: Sprott Asset Lending out of Toronto. We basically borrowed $8M. We paid $8M back out of cash flow. They thought we were legend Most people do an equity raise to settle the debt. We earnt a huge amount of trust with these guys and they are absolutely ready and waiting when we’re ready permitted with Coringa.

Matthew Gordon: So again, I just say it sounds like you know what you’re doing with it goes to your cash position with the acquisition and the debt and so forth. So maybe that’s one we can pick up on the next update when you have delivered a few of these things. Because I guess you’ll be in a position to know where you’re at, and what you want to do. But, just just on this market condition at the moment. Have you got any views? Is it going to sustain? Do you have an opinion?

Mike Hodgson: Well, we had a board meeting today. Everyone around the table had a different view.

Matthew Gordon: Well, who knows?

Mike Hodgson: Do you?

Matthew Gordon: Well, no, absolutely. Absolutely not. But I’ve heard some really quite strange $3,000 type numbers being put out there. Obviously that sells.

Mike Hodgson: I just went to Beavercreek to the Metals Summit. We are all of the gold bulls? 85% of our costs are in Brazilian Real. Once we’ve got the double whammy. We’ve got we’ve got the gold price growing and 6,300 Real ounce. I mean a year and a half ago it was just over 3,000. There always used to be a natural hedge between the Brazilian Real. When gold strengthened, the Real was was weakening or vice versa. We never really got the double lift.

Matthew Gordon: A lot of people are getting that.

Mike Hodgson: Record levels in Australia. Record levels in Canada. All the resource-based economies are actually getting this.

Matthew Gordon: But it’s question of how long it lasts?

Mike Hodgson: At the end of the day, you look at the macro economics. China and the US and all that, it probably bodes quite well for gold with all this uncertainty, I think. But, people with much better pay grades than I, have got it pathetically wrong. Well that’s probably why, the time is good. Our share has gone to three times, and the market’s there at the moment. I hope he’s gonna be there when we finally need it.

Matthew Gordon: It’s been a good chat, good introduction, because we haven’t spoken before. Our listeners and subscribers have not heard the story before. I know you’ve been around for a while. I wanted to speak to you. I like the robust, relentless, can do attitude of the business. And its share price has been what it’s done for the last few years, but it’s on the move. It’s doing all the right things it seems to me. I want to see that you continue to deliver what you say you’re going to. Do you want to leave us with maybe a few reasons why new investors should be looking at Serabi now?

Mike Hodgson: We’ve now got a record. There’s liquidity. You can get stock now, which is great. For a long time, you couldn’t. So that’s a plus. And there’s a lot more steam in this price. We’ve got a real great economic tailwind at the moment. We’re going to be meet guidance. And next year it’s going to get a little bit better.

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Pan African Resources (AIM: PAF) – A Dividend Paying Gold Producer

Interview with Cobus Loots, CEO of Pan African Resources (AIM: PAF).

We don’t tend to like investing in Gold producers as they rarely perform for shareholders. But we like this one, a lot. The CEO is brutally and refreshingly honest. He spends lot of time pointing out the difficulties in mining and operating in South Africa.

However, they make it work. They have a long track record of producing Gold and paying dividends. Last year they suspended the dividend payments as their debt borrowing for the new plant was the focus, however, they are planning to pay a dividend (subject to shareholder vote in November). The Audit Results are out today. The numbers are extremely encouraging and show a tremendous growth across the company. Cobus Loots talks about how they have done it and what the growth targets are in the short term. We were impressed about the way they think about capital allocation. Investing in their assets, they want to repay the debt on balance sheet, paying a dividend and how to deliver growth.

They still have a lot to do but we think this team is rigorous in its planning and methodical is how it delivers its projects.

Interview Highlights:

  • Overview of the Company
  • Audit Report: Great News?
  • Safety & Why It is Important to Pan African Resources
  • Productivity & Production: What Numbers Are They Looking At? Can They Lower Their AISC?
  • Paying a Dividend: Why Now?
  • Mining in South Africa: Benefits and Risks
  • Company Financials and Share Price: What’s The Outlook?
  • Future Plans for The Company

Click here to watch the interview.

Matthew Gordon: I’m looking at your executive officer statement. We had a chance to quickly scan through this. Some great numbers on there, you must be very pleased.

Cobus Loots: We are quite pleased. And I think this was a great improvement on pretty much all fronts.

Matthew Gordon: Definitely. Give us a one-minute summary of the business for those new to the story to start with.

Cobus Loots: The company is Pan African Resources PLC. We’re a UK company, but with a South African base, with all of our operations currently in South Africa. We have two large gold mining complexes. The first being Barberton Mines. Barberton Mines has been going for almost 130 years. So, gold mining started in Barberton in 1886. We’ve made some major improvements in recent years at Barberton. So, we have the underground mine that we’ve been mining, and will continue to mine for quite some time. And then we also have a tailings plant that produces ultra-low-cost ounces. The other complex is Evander Gold mines. The largest operation that we have now as part of the Evandar is the Elikhulu plant. That also produces very low-cost and low-risk gold ounces. And then we have an underground operation that we are also in the process of developing further at the moment.

Matthew Gordon: Can we talk about some of the growth stories that I’ve been reading about, eg: Egoli and Royal Sheba. But let’s start with these numbers. You’ve produced some exceptional numbers there. What stands out for you?

Cobus Loots: What stands out is the fact that we improved our safety performance at the year past. That’s critical for us on a number of fronts. If we can’t produce safety, we cannot produce. I’m very happy to report that all of our safety statistics have come down in terms of incidents in the last year. That’s a result of principally the Elikhulu tailings plant, which inherently is just a lower risk operation, but then also a massive focus on safety schemes, safety initiatives across the group. The safety box is never ticked. We have to continue to work on safety, but it was a good performance. Operationally we exceeded our production guidance for the year past. That’s obviously quite a positive. Actually, from all operations we had an improved performance. On the cost side from an All In Sustaining Cost (AISC) perspective we reduced our costs quite substantially. I’d like to say we are the lowest cost producer in South Africa as a group, certainly amongst the lowest cost at the moment. But not only that, we also internationally very competitive. So, AISC came in at $980 an ounce. The international benchmark at the moment is just over $900. So, $980 versus $900. Not bad. And there is potential for us to bring down that cost further in the year to come. So overall, good performance. I’m also very pleased by the fact we are proposing a dividend for approval at the upcoming AGM. And that’s positive. We had to suspend the dividend last year as a result of obviously gold price. What was happening at Evander, the substantial capital we were incurring on the construction of Elikhulu. So, I’m quite happy that the dividend is back. We’ll be at a more modest level, but it’s still to 1% yield is not to be frowned at.

Matthew Gordon: Good news it seems to me, but not without a lot of hard work from your team. And I noticed the first thing you focused on there was safety, which again is unusual. People usually to stick that at the back of the presentation. Why is it such a big deal for you guys?

Cobus Loots: If you analyse it coldly, the world is changing. If you can’t produce gold safely, it makes it very difficult to produce. Our people are our primary asset. That’s an addition to our ore bodies and all of our other infrastructure. So, we need to take care of our people from a health and safety perspective. Safety first, health also very important. So, without our people, well, we can’t achieve what we’ve achieved in the last year.

Matthew Gordon: Good. Nice to hear. Let’s talk about productivity. You’ve increased your forecast, so you’re going to be producing at what level by the end of next year?

Cobus Loots: We’re guiding 185,000 ounces for FY20, which as going to you said, is quite a be a big improvement on the 172,000 that we did last year. So that’s off the back of a number of projects. So, 1. Elikhulu will produce now for a full year. We commissioned Elikhulu in September 2018. So, we really only had the benefit of nine months of production from Elikhulu. You obviously ramping up also. So now you’re looking at a full year of production from Elikhulu which includes the enhanced or increased capacity via the ETRP. It’s a tailings block. So, we’re saying 65,000 ounces from Elikhulu. We’re saying 20,000 ounces from what we call the Evander Pillar project at the Evander underground, and then 100,000 ounces from Barberton. So, that makes up of our increased production guidance of 185,000 ounces.

Matthew Gordon: That puts you firmly in the mid-tier producer range. And if you look at what gold price is doing in the last couple of months, you’ll start to see the benefit of that in terms of margins, because of the amount that you’re producing. I make that point for investors, because there’s an assumption because gold is up that the junior explorers and developers will benefit. And they don’t. It’s the producers who will benefit far more quickly because of sales. You talk about the lower AISC, which I thought was interesting. You are striving to drive towards that $900 mark. You’ve clearly made some headway into that. What do you attribute that to and how are you going to continue driving the AISC lower?

Cobus Loots: The first contributor to the reduction of AISC has most definitely been our tailings business. We commissioned Elikhulu in the last year. It’s quite a large plant. It processes 1.2Mt of tailings p/m. And that’s where we get our 65,000 ounces of gold for the next year. The great thing with Elikhulu is it produces at an exceptionally low AISC. We should be at $650, if not lower. We then have the Barberton tailings retreatment plant (BTRP) that does also 20,000 ounces. So overall, we have 85,000 ounces that are what we like to call ultra-low-cost production. This provides a stable base load, for our portfolio, and allows us to survive pretty much in any gold price environment. And it brings down the groups AISC quite significantly. Those are the tailings businesses. There’s quite a lot of optimization happening underground at Barberton. We’re simplifying the infrastructure. We’re doing a lot more development which allows us further access to high-grade ore bodies. We’re looking at the marginal side of the business to see if we cut some ounces and reduce costs? There are a number of initiatives also ongoing to further reduce the AISC for the group.

Matthew Gordon: But that does tend to suggest that the Barberton costs are quite high.

Cobus Loots: If you look at our results presentation, Barberton underground actually has put different shafts with different cost structures. The flagship underground business is Fairview. Fairview has been going for many years. It’s an incredibly high-grade ore body. It’s on average more than 10g/t, but we get pockets of +100/gt. The principal ore body that we mine at Fairview is the MRC. It has a life currently of 20 years. And we’ve been doing a number of improvements to infrastructure to ensure that we can continue to mine successfully, safely and profitably in years to come. So, Fairview by itself is still a fairly low-cost producer. Then we have a more marginal ounces at Sheba and at Consort. So those are the answers that we have to focus on and reduce that all in sustaining costs.

Matthew Gordon: With regards to Sheba, what’s the chances of that making some kind of contribution this year?

Cobus Loots: Sheba has certainly contributed in the year past, but the focus is increasing that contribution. It’s a project that we’ve been speaking about for some time. We want to get the first gold out of Royal Sheba in the year to come. Sheba should do better this year.

Matthew Gordon: Let’s talk about dividends. But you’ve announced that you’re going to pay a dividend, it’s got to be voted for. I’m assuming the shareholders will accept. What made you do that?

Cobus Loots: It’s a modest dividend versus what we’ve paid in the past. It’s still in effect a yield versus having your money in a bank and in some jurisdictions earning a negative interest rate. I think that makes it attractive. If you consider the way that we think about capital allocation. 1. the first is investing in our assets. We have to continue invest in our assets, otherwise we will not be able to continue to generate returns. 2. is balance sheet, because of the project Elikhulu that we constructed in the last year, our balance sheet is highly geared, certainly more than what we’d like to see. So, in the next year, we’d like to repay quite a lot of the debt we have sitting on the balance sheet. 3. it is providing a cash return to our shareholders in the form of dividends. 4. once we’ve taken care of those we also look at growth.

Matthew Gordon: Mining is tough. Mining in South Africa is really tough. But your track record of bringing projects online is good. We talked previously about doing business in South Africa and what it was like. And you said, ‘yeah, it is tough, but we deal with it. We’re used to it’. Tell people about that conversation because I thought it was fascinating.

Cobus Loots: Well, I’ve concluded that gold is so precious because it’s so difficult to mine regardless of where you are actually doing your mining. South Africa has a fairly negative perception internationally and some of it is justified and some of it potentially is not. We have a long history of mining, certainly gold. More than 50% of all the gold that’s been mined in the world has come from our country. We have great infrastructure. We have access to power. We have access to technical skills. We have a good constitution. We have a good legal system, etc. But then you’re faced with the con’s also. You have unemployment. The economy is not doing great. There’s uncertainty in terms of mining legislation. We have power challenges, electricity issues. So, that sort of makes for an interesting mix. But as you point out, we’ve been able to mine successfully in South Africa for many years. We’ve been able to bring great projects online in South Africa in recent years which demonstrates that we have the ability to operate. One thing that’s certainly come to the fore in the last year is that Africa generally is a difficult place to do business. You look at regulatory issues in Tanzania. You look at terrorism in West Africa. You have to accept that mining in Africa does come with challenges and you have to equip yourselves and skill yourself to be able to deal with us and be successful and operate successfully and sustainably.

Matthew Gordon: You bring up points which most CEOs try to avoid discussing, which I appreciate. It’s also on page 7 of the presentation whene you talk about the underlying risks and how you’re dealing with them. It’s quite attractive when a company is refreshingly honest about the issues that they are dealing with. What it is hard to argue against is your track record of continually delivering the answers. What’s also important is driving that share price up. You have had your share price affected negatively. So what are you doing about it?

Cobus Loots: Well, if a share price does badly and we continue to sort of fret and worry about the share price, that it doesn’t really get us anywhere. So now we have a saying that ‘we focus on those things we can control and then the share price will take care of itself’, as it has done to some extent. I don’t want to speculate about the future, but now we’ve repositioned ourselves as a low-cost producer, even in a global sense. We have a long life. We have great projects where we can further increase production with fairly benign investments. I think we’re well positioned. We are safe producer. We are investing into our communities. We’re making a difference where we operate. All of that makes for a good mix. And if we deliver pretty much what we said we will do, the share price should take care of itself.

Matthew Gordon: As a producer, you’re benefiting from a higher gold price. Certainly, next year’s numbers will should, if it continues, benefit from a higher gold price because your margins are quite good. They’re definitely improving. I want to see them continue to improve. And I’m sure you do too. Let’s see what that looks like in the next the next few months. The one thing which I look for when I’m analysing a company is an understanding its financial health. You have debt at the moment. Which project are you using that for at the moment?

Cobus Loots: Well, that was the $130M Elikhulu project this last year. The project-based testament to what you can get done in South Africa. So, to put $130MIL into the ground in 12 months is not insignificant. This plant can cheat 1.2Mt of material a month. We currently produce for 65,000 ounces at an ultra-low AISC in the year ahead. So that’s to demonstrate that you can get things done in South Africa.

Matthew Gordon: And have you got more plans to raise any more money for capital expansion programs or are you done?

Cobus Loots: We are funded as far as the existing projects are concerned. So, there’s no need for us to go to market. I think the shareholders want to see us deliver on what we said we would do. 2019 was a first or second step in doing that and 2020 should be more of the same.

Matthew Gordon: So, margins are improving. Cash flow is starting to improve, are you starting see the benefit of it now?

Cobus Loots: Well certainly at the current gold price we are definitely seeing the benefit. That’s another positive around being based in South Africa. We have generally a Rand cost base, which is our local currency, which means that inflation is higher than what you’ll find in U.S. dollar terms. Wage inflation is higher than what you see in dollar terms. Electricity inflation is higher than what you’d see in dollar terms. So that’s sort of generally then puts a squeeze on margins. Where there’s a benefit is when you find a local currency, the Rand, blow out a little bit more to the dollar. What it’s done in the last months. So, then you see the margins actually go up quite a bit more than what you would find in dollar terms for your African producer. You can look to hedge. But what I’m saying is that the negative on cost inflation is offset when you find a large depreciation in Rand, which is what we have seen in the last month. So, $15,000 gold price is good for us, 700,000 Rand per kilo gold price, which is what we look at is even better for us at the moment.

Matthew Gordon: And then there’s just one other aspect – you’ve covered off safety and you’ve covered off the CSG component, but there have been some disturbances in-country. One of your sheets talks about arrest rates. Why declare that one? What’s that got to do with your ability to mine?

Cobus Loots: Well, illegal mining is a serious issue, and not only in South Africa and the rest of Africa. But you do find the guys being in South Africa quite militant, aggressive, armed. It’s meant that we’ve had to up our game a little, to professionalize further. We’ve spent a lot of money on security in the last year, more so than in years past. And that’s to protect our assets and to make sure we can continue to mine safely and sustainably into the future. So, yes, it’s endemic in South Africa. The fact that you have really high rates of unemployment. That’s going to create discontent. It’s going to create sort of people that have nothing to lose. And hence are desperate and that’s understandable. And so, we do what we can. If you look at our operations, contractors and employees combined, we employ 3,500 people. So, rule of thumb each of the workers and contractors look after up to 10 other dependents. So, 35,000 people that’s depended on our business. So, that is a big responsibility for us and it’s also a big responsibility for government to make sure that we can continue to operate. And we have been seeing the support from government, both nationally and locally, in terms of making sure that we can continue to operate.

Matthew Gordon: It is not just restricted to Africa either. We’ve been speaking to some companies in South America also struggling with illegal workers and all the issues that brings. You’ve got to be sensitive, but you also need to be able to continue to mine. If I may finish off with what you’ve done with your current assets, you’re sweating those assets and working them hard. And that’s reflected in the numbers we see. We look forward to seeing some guidance as to what that is looking like during the course of the next 12 months, obviously. And the final question is always, so any plans for any acquisitions?

Cobus Loots: We continue to look at acquisitions. It’s always a good thing because it teaches you. I always say in looking at other people’s businesses, you learn quite a bit about your own assets and what you can do differently. So, to some extent we’ll be busy with Royal Sheba, as a product of us looking at assets elsewhere. So, it’s not a priority for us. If we only sweat our own assets and we develop as we’ve set out in our plans for the year ahead, you should see a nice appreciation in the value of the business. So, an acquisition is not an imperative for us. So, we’ll continue to look, but we are certainly by no means desperate. And we’ve always said if you can develop your own portfolio, that really is first prize. Elikhulu being case and point. Egoli potentially also part of Evander, being a second example of what we will look at in the year ahead.

Matthew Gordon: And I’m guessing, given you’ve got experience in underground mining and tailings, if you were looking, you’d be looking for some similar kind of setup that would be optimal for you.

Corbus Loots: I think generally it’s difficult for us to justify going out of Africa. Southern Africa in a way makes more sense because it’s close, it easier to manage. Well, I wouldn’t want to limit the company by only that. So, you know, does it make sense a risk adjusted return basis. That’s what we would look at.

Matthew Gordon: Cobus, thanks very much. I know you’ve got a really busy day today with these numbers out and you’ll be speaking to lots of people. Thanks for making the time for us. Appreciate that. Please stay in touch, because I think you’ve built, or you are you continuing to deliver on your track record. Refreshingly honest.

Cobus Loots: Great. Thanks for having me.

Company website:

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Pure Gold Mining (TSX-V: PGM) – Funded to Production H2/20, High-Grade, Low AISC

Interview with Darin Labrenz, President & CEO of Gold Developer Pure Gold Mining (TSX-V:PGM). If you want to invest in mining or invest in Gold you need to be sure about the company’s strategy and the management team’s ability to deliver. Pure Gold recently closed a debt financing agreement with Sprott for $90M. This follows closely on from an equity raise in July for $47.5M. This means that they are fully financed through to production by the end of 2020. The company is hoping that their story will mean investors invest in Gold in Canada.

Investing in mining has slowed down in Canada in the last two years. Investing in stocks such as PGM has been slow too, especially compared to its peers. Darin Labrenz explains why now is a good time to look at Pure Gold Mining and mining stocks in general. He tells us why investors should not be nervous about their mine plan following the Feasibility Study. This is a large area play which needs planning and investing in Gold mines is expensive so investors need confidence.

Interview highlights:

  • Overview of the Company
  • Sprott Debt Financing and Company Financials
  • The Market: When is the Share Price Going to Move and Why?
  • Feasibility Study, Resource Risk & Assets: What are They Focusing On?
  • Why Should You Invest in Pure Gold?
  • Entry into the LSE, Share Price and Shareholders

Click here to watch the interview.

Matthew Gordon: We spoke at the end of April. A lot of good things have happened since then. So why don’t we kick off, just give people new to this story, one-minute summary and then we’ll get into some of these exciting developments. 

Darin Labrenz: We are Pure Gold Mining. Our flagship asset is the Madison Red Lake Mine, located in Northwest Ontario. In February of this year we completed a Feasibility Study that outlines an 800tpd underground mine with 1Moz Reserves at 9g/t, which makes it today the highest-grade development projects in Canada. Recently we announced a $90M a debt project finance package, which puts us in a position today where we’re fully funded for construction and anticipate for pour by the end of 2020. 

Matthew Gordon: Well, let’s kick off with one of those things you just mentioned. I think it’s the big news of the days, the Sprott debt financing. Can you tell us a little bit about how that breaks down? In fact, how did it come about because you listed on the LSE recently. You were going to talk to both markets about raising some capital. However, Sprott has come along and are giving everything you want. 

Darin Labrenz: We listed in London in May, looking to satisfy the equity component of our project financing ideally with a raise that was going to be supported by both the UK audience and the North American audience. In the end, Sprott did come along with the Bought Deal proposal and the lead investor in that was Eric Sprott himself. So Eric took down $20M of the $47.5M that we raised, putting them as a 10.2% shareholder of the company. We were able to draw in some UK participation. It wasn’t as much as we obviously had hoped for, but certainly did see some support from UK as well. Our listing in UK is still part of a broader plan to increase liquidity exposure for the company. So $47.5M raised in equity. And then we followed that up with a $90M financing package, which is broken down to $65M debt facility and a $25M US Callable Gold stream. 

Matthew Gordon: That’s a lot of moving parts. You’re fully funded now. Is that correct?

Darin Labrenz: We’re fully funded. In fact, when you look at our initial capital requirement for the mine, it’s a $71M. We raised $90M in our facility, plus the $47.5M equity raise and so the fantastic thing is we’re sitting in a position right now where we’re set to pour first gold in the end of next year, but we’re still continuing to drill and continue to pursue growth strategy for the company and in the financing that we’ve done is enabled us to be able to pursue that. 

Matthew Gordon: Why $47.5M equity? Why not less? It would be less dilutive? Is that because you didn’t know at the time. Were you engaged with Sprott at the time with regards to this debt facility?

Darin Labrenz: We were well down a path, with respect to a project finance facility, but at the end of the day, we didn’t really know what the final outcome would be in terms of the quantum that we would raise, the breakdown of how it would be raised. And so the $47.5M gives us the most flexibility moving forward. One of the things we want to be able to do and will be able to with this is, as I mentioned, to pursue a fairly aggressive growth strategy. And so we do continue to drill on the property and we’ll do so through the balance that you’re looking to increase Resources and areas, our new discoveries, that weren’t incorporated in the feasibility plan, we’re looking to ultimately incorporate them. The other thing is with this financing as it gives us a lot of flexibility moving forward with respect to the project build. No need for cost overrun facility, given that we have a fair bit of room in there with respect to the equity and debt components of the project finance package.

Matthew Gordon: If I look at the share chart it makes for a kind of sober reading. As I said when we spoke last time, you guys had got some great numbers in there, but the market didn’t really care and you are up from, I think we when we spoke at $0.55, but at $0.62 today, but it’s not a lot of movement. Obviously, you’ve had a bit of dilution recently, but do you think that this has just been about timing in terms of the equity raise, the way the market was going. Obviously in the last two months, Gold has moved considerably. We’ll see where it goes. If this had happened 3 months later where it clearly would have been better for you? How do you assess what’s gone on in the last three months re. around the financing?

Darin Labrenz: We can’t really predict what direction the markets are going to go. We were happy to receive a proposal from Sprott that included the equity investment by Eric Sprott. I see this as another sign of validation. When you look at the company, we have 4 cornerstone investors. You’ve got AngloGold Ashanti, which participated in equity financing, maintaining their pro-rata position so they’re a 14% shareholder. You’ve got Eric Sprott now at 10%, I’ve got Rob McEwen at 5%, and you’ve got Newmont Gold Corp in there. So a strong validation from two senior producers and two mining Titans. I can say when you look at Sprott and you look at Rob McEwen, they didn’t buy Pure Gold to come in for the mine that we’re trying to build. They bought with the anticipation that it could be much larger. And that’s certainly our view. You look at some of the opportunities that those two gentlemen have been an integral part of Gold Corp.  Rob McEwan, founder of Goldcorp, that company was launched really by the discovery of the high-grade zone, deeper down in the Red Lake Mine. And similarly, when you look at Kirkland Lake, which has been highly successful, led by Eric Sprott, the Fosterville mine has really rekindled itself with deeper down, high-grade discoveries. We think that that same potential exists at Madison and the financing we raised allows us to pursue a plan to demonstrate that. 

Matthew Gordon: But coming at it from the perspective of a retail investors, high net worth’s, family office investors, we’re looking at where the shares have been doing. You’ve been busy.  You’ve got a great grades, great project, it’s cheap in terms of the cap backs component to this, but the market just hasn’t reacted in the way that you’d hoped. With Eric Sprott coming in now and Sprott themselves coming into this, do you think that’s good for the institutional players or do you think there’s room for retail to actually do well as well? When’s the share price going to move, and why? 

Darin Labrenz: We clearly think that we’re undervalued. I have no doubt that there was a bit of an overhang with respect to project finance. So when you look at that typical mining investment curve, often companies will stall as they go into a period of project finance, into a construction period and ultimately start to generate cashflow where you tend to rerate. We think we’re really unique in this scenario in that our project build is very short. And so we made it a decision to construct last week and we’ve got a 13 month project build and anticipate pouring Gold by the second half next year. And we see this as the best of both worlds because not only are we moving towards the cashflow positive, but we have sufficient financing and funds in the treasury today to continue to drill in team to generate that growth interest. 

Matthew Gordon: Let’s talk about the Feasibility Study. Because if I look at chat rooms and forums, people are nervous about the plan, can you tell them why they shouldn’t be in terms of the deep watering access, rehabilitation…those sorts of things? Why should they not be nervous about the plan that you guys have laid out here? Because if I look back, a lot of Gold companies, their prices have popped. Gold at over $1,500. Yours has moved a little bit, but not a lot. Do think there’s this nervousness in the market about your plan?

Darin Labrenz:  Let’s talk about the Resource first and Resource risk. When you look at our project, we’ve got more than 1M meters of drilling that has gone into defining the Resource. In fact, the average spacing between drill holes within the feasibility reserve is 6.5m which is absolutely incredible. I mean, I’ve never worked on a project with that kind of density of drilling. So from that standpoint the Resource itself is very well-informed. This is a brand new mine that we’re building, all of the development is new. So when you look at the initial capital requirement $95M million. We’ve got about $31M going into preproduction underground development that’s putting in new openings to access the ore body. With respect to de-watering well that’s a natural phenomenon that every underground mine has to go through and I don’t see any particular risks associated with that. At the end of the day, we’ve got a very high-grade reserve, 9g/t, 1Moz in what I would call the starter mine and a huge opportunity here for additional Resource and reserve development as we push forward. 

Matthew Gordon: But what is the plan? This is a very big area you’re dealing with here. This isn’t one small asset, you know where everything is because you’ve done a lot of drilling. You’ve got a plan for a development of a whole entire area. What are you focusing on? 

Darin Labrenz: I mean it is a big area, but we’re talking about a mine that’s going to last for 12 years, in the base case. So we’ve got new discoveries near surface that we think have the potential to impact the mine as we move forward and we continue to drill in those areas. Ultimately, we’re looking at establishing all of the access required to develop the min. We’ll start with the existing ramp, which goes down 150 meters and we’re going to push that ramp downwards. We’ll eventually start moving into access development for the first stoping areas that’ll form the first part of our mine plan. And then in year three, we’re going to incorporate the shaft. And so what you ultimately see here is meta-materials accessing the mine via a brand-new ramp system and then all of the ore will be hoisted out of the shaft, which gives you a real operational benefit. So this is a reasonable size area but it’s an area that’s going to be developed over the course of 12 years and we think has potential to go for much longer than that. 

Matthew Gordon: So the plan will evolve over time the more data you gather. And so do you feel for right now, you’re fully funded. You’ve got enough margin in there for error to make sure that this thing gets into production towards the end of next year, you’re good?

Darin Labrenz: That’s right. And let’s not forget that our project has a history. It operated successfully for 36 years, generated 2.6Moz Gold over that period at a grade of 10g/t. So we have the benefit of a successful mining history and we also conducted a test mining program last year were also achieve plus 10g/t in test mining.  Within the two areas that we had planned in mine. Reconciliation was fantastic. We were within 1% on our expected tons. We overachieved our grade and at the end of the day we realised 13% more ounces out of those two areas. But one of the things that test mine showed us, is that with drilling hang wall and foot wall we were able to see better continuity in a lower grade portion of the model and ultimately, we were able to extract another 1,575t out of the area of grade of 8.7g/t, such that we actually achieved better than 50% more ounces than we expect in that area with that additional discovery. So, those all go along when you’re de-risking the existing infrastructure that we have in place. The 1M meters of drilling, very close density of drilling, it’s all brand-new development, fresh rock. This is a newer body that sits well away from any historical mining. And, then we’ve mined ourselves and achieved what we expected. 

Matthew Gordon: And, so remind me again some of the numbers, the IRR is 35%-36% sort of level. What was the AISC on this? 

Darin Labrenz: It’s $787 per ounce. 

Matthew Gordon: A great AISC. So that all the figures that one we typically look at on this project are good. You’ve just been in this rather boring period waiting for project finance to come through. But you think people should start paying attention now, because you’re moving to production and it’s quick production too. Let’s not forget there’s a very small CapEx required for this.

Darin Labrenz: Exactly. And our project obviously is very highly levered to Gold. All of our costs are in Canadian dollars. One of the things that quietly happened last week was when Gold hit $1,500per ounce in Canadian dollar terms across $2,000, which was an all-time record high in Canadian dollars. So when you look at our IRR and after tax NPV of the project, and our base case, which was $1,275 grounds. Our NPV is $250M. Today it’s $400M, so you can see the impact of the rising Gold price., And we think that we’ve got a project here that perfectly timed to deliver into the market. 

Matthew Gordon: Well, you and a lot of other Gold companies at the moment feel that way and we need Gold to sustain. That’s really interesting. Can we just finish off on the entry into the LSE? Obviously, you did that for a purpose to get out there and start talking to and have new investors see the story because the Canadian market was slightly frozen. How’s that gone for you? 

Darin Labrenz: We’re really excited about our secondary listing on the main market of the London Stock Exchange. We’ve got a bit of work ahead of us to continue to broaden the exposure, generate interest and generate liquidity. We’ve traded 500,000 shares on the London market today, which is a new milestone for us and we’re committed to it. We’ll continue to do to try and develop the exposure for Pure Gold and our project.

Matthew Gordon: So that’s great about what’s going on with the LSE? How’s trading overall? 

Darin Labrenz: We’ve been trading a lot of volume here over the last couple of weeks. In fact, we’ve created about 25M shares. So, I think we’ve had a bit of an overhang with respect to the financing, but I think we’re setting a new floor here and we’re really ready to break out. 

Matthew Gordon: You’ve got marketing in Canada and marketing in London, and you’re committed to that?

Darin Labrenz: Absolutely

Matthew Gordon: So, Retail’s important to you?

Darin Labrenz: All of our shareholders are important to us. Retail is a key component of our shareholder base and will continue to be so in the future. 

Matthew Gordon: Thanks very much for today. Really enjoyed that conversation. Thanks for the update. 

Darin Labrenz: Thank you very much. I appreciate the opportunity to talk about our project and I appreciate the line of questioning. You’ve taken a lot of character to go in depth and ask questions about our project that might not otherwise be brought to light so I appreciate the opportunity to respond. Thank you. 

Company page:

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Sierra Metals (TSX: SMT) – Good Fundamentals, Main Shareholder Restricting Stock

Interview with Igor Gonzales, President and CEO of Sierra Metals (TSX:SMT).

The fundamentals of Sierra Metals are good and the company is effective, safe and robust. However their share price has been negatively affected by a significant shareholder, Arias Resources Capital, needing to off-load up to 30% of the shares. Arias controls 52% of the shares so liquidity was an issue previously. The market knows this and despite successful operations on the ground, the price is being held back. We try to find out how the company is resolving this issue. Let us know what you think about their response to this in the comments below.

Sierra Metals is a South America brownfield and greenfield focussed Silver, Copper, Lead and Zinc miner. $290M, NPV c. $500M. They have paid back a $34M of debt and $15M revolving credit back by restructuring their debt, currently at $59M. Revenues are $52M with $13M of operating cashflow, to fund their capital requirements and operating costs. 2019 is a year of heavily capital costs as they will be investing $83M.

Sierra Metals is one for new investors. Existing long-term shareholders should also feel that the share price will eventually be resolved with Arias. Short-term holders and traders may be be less satisfied, but they always are. We view this as an opportunity to get in cheap.

There is a new 43-101 due by end of the year and another in Q2/20. Lots of infill drilling. Brownfield and greenfield exploration is the foundation for their strategy going forward. A good track record of delivering improvements in operations and they are generating cash. Operating in two countries with good mining codes and taxes with a good infrastructure and in the right mining jurisdiction. There is a lot to like on the mining side.

Interview Highlights:

  • Overview of the Company
  • Projects in Peru & Mexico
  • Company Financials: Arias Resource Capital, a 52% Shareholder – How Quickly Do They Intend to Sell and Are There Any Regrets?
  • Why Invest in Sierra Metals? What’s in it For Investors?
  • Strategy & Risk Mitigation

Click here to watch the interview.

Matthew Gordon: We spoke back in May when you told us your story. We want to catch up and see how things are going. So, why don’t you kick off for people who’ve not heard this before with a one-minute summary and then we’ll get into some questions.

Igor Gonzales: Sierra Metals is a poly-metallic producer that operates in two jurisdictions, Mexico and Peru. We have two operations in Mexico, the Bolivar mine, which is a copper and gold Silver play, and the Cusi mine, which is a Silver play. It’s our smallest mine. And then in Peru, we have the Yauricocha mine, which produces all fine metals. We are now in a process of expanding our company.

Matthew Gordon: Tell us what’s going on in Peru?

Igor Gonzales: In Peru, given the fact that we have an older mine that has been operating for 70 years, we need to keep on top of the infrastructure upgrades. And therefore, we have five ongoing projects now in Yauricocha. The main project is the shaft upgrade, the Yauricocha shaft. This is a brand-new shaft that we’re building from scratch and we’re in the third year of construction and we have 1.5 years to go. However, we’re going to be implementing portions of the project as they become available. Then, we just completed the Yauricocha tunnel, which connects all the entire mine facilities with the processing facility, that’s now up and running and operating. Then we have all the ventilation upgrades that we’re doing, and that work is continuing as we speak. We also have the tailings dam, phase five upgrade. We obtained the permits and now we’re in full construction mode, which should finish the main dam for phase five sometime in September of this year. And then we also have a new mess hall and camp refurbishing project which is ongoing and will finish in the second quarter of next year.

Matthew Gordon: What’s happening in Mexico?

Igor Gonzales: We completed two expansion projects. One in the Bolivar mine, which initially was conceptualized to go from 3,000tpd to 3,600tpd. We then added some additional capital spend and now we have completed all the construction of that expansion and we are in the final phases of the ramp up, both the mine and the plant. And I’m happy to report that as of Q2 we have on average 3,700tpd per day, which is above the initial target and we continue to ramp up those 4,000t in Q3. We would like to take that ramp up to 4,250tpd in in the Q4 of this year. So that ramp up is going well. We achieved the intended initial capacity and then we continue to ramp as we go. Then on our next mine, the Cusi mine in Chihuahua. We increased its capacity from 600tpd to 1,200tpd. 100% increase in capacity. We have completed most of the construction. We still have a few things that we’re finishing up. But we’ve had struggled with the ramp up both at the mine and at the plant. However, we will continue to increase the throughput. We’re now approaching 1,000tpd so we’re getting closer to the 1,200tpd and we’re trying to get to 1,200tpd by the end of Q3 of this year so those are our two expansion programs.

Matthew Gordon: Let’s talk about your finances? When we talked previously you were talking about investing $83MIL into the company. You’ve got a market cap of $290M, NPV $500M. Those are good numbers, but you’ve got some debt as well, and you’re self-funding on the capital expansion program. So, can you run through some numbers for us, please?

Igor Gonzales: I will talk about the debt. We had a loan from a Banco Acredito Peru this year at the end of Q1 for $100M and that allowed us to pay a remaining $30M-$34M in the purchase that we did in Yauricocha, which was another loan that we had outstanding. And we also pay a revolving credit of $50M and we will have $30M of funds for additional expansions or we would like to give it. We have reconfigured our debt profile. Right now, our net debt is about $59M. Now, going to our performance for the Q2. We had revenue of about $52M and about $13M in operating cash flow, that allows us to still fund our capital requirements and all our operating costs. This is a year of heavy capital investment for us. We initially budgeted for $83M. We had a strike Yauricocha that forced us to defer some of the capital into 2020. However, we remain with the same projects. Also, we completed the capital spend in Bolívar and we are completing the capital spending in Cusi. So, it’s going to be a very fruitful year for us once we are done with all the capital investment.

Matthew Gordon: I feel that you know what you’re doing, your team knows what they’re doing. It’s a very well-run, safe and to use a word that you’ve used in your presentation, it’s a very ‘robust’ operation. But I’m not excited by it, and I want to know what am I missing. Because you’re producing cash flow. You’ve got revenue. You’re in production. All the right parts are there. What am I not seeing?

Igor Gonzales: I think we’re not also happy with the current share price, which think we’re undervalued.

Matthew Gordon: Why?

Igor Gonzales: We think that we don’t have enough float in the market, in our share. We have a main shareholder which holds 53%, Arias Resource Fund; he holds in two funds. He’s trying to resolve Fund 1, which he’s committed to do and I think that’s part of the equation here. And so, when this Fund 1 issue gets resolved. I think that the float is going to normal levels and then that’s going to help our share price.

Matthew Gordon: How much does Fund 1 own?

Igor Gonzales: Fund 1 owns roughly 30% and Fund 2 about 23%.

Matthew Gordon: So that’s a lot of shares to come into the marketplace, which is great for potential liquidity, but it’s also a problem for the Fund. How quickly does he need to sell these into the market?

Igor Gonzales: I don’t have that information because we don’t we don’t manage the Fund and Arias Resource Capital has that all that information.

Matthew Gordon: So, they are not are not obliged to tell you how they’re going to manage that into the marketplace?

Igor Gonzales: I know they’re doing some movements to try to resolve that. And they have invited third parties to review our operations and see if they can commit to packages. But that’s as far as I can I can tell.

Matthew Gordon: Because that’s going to be holding the stock back, because people know that’s coming.

Igor Gonzales: They’ve been inviting the parties to look at our operations. We’ve entertained their visits and so forth, so I think it’s a moving process.

Matthew Gordon: It’s a moving process, which is affecting your ability to create shareholder value today. All you can focus on is delivering on the mining side, the production, the announcements.

Igor Gonzales: Exactly. That for us is extremely important not to lose focus of what we are here to do, which is our long-term strategy. We need to continue to add value to our units and to create value for our shareholders, independent of who holds our shares. I think that focus needs to remain and we are doing that, we’re delivering on the expansions. We will do another expansion in Peru. We’re now doing all the permitting work. And so, we continue to drive our strategy forward to grow the company.

Matthew Gorodon: It must be like trying to do your job with one hand tied behind your back, because you’ve got a significant shareholder restricting your ability to create value for shareholders in the marketplace. So, you are having to focus on mining, which is which is good is what you’re good at. And I fully trust that you get at it from what I see. Do you regret doing that deal with Arias?

Igor Gonzales: No. Arias had the ownership of the shares for quite some time now. I entered the company after all the shares were in place, so I have to focus is on trying to grow the company myself and not be side tracked by the activities of the shareholders.

Matthew Gordon: It’s a kind of salutary lesson in terms of how share structures are set up and ownership structures are set up, because it can restrict a company’s ability to perform as it should. I would argue that on your fundamental numbers, your shares shouldn’t have done what they’ve done in the last year. They should be heading the opposite direction. So, what’s your message to shareholders on this topic?

Igor Gonzales: I think our main message to shareholders is we’re staying the course. We’re creating value. We’re showing the numbers, we’re reducing our costs, we’re increasing our production throughput and recoveries. And so, we have all the main elements that create value in a company and they are in place. So, we will continue to do that and remain focused on that aspect of this.

Matthew Gordon: What I’m about to say, I don’t think is of any comfort to your existing shareholders, but for new shareholders coming in, this is a very interesting proposition. And I don’t expect you to comment on that, you’ll get yourself into trouble.

Igor Gonzales: Once the metal prices recover, the potential for our shares to improve are quite significant.

Matthew Gordon: So, it’s a question of time? When Arias sorts out Fund 1 or one of their two funds, and gets these block sales away, then your arm will no longer be tied behind your back. You feel that the market should recognise what you have been doing, is that what you’re saying?

Igor Gonzales: Ibelieve so. I believe that once we have the right float then the market will start recognizing the value for Sierra as they should.

Matthew Gordon: Do you mind if we just talk about strategy? What’s your thinking in terms of building this business? I know you could say you’re mitigating jurisdictional risk because you’re in two countries. You’re underground mining. That’s what you know, that’s what you’re good at. And you’re obviously in production, which is all good. But what is it that you’ve set out to build? And what will this company look like in 12-24 months’ time?

Igor Gonzales: A fundamental element of our strategy is exploration, brownfield exploration for one. And then the second phase is greenfield exploration. We have been putting important Resources in both areas. We’ve been growing the Resource of all our three mines steadily over the last three years and we continue to do so. As a matter of fact, we will have two new 43-101’s for Bolivar and Yauricocha by year end in 2019. And another 43-101 in the second quarter of 2024 at the Cusi Mine. We continue to do brownfield infill drilling also, in all three mines, but in Bolivar and Yauricocha, besides the brownfield, we’re also doing some greenfield exploration close by the operation. In Yauricocha, we have high value targets for this year. We’re already drilling with two platforms and in Bolivar we’re also doing some near mine exploration, but these are brand new targets and we continue to expand our Resource. So, I think that’s one of the key elements for our growth is to find additional Resources, then turn those Resources into a reportable Resource, via 43-101’s and then conduct the expansions that we require accordingly. So, exploration for us is the fundamental foundation of our strategy.

Matthew Gordon: So those are things that you’re going to do. Build up the Resource and reportable Resource, but to what end? What’s the strategy? Not what’s the deliverables? You are going to drill holes to build a company of a Resource of what size and for what purpose? Are you going to mine it yourself?  Are you going to sell it? What’s the game here? What do investors need to know?

Igor Gonzales: Well, it will be hard for me to tell right now what we are going to find via the exploration. However, we’re open in doing joint ventures or bringing new partners if our exploration results deliver significant results. So, I think we keep ourselves so open. We keep analysing other properties, other projects that come by and we were open to growing the company also via that avenue which is associated with other enterprises.

Matthew Gordon: But you can’t say to what end? If someone said “What is Sierra Metals? What are they trying to be?” What what’s your answer?

Igor Gonzales: We would like to be a second quartile producer in terms of volume of production. And right now we’re in the third quartile and our target would be to be in the top of the second quartile and the top of the second quartile of production with all the other Silver producers.

Matthew Gordon: I think the fundamentals of your company are good, but I’m struggling to understand why I should be investing in your business. You talk about track record, robust performances, strong capitalization, low net leverage, robust liquidity. What do all these things mean? Why should I invest in your company and not the 50 other South American businesses doing the same thing?

Igor Gonzales: I think what we’ve got is a business that is generating cash. We’re operating in two countries that are very supportive to mining. We have all the Resources available to do our jobs in terms of contractors, people, services and legislation and tax stability. We also would like to point out that the potential of our properties is very significant given their location within the countries where we operate. In the case of the Yauricocha mine, it’s located in a major fault system where North and South you have very large deposits and so the likelihood of finding significant additional Resources is important. Likewise, in Mexico, in the Bolivar mine, we’re in a location where it’s a mining jurisdiction with a huge potential for growth. So that’s another part that is very appealing to our story. We’re not just in one mine and trying to develop one mine, and that’s it. I think we can grow these mines into something much bigger. We don’t have the results yet, but they all the geological information that we have to date indicates that we are in a very fertile zone. Our track record, if you analyse Sierra at 5 years ago and Sierra today, we increased our throughput and our production, our cash flow generation tremendously. 5 years ago, we were probably in Yauricocha around 2,000tpd. In Mexico, at 800tpd and today we’re at 4,000tpd. So, we’ve improved our capacity to generate cash via production in a significant way. So that’s our track record of creating value for our investors via the improvement. In the meantime, we also have generated the cash flow. We’ve been trying to manage our debt. We have a solid financial position. We have $40M cash as we speak. We have a $59M in debt. And as soon as we finish our expansion projects, our ability to generate cash is going to be even greater than what it is today. But the most important element of our business is the people. We have been able to attract talented and experienced people into our team. And we operate with three mines and the mines have their individual staff. But we also have a senior team at the corporate office that provides technical support to our operations in projects, in managing, in planning, and very soon in maintenance and asset management. So, with that oversight and support to our operations, we bring the experience at the head office that can be utilised in the different operations without interfering with their work, but reviewing their plans, improving our plans. I think that part of the business has been reinforced in such a way that we brought in very talented individuals in to our company.

Matthew Gordon: I buy a lot of that. These are good mining jurisdictions. We’ll see what the drilling reveals. Having $40M in the bank is fantastic. Having free cash flow is fantastic. But you’re still paralysed in a way, in that shareholders make money when your shares increase. Don’t you think that you need to get involved in a conversation with Arias Resources Capital. Rather than them just sending people through to diligence your mine. Shouldn’t you understand what is the process by which you are going to release this pressure on us, because it is pressure on your share price. At what point do you get involved and say we need to be part of the solution?

Igor Gonzales: We review this situation with the board on a regular basis, and we have a share buyback program, for one. We had an ATM in place or another. Arias Resource Capital is moving is trying to deliver on Fund 1 and they are trying to resolve that issue. And we’re all aware of that. In the meantime, we have to stay focused on what we’re doing. But we don’t have control of what Arias Resource Fund does with the shares.

Matthew Gordon: I appreciate you don’t run their fund, but I’m saying that they should, as a matter of courtesy and expediency, work with you to agree and resolve the way forward if they are to exit quickly.

Igor Gonzales: And we’re are co-operating, they’re bringing parties for review, etc. and we are cooperating with that. We have an active data room where they can go and see our company and they can analyse the potentiality of our business.

Matthew Gordon: I think that you’ve got a great company. I think you’ve got a great team. I really like the way you talk about your business. But I think there’s this pressure with Arias Resources Capital which needs to go away. But when it does, I would like to think that your shares will be given the chance to breathe again and maybe start moving in the right direction. Igor, thank you very much for your time today and your explanation. You’ve been very honest, as always. So, thank you.

Igor Gonzales: Thank you, Matthew.

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Roxgold (TSX: ROXG) – Little Fish Taste Sweet

In our second interview with John Dorward, CEO of Roxgold (TSX: ROXG) he digs in to the strategy and thinking behind the company’s approach to Gold mining and operating Gold mines in West Africa.

What is their exit strategy? Will their plan to have 3 projects plus one world class asset, a game changer, work out and how? What are their priorities? Can investors get cash in hand or do they prefer having cash reinvested by the company at higher and higher rates?

We discuss these topics and more:

  • Drill Announcement
  • Piecing together the Company Strategy
  • Fundamentals of Mining in Africa and the Competition in the Country
  • Possible Gold Market Prediction

Click here to watch the interview.

John Dorward: Roxgold is a development and an operating Gold mining company. Our principal asset is the Yaramoko Gold Mine in Burkina Faso, which Roxgold discovered in 2011 and put it into production in 2016. So it’s been in operation now for three years. It’s a very profitable, very good operation and has been a strong underpinning source of cash flow for our company. And we’ve just made our first significant investment in terms of growth by buying the Séguéla Gold project in Côte d’Ivoire from Australia’s Newcrest Mining.

Matthew Gordon: So let’s talk about that. I want to paint a picture here for investors who are watching this on Crux Investor. You outlined a strategy to me, which I thought was fascinating. You thought, we’ve got an asset, rather than work out what you’ve got in the ground, you got quickly into production. And that’s given you the cash to be able to look at additional acquisitions. But it was also out of necessity because of the mine life at Yaramoko is what it is. And we can maybe get into that now. Tell us a little bit about Yaramoko. What you saw there, and perhaps what the restrictions were in terms of things like mine life?

John Dorward: So, I mean, Yaramoko is really a great asset. It’s really, I think for a company that starting out is a junior with a development asset, Yaramoko is exactly the sort of asset that you want to find. High-grade. So extremely high-grade, double digit Resource grade. We’ve been mining high-grade now for three years. The interesting thing with respect to the mine life is that we published a Feasibility Study in 2014 which showed that we had a 7 year mine life at 100,000oz a year. So 700,000oz of production. We’ve been in production now for three years. We have produced over 350,000oz and we still have a 7 year mine life, with eight 830,000oz of Resources.

Matthew Gordon: So you’re continuing to drill out and step out, and work out how you can develop that body there. You mentioned when we spoke last, there are a couple of other targets you’re looking at in and around Yaramoko. How’s that going?

John Dorward: It’s going well. So we’ve had a very active program of generating new targets, which we are setting up to start targeting and drilling in the second half of this year. I think for, as with a lot of projects, the brownfields potential is always the most compelling. If we can find another deposit like Bagassi South or the 55 Zone, which are currently in operation, then the returns to our shareholders and the company should be very good. So that’s motivating the search in and around where we’ve got infrastructure already.

Matthew Gordon: So let’s get into some numbers there with Yaramoko as people understand that, because I have talked about short mine life, but you’re extending that out slowly and surely. You’ve got a good team there, I’ve looked at the track record of delivering. Mining’s mining. It’s tough, it’s hard work. There’s no kind of easy shortcuts here. But you’ve been building that out. You hoped to grow that and extend the mine life even further. So what are the things that you are looking at with your team on a daily basis? What’s the things that are keeping you awake at night in terms of needing to deliver?

John Dorward: Really continuing to deliver consistent production is the key for us. So if you look at our track record, we’ve tried to establish a record of under-promising and over-delivering. I think if you look at our first two full years of production being 2017, 2018, both years we increased our guidance and then came in above the top end of our guidance range. This year we’re guiding to what would be record production at Yaramoko. The guidance range is 145,000oz to 155,000oz. We’re very much on track to deliver that guidance, again.

Matthew Gordon: Yeah, I’d encourage viewers to go to Page 4 of your current PowerPoint. It’s got some quite interesting numbers on there which backs that up. So, it’s been a cash cow for you. You created enough cash, I think shareholders should be happy with what you built there. It’s enabled you to have enough cash to look at the second asset, which is Séguéla. Why don’t you tell us a bit about what you saw there and why you’ve gone for that?

John Dorward: It really plays to, I guess, our real strategy, which is to offer per share growth in both Resources, Reserves, production, but most importantly, earnings and cash flow. Slide four of our current presentation I think is a good starting point, where it shows on a per share basis how we’ve gone and it’s some pretty impressive growth in terms of production and especially Resources. So what I think happens with a lot of mining companies, and this is sometimes why I think investors may have a bit of a jaded view of the mining sector, is that the mining companies chase growth at pretty much any cost. And a lot of that comes with issuing shares to acquire new development assets or new producing assets. And we think that it’s very difficult to deliver long-term sustainable value in doing such a way, because if you’re buying someone else’s producing mine or you’re buying someone else’s development projects, they’ve probably surfaced a lot of the potential value. We would like to do that ourselves. We believe we have a team, we have a good cash flow. So we’d like to take an asset maybe at an earlier stage, invest capital in it, invest the expertise, de-risk it, move it along and ultimately make it more valuable.

Matthew Gordon: So how do you do that? Because obviously no one sells good assets. Right. Or if they do, they don’t sell it cheap. So you’ve got to come in at an early phase. Makes sense. But there’s a lot of crap out there, too, right? So what are you looking for that says this is the one out of the hundred that we’ve looked at?

John Dorward: Yes. Well, you’re absolutely right. There is a lot of crap out there. We’ve popped the hood on a lot of assets, both operating and development and exploration assets. And to be honest, often not as advertised. And I think that’s something that we’re concerned about. With Séguéla, which is our first acquisition, I think is a really good case study to understand how we look at  opportunities and what we want to do. It came out of Newcrest. Newcrest is Australia’s, as many people will know, Australia’s largest Gold producer. It’s the third largest Gold producer in the world and really has a strong exploration focus. I mean, Newcrest has discovered the majority of its assets over time. So it’s really focused on exploration. Exploration is held in high regard.

Matthew Gordon: So why did they sell it to you?

John Dorward: So it probably looked like it didn’t make their size threshold. As I mentioned, the third largest Gold company in the world. The asset now, we just published a new Resource at nearly 550,000oz. So I guess they couldn’t see visibility to the 5 million plus ounces that a company of that size needs to be able to justify the effort.

Matthew Gordon: But you’re not looking for that? Certainly not day one.

John Dorward: I’d love to find it!

Matthew Gordon: Sure, that’ll be nice. But this is what I’m trying to get at, so investors get a sense of what your thinking is here. You’re not looking for world beaters, you know, global, scale assets. You’re looking for a mid-sized, profitable, low operating costs, reasonable AISC to this and piecing together this picture. So tell us about the thinking. That’s what investors want to understand. How do you think about these things and why does that make sense and how are you going to deliver it?

John Dorward: Sure. So I think we have the the belief that little fish tastes sweet. Yaramoko, and we think it’s not done and we’re finding more Gold there, but it’s not a world scale, world-class scale asset, although very profitable. So we’ve taken that model and said okay, ‘this is interesting. We believe this is an interesting model. This is a way that we can operate in the competitive landscape and still add value on an appropriate risk reward basis’. So buying Séguéla at just north of 500,000oz now for $20M cash. And that’s very important to us because we were able to pay cash that we generated at Yaramoko.

Matthew Gordon: So no dilution?

John Dorward: No dilution.

Matthew Gordon: And I know the share count has barely risen in the last two years, two and a half years.

John Dorward: We haven’t issued shares, in terms of a traditional equity financing, since early 2015. And we want to keep it that way. We want the owners of Roxgold to enjoy increasing share of Resources and Reserves and profitability, and earnings and cash flow, as opposed to having to share that with new shareholders who’ve come in on the back of a dilutive financing. So, Séguéla presents itself as an opportunity we can get into at a reasonable price. It’s $20M on the barrelhead that we’ve paid to Newcrest, another $10M payable upon first production. So we think the interests, the risk is shared there. If the project doesn’t make the production hurdle, then we don’t pay Newcrest $10M. If it does, we’ll be happy to pay that $10M.

Matthew Gordon: But, okay, if you don’t, you’re $20M into this, albeit with cash you’ve generated, it’ll be a non-dilutive exercise, but why is $20M a good price?

John Dorward: Well, we believe it’s an excellent price. So we believe it, as I say, Newcrest were motivated to sell because they didn’t see the long-run pathway. We can still have a very good asset. Anything above what we’ve found today. So we believe today, as it currently stands, Séguéla is an economic asset and we’ll be the next Goldmine that Yaramoko builds.

Matthew Gordon: But the Resource is half a million right?

John Dorward: Absolutely.

Matthew Gordon: I normally wouldn’t look at anything under a million. So what are you seeing?

John Dorward: And to be honest, I think that’s the sort of thinking that we’re trying to take advantage of. Perseus has just built a new project in Côte d’Ivoire called Sissingué, which has been very successful for them. It’s actually a small Resource and a lower-grade than what we have today, at Séguéla. So I think there’s a good case study that this can be worthwhile.

Matthew Gordon: Well, case studies, neurology, whatever. That doesn’t answer the question about what you were looking at. What are you seeing over and above the data that Newcrest has given you, which says, I think we can make this bigger?

John Dorward: Yes. So we see, the Resource we’ve put out, 530,000oz @2.4g will get bigger from the recent drilling that we’ve done. So we’ve done some additional drilling recently in the last few months over and above what’s included in that Resource. And we published that earlier this week.

Matthew Gordon: But that is a kind of post the event thing. I’m intrigued by again the thinking. So you agree $20M plus $10M with the data you had, the drill results that you inherited or you were allowed to look at before you decided to make the decision. What did you understand that others didn’t?

John Dorward: Well, I think we understood I think it’s probably buying option value at a reasonable price. When I say reasonable price, I mean, we bought a project that we thought would be economic and we could make money off, off what we saw if it didn’t get any bigger. 530,000oz, 550,000oz doesn’t ring a lot of bells for people. But when you come from a company of our size, it’s still a meaningful increase in production. So we’re realistic about where we are and how big we are. So we saw our base case was squared away with an economic asset. We then saw that there was a series of other potential deposits that Newcrest had done work on all around Séguéla. And if you look in our presentation, you’ll see a map with concentric circles. So within 10 kilometres of the intended deposit, which is the current deposit that has a Resource at Séguéla. There’s over a dozen targets that Newcrest has delineated, some of which are quite advanced, mainly Boulder and Agouti. We put those results out earlier this week and it’s from additional drilling that we’ve done, and you see very attractive, high-grade over broad intervals close to surface. So we’re very confident that some of these…and we were very confident when we bought the project.

Matthew Gordon: So that is page 17 of the PowerPoint.

John Dorward: That’s right. So if you look at that. So we were very confident that some of these additional satellite targets would make the grade and become additional feed sources for a central mill. So it wasn’t a question that we had to grow Antenna, the one with the Resource. It didn’t have to make that any bigger. What we wanted to see was some of these additional come in that would improve the economics.

Matthew Gordon: Would you have done that deal if you had to borrow the money?

John Dorward: Yes, I think so, yeah. I think if we had the borrowing capacity, I mean, we’re relatively agnostic to capital. If you borrow the money, you have to repay it. We have a relatively modest gearing level, so I’ll be able to do that.

Matthew Gordon: But there’s a very different conversation with the shareholders, you’re going ‘right, I’m borrowing some money, diluting the company down here’. I appreciate your market cap is where it is. But versus actually ‘we’ve got the cash, we’re going to give this a go because the optionality looks good to us’.

John Dorward: Yeah. I think that’s right. And I think being able to go to Newcrest and say, ‘here’s a cash offer’. I think that was a competitive advantage for us.

Matthew Gordon: You could close the deal a lot quicker.

John Dorward: Yeah. And we always look at where we sit in the competitive landscape. So we think we’ve got an area that sort of flies under the competition of the larger companies, even sort of the mid-cap companies that are well capitalised are probably looking for projects bigger than us. And I don’t want the viewers to think that we’re deliberately looking for small projects. We just think that on balance, there’s probably more opportunities for us –

Matthew Gordon: – and less competition. And with less competition comes, the price doesn’t get inflated.

John Dorward: That’s right. And then Newcrest, and I don’t know what other offers they received, but I imagine it would have been offers from very junior companies with a lot of script in it. So Newcrest would have ended up being a large shareholder of a junior without a cash flow. And then really sort of hostage to the success of that company being able to finance and take the project forward. With us, It was a clean exit. We’ve known the Newcrest people very well, and I think they they’ve seen what we done at Yaramoko. And I think for a large company, and especially one like Newcrest, leaving a good legacy of where they’ve been is important. So they want to see it go to a good home. People who will be good operators, good stewards. And we’ve been able to demonstrate that in Burkina Faso. The minister for Mines of Burkina Faso, actually wrote to his counterpart in Côte d’Ivoire, giving us a recommendation and endorsement.

Matthew Gordon: Always good. So Newcrest, are they sitting on more assets in West Africa that you’re aware of?

John Dorward: They still have a joint venture position with Barrick that they inherited, part of the Randgold acquisition.

Matthew Gordon: And what’s that doing?

John Dorward: I’m not really sure, they don’t talk about it a lot, but I’m always interested to know, to learn more.

Matthew Gordon: So are we! Okay, so that helps us understand a little bit about your thinking. The small fish tastes sweeter. And you think you’ve got the team to be able to extract the value there. And there’s a big list of things to look at in that portfolio, that come along with Séguéla.

John Dorward: That’s right. I mean, if you go forward. We’ve talked a little bit about what attracted us to the asset. If you roll forward over the next couple of years. So, we will deliver a Preliminary Economic assessment later this year. And I think the opportunities that, in talking to analysts and investors who are active in Roxgold, a lot of them are still carrying these assets at $20M in their valuation, what we paid. So I think when we table a P.E.A. (Preliminary Economic Assesment) and not to to front run what that will look like, but I think it’s going to to be better than $20M.

Matthew Gordon: Well it’s interesting. People have different views of PEA’s, in terms of their accuracy and the relevance of them. So, yes, some people might like it. Some people may wait for the next step. Okay. Let’s talk about…before we talk about drill results, we’ll come onto that in a second. Your share price. You took a big hit. We talked about this in the last conversation. We’ll put a link up to that interview. But let’s talk about that here. The share price took a bit of a hit because of some selling, you believe? Why don’t you tell us about that?

John Dorward: Yeah, look, I think we’ve actually recovered a little bit in recent…last week or so.

Matthew Gordon: You have. I want people to explain…because if they look at the chart, they’re going to go, ‘oh, there’s something going on here’. But it’s explainable so why don’t you.

John Dorward: Absolutely. So, it’s been quite an eventful 12 months for Roxgold in terms of its share register. Probably a lot of your viewers would have seen this rippling through junior mining companies when M&G lost their Vanguard mandate in July of last year. And that went to Wellington. And we’ve, and I think we might have talked a little bit about that, so that was announced, I think in July last year when we were trading at a point $1.40. And we’re not looking to make excuses, but when you look at the share graph performance, basically from the day of that announcement, it trailed from a $1.40 down to $0.70 or thereabouts. As the stock…as that overhang leaned on our stock. And that is a little bit of a subtle difference that happened, too, because we historically have been a fairly thinly traded company. So we’ve got a good number of very long-term loyal shareholders who own big chunks of Roxgold and don’t sell them and don’t buy more, don’t sell more. They’re happy with their position. So we’ve had a lot of…we’ve had limited trading. And so when you have your second largest shareholder loses its mandate, and everyone expects it to be sold, which it subsequently was. That’s a bit of a problem for you. So that predictable response, share price down, that cleared in late January. So there was a bought deal…a deal done and a block traded which went to a lot of good homes, good long-term, strong hands. And that really marks the share price which has turned around quite a bit since then. And that’s been very helpful for us. And what that’s also done is it’s really increased the velocity of our trading. So, our share trading has gone up considerably. And the up-shot of that is interesting because one of the one of the key structural shifts in the junior Resource market has really been the rise of passive investing. And that’s that’s not just junior resource companies, it’s across the board.

Matthew Gordon: Yeah. We’ve talked about them in previous interviews.

John Dorward: We’re well on track for inclusion in the junior ETF, the GDXJ at the next re-balance.

Matthew Gordon: How do you know that?

John Dorward: Well, so you look at the criteria for entry and it’s pretty straightforward. You need a market capitalisation of greater than $150M U.S. So that’s a check for Roxgold. And you need to have $1M…an average of $1M per day traded for three consecutive quarters. Now they’re not calendar quarters. So this current quarter finishes in August. But we’ve already cleared that hurdle for two quarters. We’re halfway through the third quarter and we’re trading at over $1.5M U.S. a day. As we speak.

Matthew Gordon: That’s a big deal. The GDXJ is a big deal.

John Dorward: It is quite a big deal because you’re looking at a significant new shareholder buying onto the register. And also that facilitates other shareholders I think who may be looking at being tied to the index and then increasing our liquidity.

Matthew Gordon: Right. Okay. Well, I hope that comes because I think for a Retail Family Office and High Net Worth, that’s a big deal. It shouldn’t be understated. Okay. So, we will watch out and see if that happens. Now, generally you…I’m looking at things like you’re AISC, your overheads, your cost and your G&A, all of that good stuff. And I always ask the CEOs, in terms of what do they think juniors should be paying their board, the management? And how do they remunerate each other? Is it incentivised on deliverables? Or is it ‘actually, I’ll just take a big salary here’. How do you guys look at that? How do you approach that?

John Dorward: So I think I mean, and there’s a lot of commentary on what’s the appropriate –

Matthew Gordon: – Quite rightly.

John Dorward: Absolutely. I know it can be a hot button item for a lot of people. With Roxgold, we have a combination of fixed and variable pay. And really it’s, fixed pay is a salary and the rest is really to be put at risk. And there’s two components to the risk base salary. There’s the short-term and long-term. Short-term is really set around delivering metrics. So for myself and for my team at Roxgold. We’re incentivised on on a variety of metrics. Safety is first and foremost. Production targets, making sure we hit various milestones in terms of developments.

Matthew Gordon: Who sets those?

John Dorward: Those are set by the board.

Matthew Gordon: So the board set the targets by which they are remunerated?

John Dorward: No, no, so the board don’t have those sort of targets, this is for the executive team. I happen to be on the board but this is for the executive team.

Matthew Gordon: Got it. Okay. I understand.

John Dorward: So you have to deliver. And if you…and there’s a range and if you don’t deliver, then you don’t get that component of your short-term incentive. And then on the long-term incentive, is essentially fully tied to shareholder returns.

Matthew Gordon: And who watches the watchers, as it were? I’ve been talking to a company, let’s say, in the last two weeks to keep it vague. They have a little bit of production. They have a market cap of circa somewhere between $200M and £300M. And their board pays themselves as much as the Kirkland Lake board. And I’m like, wow, that’s pretty ballsy for a low revenue business. We got a lot of communication from investors saying, well, ‘what are the rules? Who manages that. Who oversees that?’. Because people forget to read the prospectus when they’re putting their money in. If there’s a private placement or if there’s a fund raise of any description, I mean, it’s just interesting how juniors manage that.

John Dorward: Yeah. So I guess the ‘who’s who’s watching the watcher’ and it’s not an exact science. But I think the rise of the proxy advisor has been interesting in recent years. I’m sure a lot of your viewers are aware, a lot of funds are advised by proxy advisors. And these proxy advisors comb through the management circulars and annual reports to see what the the pay mix is. And they basically have a recommended approach. I have a template and that’s largely in line with what I was saying. So there’s things that they don’t like. They prefer whole share units over options because they’re less dilutive. Things like that. They want to see performance metrics that, if your company outperforms its peers set then that’s good. If it underperforms, then there’s less reward. So they want to see that the management team make some gains and the shareholders and the company is doing well and feels them pain on the on the down side.

Matthew Gordon: We’re here to help investors understand why they should invest in Roxgold. So let’s get back to that picture painting. You’ve got Yaramoko, you are enhancing that, you’re continuing to work and extend the life of mine. Very high-grade, very low AISC. It’s a good, solid project. And you will keep sweating that. And it’s producing cash to all you…give you the freedom to do things. You’ve just bought Séguéla. You like what you see. You explained why you bought it, why you paid the price that you do. So how do those things set in terms of your vision, the complete picture, the overall picture of what Roxgold could be. Without getting into the, ‘we’re going to get into development, etc. We will never sell’. Don’t do that. Do the reality. What are the options for you if you build this out the way that you could?

John Dorward: Sure. So the first and foremost is to try and make as many things as you can, put them under your control as best as you can. So there’s a lot of variables that we can’t control in our business, price, price of Gold, whatever. But what we can control is our capital structure, to a certain extent. And for us that’s very important. And on the theme of the ‘why we went to Séguéla’, the beauty of this project is we can build this out without raising another dollar in equity. And that’s as I said, we paid cash because we didn’t want to issue shares. From cash on their balance sheet and cash from Yaramoko and probably a combination of a re-cut financing or project finance arrangement, we should be able to build that Séguéla without going to our shareholders and asking them to dip into their pocket to fund our growth. And I think that’s important. So that’s really, sort of, set in stone for us. That’s what we want to do. So ideally, we would like to find a third project. And if we could rinse and repeat the Séguéla style of experience, we would do that. Because I think we could then schedule that to come in after say Séguéla. And again, if we could do that by minimising or avoiding dilution totally, and then use cash flow from Yamamoko and Séguéla to then build that, we’re actually starting to look like a real business as opposed to a mining company because we’re taking earnings, genuine cash flow and reinvesting at an increasing return on investment.

Matthew Gordon: That’s what interests me. That’s what interests me when we talked last online. The model was different. It seems to be a business which understands the needs of investors. You’re not asking them to continually fork out or diluting them. You’re creating your cash to give you optionality, which is great. Are we going to see dividends at some point?

John Dorward: So an interesting thing, a book that I’ve read, and I’ve read it a couple of times now, is Outliers. You may be familiar. It really talks about CEOs who have been very impactful and tries to sort of divine what was different about these actors or these CEOs who really compounded earnings and made extreme returns for their shareholders. And one of those is really, they don’t typically pay dividends. They favour buybacks. So that the form of return of capital to shareholders is buybacks. But what they do is they take the earnings from their business and they reinvest those earnings, allocate that capital into future growth. And that’s what we were looking to do. So I don’t think it’s a new idea. Certainly not a new idea that we’ve come up with.

Matthew Gordon: No, but it’s important for people to understand the way you think, because there are different ways you can come at this. Some people look at cost cutting exercises, some reinvesting in infrastructure, dividends for some, buybacks. Effectively, same thing. So. Yeah. Okay.

John Dorward: So my main job, the principal job that I have is really allocating capital. Now when you’re a single asset, as we were with Yaramoko, it’s pretty difficult. So for a man with a hammer, every problem looks like a nail. So you drill around and you drill Yaramoko. So now with Séguéla coming on, we’ve now taken our first step into being able to really establish a competition for capital within Roxgold. So the expiration team at Yaramoko needs to be able to justify why their targets are as good, if not better than the targets at Séguéla. Then we can adjudicate with our Vice President of Exploration, Paul Weedon, and direct the capital to where we think the best return is, both in terms of absolute returns, sort of temporal like ‘what’s the faster path to a return’, etc. So I think that’s really set up an interesting dynamic for our company that we now have the opportunity to direct cash flow in to different directions.

Matthew Gordon: Absolutely. It comes back to remembering. I like the fact you said you’re not a mining company. That’s great. One of the very few people to recognise this in this space and what they’re in existence for. I like the approach to growth capital. It’s a question of what’s that eventually going to mean to new people coming in and existing people, shareholders. How do they see a return? How are you going to get them that return? So that answers this question of, ‘well, maybe I should put my money somewhere else’. So why stick with you? Why come into Roxgold?

John Dorward: I think there’s two paths. So in my career, generally, the happiest path to realising returns has been to be taken out.

Matthew Gordon: Well, is that true these days? Because the multiples are not what they once were. So what would you think they would be?

John Dorward: Well, I think that’s because we’re in a cyclical business. So for me, the biggest returns come from being able to work within the cycle. So it’s classic. I mean, it’s easier said than done. Buy low, sell high.

Matthew Gordon: You’ve done it a couple of times I note.

John Dorward: Yes, that’s right. So we have. So we’ve had three exits. One I’ll always characterise as an honourable draw and two, which were, I think, very successful for everyone involved. NPI mines back in the early 2000s and Frontier Gold, had a very good team there. I worked with some very good mining professionals. And Newmont acquired Frontier in 2011 and they bought a really good project. But it was a good time to sell a project.

Matthew Gordon: But you weren’t CEO then. You weren’t running that. You were part of a team. So today, what do you think you need to create to put yourself in a position too, if you wanted, be taken out?

John Dorward: So my whiteboard has three projects, three operating projects on it. And then a potentially world-class scale asset in the future. So we’ve taken our step towards getting two of those. So we’ve got our second mine, so sequentially we’ll build that. I would love to find another Séguéla or something similar, hiding in someone’s portfolio that they don’t love.

Matthew Gordon: But where’s the bit where you are making investors money? Because spending money on stuff, great. How does this three plus one world class asset convert into a big payday for investors?

John Dorward: Well, I think so. I mean, I think compounding those earnings and making sure that our share count, if our share count of stay tight, then those 374 million shares that we have on issue today are earning a lot more cash. Now, I think you get down to a debate. Maybe it’s a bit more philosophical as to whether people want cash in their hands or whether they want to have that cash reinvested and continually growing at a higher and higher rate.

Matthew Gordon: I’d say both because it mitigates their exposure.

John Dorward: No, that’s right. So I think so for us, we think as long as there are opportunities to continue to reinvest capital at sort of the returns we expect to see from Séguéla and project number three, we would recommend continuing to do that. I would like to ultimately have an asset that’s in the pipeline that has the potential to be a real game changer. And that’s probably taking some geological risk and investing in it and and moving along. And and ultimately… I mean, one of the case studies that I liked to look at is was Redback A very successful company, made a lot of money for its shareholders, had a good mine at Chirano in Ghana, doing around 200,000oz. Then they had a massive projected Tasiast in Mauritania. It eventually proved irresistible to Kinross. And they came in and paid something in the order of, I think, $8Bn dollars. So the shareholders who were sitting in Redback 5 years earlier probably didn’t envisage an $8Bn payday. But I think if you get the timing right and you’ve done a good job building a compelling business.

Matthew Gordon: Well, obviously that’s the dream, because that’s a really good example. Putting today’s language, what are you trying to be? I mean, an $8Bn dollar company from where you are on today, that’s… you’ve got a ways to go, right?

John Dorward: Yes. But I mean, I think to be a $5 stock. Roxgold needs to take its 374M shares to around 1.6Bn-1.7Bn. Now from a +$300M market cap. Now, that may seem a little ambitious, but from what I’ve seen in the past, when the market cycles in your favour, then there’s the opportunity to make an outsized return. And that’s what we’re sort of looking to do. So we don’t know when or if that will happen again. If history is any guide, it will happen. Just hard to predict when. So what we’re going to do in the meantime is build a company that will be irresistible, both to investors along the journey and also potentially a large acquirer in the future.

Matthew Gordon: Okay. Thank you. Let’s talk about the future. The last time you wouldn’t give me a number about the Gold market, because you’ve been around too long. You know not fall for that one. But the Gold market since we spoke has started moving. There are some signs that it’s heading the right way. You talked about timing a second ago. How long do you think this cycle will last? Or do you think it’s just unpredictable these days?

John Dorward: Look, it’s definitely unpredictable. So I would generally stick to my practice of not providing number, certainly not numbers, and certainly not times, but I think as broad direction of travel, it looks extremely positive for precious metals. I think we’ve seen an operating…

Matthew Gordon: $1,800 bucks?

John Dorward: I think that’s well within the range. I don’t know when, but if you look at Gold in the 2000s when it came off its lows, around $250 at the turn of the millennium. It ran pretty strongly up and then immediately around the GFC, Gold didn’t perform very well at all. And then we had a bunch of radical action and then Gold took off. And then it’s come back down again, but still pretty high. I mean, North of $1,400 historically was not a bad Gold price. But I think as we see liquidity start to unfold, Central Banks looking after their balance sheet and maybe some normality return, then Gold stands a very good chance of seeing new highs.

Matthew Gordon: It’ll be happy days if it does.

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Para Resources (TSX-V: PBR) – Focused on Their Two Gold Assets but Also Feeling Opportunistic

Interview with Geoff Hampson, CEO of Para Resources (TSX-V:PBR).

We ask him about getting into production and making money and creating value.
Current assets will be in production by end of the year and producing Gold. High-margin and Focused on stabilising cash flow.

In conversation with targeted assets which fit the profile of companies they like to acquire, small undervalued, near term producing Gold assets, probably South American. Building a mid-tier gold producer. They are in a show me stage.

Interview highlights:

  • Overview of the Company and Team
  • Assets and their positive aspects
  • Company Strategy and the Bigger Picture
  • Shareholders and Access to Cash
  • The Gold Market
  • Share price highs and lows, what happened in May?

Click here to watch the interview.

Matthew Gordon: Thanks for taking the time to speak with us.  We usually get people to kick off with a two summary on the business and then we’ll get into some questions after that.

Geoff Hampson: So Para Resources is a junior mining company.  We have a couple of different properties – one in Colombia and one in Arizona in the USA.  Both are Gold mining opportunities, and when we started this company we really started looking for mining properties that where there was an existing infrastructure, an existing mill, but also where there was a lot of exploration potential.

So we wanted to bypass the period of time that it takes from a greenfield exploration to a production, by having some small production that could generate cash flow, where the permits were already in place and where there were some under explored opportunities.

Matthew Gordon: If you don’t mind, can I just explore that a little bit further because I think it’s fascinating.  Different companies with different strategies hoping for the same outcome. Obviously, it doesn’t always turn out that way.  So tell us a little bit about you.  I notice you’re a finance guy by background but you’ve got a big team of technical people.  So you’ve gone out and identified two assets which meet the criteria that you specified, which is great.  Was there any competition for them or did you get lucky or who did you know?

Geoff Hampson: Just about my background, I’ve been an entrepreneur for 35 years.  I’ve built a number of different businesses.  I’ve been successful in being contrarian and finding my entry point at the low point of the market where the sector was out of favour, and I’m a believer that you make money if you buy well and you have the right people and the right macro environment opportunity.

One of the reasons that we’ve been able to acquire these properties and acquire them relatively cheaply, and if you look at it in the historical perspective, is because the sector has been out of favour and there has been little money, and so junior mining companies have really struggled over the last five years because the cycle changed – particularly with Gold.  Some of the majors overspent, leveraged their balance sheet, made bad acquisitions and have spent the last five years really just trying to fix their balance sheet by selling off non-core assets by producing, by not exploring and not increasing their reserves.

And that has traditionally been one of the sources of capital for the junior mining industry because the majors have allowed the juniors to take the risk and do the exploration and they’ve funded some of the juniors as they’ve started to develop resources.  That has completely dried up and the retail investors have fled.  On the Toronto Stock Exchange, the venture exchange, everybody has been making so much money on marijuana stocks that nobody’s really interested in the resource sector.

So while that’s a problem, it also has created an opportunity and because of that, asset values, equity values, are at historic lows. So we’ve able to manage that by buying cheaply.

Matthew Gordon: So no one sells their good stuff, and certainly not cheaply.  So what did you like about these assets specifically?  You’re saying you have one in Arizona, one in Colombia.  They’re not too far apart, but… 

Geoff Hampson: But worlds’ apart.  What we liked about them was that – and maybe I can just talk about them individually because in Colombia, after the government made a deal with Farc, vast portions of the country that had been off the grid in terms of being welcoming for Western mining companies, opened up.  There have been a lot of small, artisanal, some legal, some illegal miners, and we’ve looked at that as being an indicator of where there might be Gold. 

We identified the El Limon mine, which was a relatively small mine, 75 tonnes per day, 25 years, but still producing.  When we looked at that mine and the fact that it was fully permitted, that it has capacity for tailings, there’s lots of water and the fact that all around that area there were all these small miners, but the area had never been drilled.  So we said, “Hey, this fits our criteria.  A small existing mine, fully permitted, that with a little bit of work can be rehabilitated and improved to product cash flow to fund an exploration programme in this valley.”

And so we acquired the mineral rights for a 12km long stretch where there is this a vein system that we know is there because of the small miners and we know that it’s the same vein system because we were able to go and check the geology. 

So the idea is that we took this mine, increased the capacity from 75 tonnes per day to 225 tonnes per day and then went out with the government to try and formalise some of these other small mines. 

The government told us that would take about six months, but in fact it’s taken about three years, and so we’re just now starting to see the ore coming from these other parts of the vein, and we’re operating, we’re at cash flow break even, but we have a plan over the next year to bring these additional sources on, which will get us up to full capacity.

So the idea is fully permitted, ready to start producing and exploration potential. We’ve looked at hundreds of different opportunities and have found two that we’ve acquired and we’ve got  few other ones in the pipeline that we’re looking at.

Matthew Gordon: So how much have you spent on that to date and what do you think it’s worth?

Geoff Hampson: Acquisition cost, the rehabilitation of the mill, the permitting work, about $12M US in Colombia.

Matthew Gordon: And how much more to go?

Geoff Hampson: It really doesn’t need that much more.  If it needs more it would be in the hundreds of thousands of dollars, but it’s fully funded and it’s cash flow break even from operations today.  Most of the cap ex has been invested, so we’re sort of ready to go as we ramp up the production from these other mines.

Matthew Gordon: What are you hoping for in terms of production amount?

Geoff Hampson: In 2020, we should be somewhere around 8,000 to 9,000 ounces, but in 2021 that will go up to around 15,000 to 20,000 ounces.  It’s very grade dependent.

Matthew Gordon: And it’s a reasonable grade as well, from what I can read. So the hope is what there, that will be a cash generative business to do what?  Explore further or is it to create cash for other parts of your business?  What’s the thinking behind El Limon?

Geoff Hampson: The mine site is fully permitted to 400 tonnes per day, so we have expansion opportunities there, but in 2020 when we’re producing, we will start an exploration programme on this vein.  It’s called the 02 vein.  It’s about 12km long.  It’s a series of parallel veins at average grade. On a fully deluded basis it’s around seven grams per tonne.  Some parts of it are higher grade, but as we start to drill that out we would expect that we would be able to build a sizeable resource.  So we have a target of about a million ounces to be discovered in the next couple of years, at which point we think that we can justify increasing the capacity of the mill to 400 tonnes or more per day, and at that point generating $20M-$25M a year worth of cash flow.

So we also think – and this is more of a macro discussion – that as the cycle for the Gold mining industry changes, and I can talk about what I think are those indicators, the majors who have not been replacing their reserves that they’ve been mining over the last five years, will be looking to buy reserves because it’s cheaper to buy Gold in the ground than it is to actually go out and explore…

Matthew Gordon: It’s going to take a lot more ounces than 1Moz for them to come knocking at the door, isn’t it?  That’s why I ask, what’s the hope?  What’s the blue sky for El Limon?

Geoff Hampson: I think there is potential for more than 1Moz.  The cost of producing Gold there is relatively low.  It’s about $725 an ounce and with a capital cost of $12M, pay back is a year and a half.  As we increase the size of the reserves and we increase the size of the mill, that’s going to grow.  So it’s going to be a very nice cash flow business, but I think that there’s several tiers in the Gold mining business.  There’s the juniors, there’s the mid-tier and then there’s the majors. 

You’re absolutely right.  The majors aren’t going to come knocking for 1Moz, but the mid-tiers will. 

Matthew Gordon: But this is why I ask you about strategy and why I’m always interested to understand the conversations that the Board or the management team have.  It’s a nice cash generating business.  If you think it’s got potential to be a 5-7Moz Resource, that’s fantastic.  You’ll get a lot of people knocking at the door, but if it’s producing a lot of cash, maybe – and I know you’re going to talk about Gold Road in a minute – it helps with another target. 

Where you’re positioning is you think it’s a nice, small standalone business which may be able to grow. Or do you think it’s part of a bigger story that you’re trying to tell?

Geoff Hampson: We particularly like South America and Latin America.  Our team has a lot of experience there and we see this as sort of a platform.  We will use the cash flow to look at other acquisitions.  We’ve got other things that we’re looking at Colombia, but also in Ecuador and in Peru.  So we see this as a sort of first step to building a mid-tier producer in the region.

Matthew Gordon: So are those conversations ongoing at the moment?

Geoff Hampson: Yes they are.

Matthew Gordon: They are!  Obviously there’s a few people trying to do the same thing, so it’s a competitive environment.  You’ve got quite a few locals working for you?     

Geoff Hampson: That’s right.  And we’ve got a number of people… Randy Martin who is on the Board of Directors and the COO, has been very successful on Latin and South America, and building out Gold mines.  He’s built some, sold some and has very deep contacts with government and agencies.  We see a regular stream of opportunities, but we’re pretty picky and so they have to meet the criteria that we’ve established and we have to be able to buy them well. 

You’re right, there’s a bit of competition, but typically the opportunities that we’re finding at not being widely marketed, and so it’s really more based on relationships and being able to go in and talk to the owners and work out a deal.  So very few of these companies that we’re looking at have actually hired an investment banker or have any process to try and sell the asset.  So it’s really showing up and saying, “We want to buy it and working out the terms.”

Matthew Gordon: But how do you do that?  Again, I do hear that story a lot and what I’m trying to get at is the point of differentiation for you guys.  I know you’ve got a finance background, a very successful man.  Have you got ready access to cash?  I know one of the shareholders of your business.  Have you got ready access to cash to be able to have those conversations, to turn things round quickly, because that’s what it takes?

Geoff Hampson: And the answer is yes, and I think that we’ve demonstrated that by the fact that the insiders, myself and particularly Glenn and Randy, we have put the majority of the money that has gone into this company.  We’re now between the three of us about $30M deep into the company and we have additional resources that we can deploy quickly if the opportunity comes along. 

But there’s also an advantage of having an operating, profitable mine.  For instance, our operation in Colombia is unlevered.  So next year as we’re starting to produce cash flow, we can use that a base to be able to go out and make other acquisitions.

Matthew Gordon: That’s what I’m trying to understand.  How do you build this?  Otherwise the danger of it being the same story, lots of $35M companies in the same position.  What do you have that others don’t? You’ve got your own cash and access to further cash from yourselves, but also the ability to go to market with the right story. 

Geoff Hampson: I think that is the differentiator, plus I think the experience of the team in knowing how to make these operations work.  Narrow vein, underground mines are a bit tricky and so you need to have expertise and people who know how to make them work.  Lots and lots of examples of projects where they have a PEA or even a feasibility study that says they can make money, but then when they actually get into the ground, they can’t figure it out. 

 We’ve looked at a number of those opportunities that are essentially destressed plays and some we’ve passed on.  Others we’ve looked at and said, “Well, we would do differently and here’s what we would do.”  So there is an opportunity there when you’ve got access to capital and you’ve got the expertise and the track record of working in that environment and also working in that kind of mine.

Matthew Gordon: Well, I think the ASIC number is impressive.  If you can deliver that, that’s great.  Obviously the grades help.  Why don’t we get onto Gold Road, and then maybe we might be able to join the conversation up then?

Geoff Hampson: So Gold Road is a bigger operation.  It’s a 500 tonnes per day CIL plant, fully functioning.  We acquired it end of 2017.  We did a PEA which showed that it had an $85 million NPV, that we could produce 35,000 to 40,000oz a year at an all-in cost of about $825 per ounce.

So we bought the asset for $6.1M.  So we bought it well.  We had an appraisal done on the equipment and it came in at over $20M.  So on the liquidation basis, we could have doubled our money if we had chosen to do that.   

It fit one criteria which was buy well.  There’s a resource in the mine of 215,000oz, so that gives us a 7yrs mine life (LOM) but it’s open at depth and open on strike.  It’s got an average grade of around seven grams per tonne.  It’s a nice mine.  It’s in a great jurisdiction.  The Oakman district is a historic Gold mining area.  The mine itself is right on Road 66 and so it’s easy access, two and a half hour drive to Las Vegas.  So it makes it easy to get to and a mining district, so lots of people, suppliers and so forth.           Very, very different than doing business in Colombia where getting people and expertise and suppliers is a real challenge. 

So what we’ve done is we’ve rehabilitated the mill.  We’ve done a lot of development work underground and we’re essentially a couple of months away from mining right now.  We’re just opening up a new area at the 900 level.  As soon as we’ve completed the drift to the end of the ore shoot, we’ll put the secondary escape route in and then we can come in and start mining. 

That’s probably going to be some time around October or November and we’ll be able to go right to a full production now.  We’re actually stockpiling some material now as we’re doing the development work, as some of that development work is in the vein. 

The vein in Gold Road is typically around three to eight feet in width, so it’s much wider than what we have in Colombia.  The grade is about the same as Colombia, but it’s easier mining and when we did our technical report our consultants indicated that based on some of the drilling that had been done at depth, it wasn’t enough to put the ore into the resource, but indicated that the vein was open at depth.  Indicated that they thought we could increase the resource by 700,000 to a million ounces.

And so over the next couple of years we will do that.  We’ve already started drilling, but this mine is very, very good shape.  We’ve fixed some of the problems that were in the under ground that were causing the previous owner to have some problems.  Just some fairly simple changes to the mining method – just things like straightening out the decline and so forth.  We’ve done quite a lot of work there and it’s really looking good right now. 

Matthew Gordon: Tell me about the mill bit, because I just want to understand that and I want to bring this conversation back together. The mill you’ve upgraded has got potential to be upgraded further, presumably?

Geoff Hampson: When we acquired it, it was 500 tonne per day.   And so what we’ve done is we’ve gone in and just completely done maintenance, I guess you could really call it, because it was fine before, but we’ve replaced hoses, changed fluids, basically tested it . We’ve tested the whole circuit now.  We’ve actually produced Gold, so we know it all works.  The recovery is very good, 95% recovery.  So the mill is in great shape, the under ground is almost completed in terms of development work and we’re ready to start producing.

Matthew Gordon: How does it go from 500 tonnes to 1,000 tonnes per day?  How much does that cost you and when do you make that decision?

Geoff Hampson: It’s fully permitted for 1,000 tonnes per day, so probably about $20M to $25M worth of CapEx required to double the capacity of the mill.  Depending on how we build out the resource, we’ll make that decision.

What’s interesting there about the exploration potential is that we’ve also acquired an adjacent property.  There’s actually a series of three veins that ran through this area.  Gold Road is he northernmost vein, but about a mile and a half away is what’s called the true vein. There were seven historic mines that were built and mined from 1890s through the 1940s and 1.3Moz have been produced out of the true vein.

But what’s interesting there is that the vein widths are quite a bit wider, sort of 13 to 15 ft in width, and the grade is much higher.  So the average grade over the history of the mining on that vein has been 23g/t.  Because the way that the mining was done back in the old days was there was an outcrop that showed the vein.  They started mining and they traced the vein but it’s a continuous vein and it goes for about two and a half, three miles.  But it’s never really been properly drilled and so there’s a series of mines along this vein but it’s never been drilled between the mines, and the cut off in those days was 0.5 ounces per tonne.  So if they got to a section that was at 0.5 ounces, or lower, they would stop.  We know from the historic mining records that there’s an enormous amount of ore that’s still in there.  And it’s higher grade than at Gold Road.  And because it’s only a mile and a half away on a paved highway from our mill, we’re hoping that we’ll be able to establish some tonnage there and that we’ll be able to mine that higher grade material as well.

So long story to come back to, the mill expansion.  If we establish tonnage at a higher grade, we’ll obviously want to mine that and we’ll need more capacity. 

And to keep the numbers straight, 7g/t at Gold Road yields 35,000oz per year at the mill, at 500 tonnes per day.  But if we’re able to find ore that matches the historic grade – and I will keep the maths easy and say, 21g/t, if it’s three times we’re talking about 125,000oz per year and the average cost, all in cost, goes down to about $500.

So that’s the exploration potential.  We don’t know for sure what’s there, but certainly the fact that there has been historic mining there is a good indicator that there’s Gold, and that’s it open…

Matthew Gordon: A bit of work to do between now and then obviously, but lots of optionality.  But you’re going to have to also spend a lot of money to do that.  That project sounds quite interesting to me, Gold Road, which is why I asked initially about what’s the plan for El Limon  – because if that’s producing cash, that does finance your work in Gold Road?  And that’s a nice way to make sure there’s no dilution or do you feel that you can structure a deal whereby there’s very little dilution for existing shareholders going forward because you are producing some cash, there’s some leverage to be had?

Geoff Hampson: We’ve invested into Gold Road.  The acquisition plus the work that’s been done so far is about $22M-$23M.  We’ve probably got another $3-$4M worth of development work to do before we actually start mining.  But the way that we’ve designed the development plan and the mine plan, we’ll be able to 500 tonnes per day right away.  I mentioned that we’re stockpiling some material, but once we’ve completed the development into the 900 level we’ll open up a number of different stopes which will get us the 500 tonnes per day.

By the end of the year we’ll be producing closet of cash and in 2020 we anticipate in our financial model, which uses $12.50 per ounce for Gold, that we’ll generate somewhere between $18 to $20 million with the free cash flow.  So that’s net of sustained FX. 

So part of that money – not all of that money, but part of that money will go into an exploration programme to increase the reserves at Gold Road, but also to drill into the true vein.

Matthew Gordon: How much cash are you sitting on today and will you need to do another raise?

Geoff Hampson: We’ve got about $2 million in cash today.  As I mentioned we need another $2-$4M to complete the work at Gold Road.  We’re either going to go and do another small financing or we’ll do it ourselves, but we’re moving along at pace so we’re not really concerned.

Matthew Gordon: So if it was you, that’s an equity raise.  You’re not putting money into the company as a loan or anything?

Geoff Hampson: Right.

Matthew Gordon: How would you put the money in?

Geoff Sampson: Probably in the form of equity, but it might also go in some debt.  We haven’t really determined that yet.

Matthew Gordon: It’s quite interesting because management own a lot of this company.  You’re committed.  You’re in.  So your decision making is… you can genuinely say you’re aligned with the market properly.  That’s mostly retail, Canadian retail, I would presume. Is it?

Geoff Hampson: There’s a bit of… I wouldn’t necessarily call it institutional, but more sort of family offices that have written bigger cheques. There are obviously some retail investors as well, but we’ve got probably 12 or 15 mostly European family offices who have put in a quarter of a million or dollars or so each in previous financings. 

Matthew Gordon: Why European? Where’s that come from?

Geoff Hampson: There’s just been a better appetite for this kind of a deal in Europe than there has been in Canada.  It’s not for lack of trying.  I’ve done a lot of work to try and raise money in Canada, but I’ve gotten a much better reception in London, Zurich, Munich and strangely Budapest. 

Matthew Gordon: Budapest.  Okay, that’s a new one.

Geoff Hampson: I think that the Europeans have a little bit more of an affinity to Gold than Americans and Canadians, as I mentioned before have become distracted by marijuana.

Matthew Gordon: Let’s just then focus on those people, because looking at the share price, you’ve had your highs and lows.  Highs of $0.21, $0.22.  Lows of $0.12.  May was a strange month for you.  What happened?

Geoff Hampson: Well, there was one seller that decided to move his position and it would have probably been better just generally speaking if he had called me and said “I want to move this position,” but it took us a while to figure out where all the pressure was coming from.  Initial contact with him was negative.  He said, “No, I’m not a seller,” but anyway it is what it is.  This is the joys of being in the public market.

Especially the junior market for sure.  I’ve learnt this over the past few years.   He could have crossed, it would have been great.

Matthew Gordon: But if I look at where the future is, you talked about M&A, but you’re not in a position at any time soon to look at M&A.  You’ve got a lot of moving parts here as it is. Is M&A just a story you’re telling the market or are you going to focus on what you’ve got? 

Geoff Hampson: I think that we’re very focused on getting these two assets up and running and generating positive cash but we’re also pretty opportunistic.  There are some – and just sort of be careful how I say this – but there are some assets which are really good fits for us, that are available and we’re moving forward on doing a deal with those.  But it’s because it creates quite a bit more value, it’s strategic but also financial and so we continue to see a lot of opportunity and our goal is to build out a mid-tier Gold producer within the next three to five years.  We think we’ve got a fairly straight line, 200,000, 250,000 ounces per year.  It’s not going to be easy, but we think we can do that with the cash flow that we will generate from these existing operations. 

Matthew Gordon: That would be great if you could do that.  So you’re looking at these small, undervalued producing or near term producing assets, building up a portfolio, looking at different countries or are you back in Colombia and the States?  What are you focused on?

Geoff Hampson: There are some places that we would probably not go, but we have an advisor to the company who is a former Minister of Mining in Ecuador, Javier Cordoba.  He is assisting us on looking at opportunities in Ecuador and Peru and Chile, where he has very strong relationships with the government.  That is helping us to be able to shortlist opportunities.

As I mentioned, we’re really focused on getting the existing assets, cash flow and stabilised, but that’s fairly near term for us.  By the end of this year both of these operations will be in full production and producing Gold.  All of our models have been based on $1250 an ounce Gold, so in this environment where Gold is trading higher, our projections of cash flow are probably on the conservative side – which is fine, but I think that there is going to be ample opportunity for us to look at new acquisitions or expansions of existing assets.

Matthew Gordon: For investors, getting into production and making money are two different things.  Creating value is yet again something different.  So in terms of those components, you’re saying that you can get into production quite soon.  Positive cash flow, that’s a little bit further out, and I guess for some of these acquisitions you may see some value being created for shareholders.  Is that the way you see the future?

Geoff Hampson: I think that like every public company, CEO, I think our stock is undervalued.  Our market cap is essentially 1X projected 2020 cash flow.  And so our shareholders, I wouldn’t say have been long suffering, but you’re absolutely right. Our share price has stayed in a fairly narrow band between $0.12 and $0.25 for the last three years.  And so I think that we’re in a ‘show me’ stage.  I’m expecting that as we go into 2020 and we start showing quarter over quarter improvements and positive cash and, we believe, profits, that the market will say, “Okay, this is a real deal,” and that we’ll see some appreciation in the stock price

I could be wrong there because I don’t pretend to understand the public markets or the sentiment of the public markets, but I think that if we’re generating positive cash, people will take notice.

Matthew Gordon: I think they will, and as you say, do what you say you’re going to do consistently.

Geoff Hampson: And we haven’t really done anything in terms of promotion.  We’ve felt that it would be better to wait until we’re closer to achieving our goals and then start telling the story rather than be telling the story and having people have to wait.  So this interview – with some of the things that we’re starting to do are in anticipation of actually getting out there and telling the story.

Matthew Gordon: Well, I’ve enjoyed listening to it today, Geoff.  Nice first pass.  Let’s stay in touch.  Let’s maybe in the next few months see how you get on, and as you get closer to some of these catalyst moments.  Appreciate your time.

Geoff Hampson: Thank you very much for your time.

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If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Premier Gold Mines (TSX: PG) – Increasing Production, Strategy, M&A, Gold Price and Share Price

We interviewed Ewan Downie, CEO of Premier Gold Mines. This team are capable of making deals, partnering with big companies and getting access to non-dilutory cash. Despite giving guidance to the market about depleting production at South Arturo mine, their share price has been punished. They need to focus on delivering +100,000oz. Lots of Exploration assets at different stages. Where did it start?

Click here to watch the interview.

Matthew Gordon: Thanks very much for taking the time out. We always get people to start off with a two minute summary of the business.  Then we get stuck into a few meaningful questions after that, so if you don’t mind?

Ewan Downie: Premier Gold Mines is an exploration development and producing company, a company that’s been around for just over a decade and has been one of a few mining companies that’s made the transition from explorer to producer. Currently we have two operating mines and several near development or development stage projects within our extensive portfolio of project.

Matthew Gordon: I think the obvious observation I had when going through the material was that you look like deal makers, as well as miners.  You’ve put together some packages, you’ve done some joint ventures, you’ve got some big names involved – Barrick Gold Corp.  Tell us a little bit about you and the team and perhaps that might explain the deal maker / miner perception that I have of you.

Ewan Downie: Well, Premier started, as I mentioned earlier, an exploration company, and as an explorer and one of the team that we started the company with were essentially geologists, etc.  And as a geological group and an exploration company we are a team that recognise that very few projects actually go from being a concept exploration effort to full production.  In fact, probably more than 99% of mineral properties don’t become mines.  So by having multiple projects gives us more options, so to speak, and we’ve always been a company that has a moral of ‘don’t always think that we have is the best.’  There could be something better and if we find something that’s as good or better than our current portfolio, we should own it.

So we’ve always been open to trading opportunities, if we found the right opportunities.

Matthew Gordon: This is for an audience perhaps who haven’t come across Premier Gold.  I know you’re a big company.  $400M market cap now, and you’re a producer.  Can you explain the process that you’ve been through in terms of where did you start? Which assets did you start with and talk about some of these joint ventures that you’ve managed to deliver?

Ewan Downie: We started in 2006.  We were Spiona, the company I founded in the late 90s called Wolfbein.  So at the time Premier was a free share to our shareholders.  We started in the Red Lake camp, one of the most prolific high-grade Gold camps, I think you’ll find anywhere in the world, and we established a fairly strategic land positioning amongst the two producers, which at the time were Gold Corp and Plasser Dome. 

We started by there by realising at some point that to our grow our company we couldn’t just sit around and wait for Gold Corp to do something with us.  So we identified the Hardrock project, our Greenstone Gold joint venture now with Centerra as a potential acquisition candidate that could host a significant open pit deposit and luckily we were very successful at delineating that open pit deposit.  In between open pit and under ground that project is now a 9Moz, but it’s expected to be a large open pit.  It’s in full company right now and the market hasn’t been at its highest for several years and we recognise that to build a project of its scale, that it would be a very tough task for a company outside to Gold mine.  And so we set out looking for a partner and were able to secure Centerra Gold as our partner who was solely funding that project.

They paid us a cash payment and with that cash payment when they came in, we continued to identify other opportunities and our two producing projects – the South Arturo in Nevada and Mercedes in Mexico – were acquired with or partially with the funds that we received from Centerra as they came in.  So we’ve been able to, I’d say, make some strategic acquisitions to grow our business with that joint venture.

Matthew Gordon: So you’ve kind of leapfrogged the process to getting to be a producer using cash from an exploration asset which you developed through with someone else’s money.  It enabled yourself to take their cash and buy producing assets which perhaps didn’t meet their profile, but were good enough for you to start. You’re not quite at 100,000 ounces.  How many ounces are you producing at the moment?

Ewan Downie: This year will be under 100,000 ounces.  Probably in the range of 80 – 85,000 ounces.  89,000 ounces this year mainly because the South Arturo project in Nevada we depleted our first pit and we’re not constructing a second pit, and in underground from the bottom of our first mining pit.  So the South Arturo mine is going through a bit of a rebirth stage with two new mines being constructed as we speak.

Matthew Gordon: You’ve also got four exploration assets at various stages of development and funding. You’re filling the hopper?

Ewan Downie: Yes.  We take the view that we’re not looking out just for next month.  What are we going to do next month or next quarter?  We recognise that if we’re going to build a successful long-term mining company, you can’t do it one asset, and unfortunately mining is a depleting commodity industry and if you don’t replace reserves or find additional reserves at other projects ultimately you won’t be a producer anymore.  So we’re always looking out for what will be the next project that we may be able to integrate to become our next production centre for the company. 

Currently we’re curating two projects that we hope we’re going to develop and open in the next couple of years.

Matthew Gordon: Well, that leads us nicely on to strategy.  I’ve got a sense of the mentality in terms of the way you go about doing business, and it seems there’s some deal making acumen there.  But I want to talk about the strategy now, which is these exploration assets presumably are going to follow a very similar model to that you’ve already employed successfully with Greenstone, for instance.  Is that true to say?

Ewan Downie: Yes. We’re quite open to developing our own deposits.  In fact, later this year we expect to start developing our Cove property, one of our high grade projects in Nevada, and that will be the first project that we initiated the development on our own and built Mercedes, our producing mine, was acquired from New Manor, was already operating, and our South Arturo project where the two mines are under construction is operated by our partner, Barrick. We are participating in the construction, but we’re not actually… Our strategy is to continue to grow our portfolio, such that we continue to hopefully maintain a steady production profile in the future and steady cash flow so that ultimately we can give back to shareholders.

Matthew Gordon: If I look at your share price, you have been as high as $5, back in July of 2016 and you’re around circa $2 today.  It’s been a bumpy ride.  At which point do you think the market investors have given you credit for your strategy?  Obviously the Greenstone project or getting Barrick involved, finding new exploration assets… what do you think they’re rewarding you for? Or is it all of the above?

Ewan Downie: I think right now we’re being somewhat penalised for being in a development stage.  Even though we do have the one producing asset and some Gold being still produced from stockpiles at South Arturo, given that you mentioned back in ’16 we were up at five dollars, that was when South Arturo was in full swing.  So we had the two mines operating, we generated a huge amount of cash flow in that year and in 2017 I think Premier was one of the top performing Gold stocks in all of the TSX, but then that Phase 2 open pit, as we called it, as South Arturo was depleted, and since then we’ve been processing some lower Gold stockpiles but our production profile dipped as we’ve been constructing the two new mines.

At the end of this year we expect the underground to come online and I’d like to think then we start to get rewarded for our future production growth.  However, right now I think we’re being somewhat penalised because we’re in that development stage and you’re spending a lot more cash than you’re making.

Matthew Gordon: Well, that’s true.  If you look back to that period, what are the key takeaways there?  Mining is cyclical.  Commodity prices are cyclical.  There are ups and downs and it’s a tough business, understand that.  What would you have done differently looking back to that period?

Ewan Downie: I don’t think we would have done anything really differently.  There’s maybe an acquisition or two we looked at that we passed on that turned out better than we thought.  You look at those opportunities.  We always had an internal mentality that we’re going to see this production gap and what we call it, we need to fill that gap, and we’re looking for producing or near producing opportunities that would have smoothed down our production profile.  All of the assets we looked at either sold for significantly more than we were willing to pay or were solar power and we viewed them as being really not profitable or not really economic. 

I think we made a lot of good decisions on what we passed on, but there’s maybe one or two that we did pass on that turned out to be better than we expected.  So really I think we wouldn’t have done anything really differently.  Just the only thing I wish is that we would have been more successful in finding something to bridge that gap.  Now the gap is closing, so we should outperform in my view going forward.

Matthew Gordon: So if I look at your share price It’s $400M. About a hundred of that in the last month or so with the price of Gold going up. That’s obviously a very welcome addition to the mix for everyone in the Gold space at the moment.  What are you going to do during that period?  Do you need money?  Do you need to go and raise cash?  It depends what your plans are.  What have you told the market?  What are you thinking?

Ewan Downie: We ended the last quarter with approximately $45M in cash, so we’re in great financial shape.  During the first half of the year we secured a credit facility for an additional $50M which provides us with the ability to fully fund the building of the Phase 1, El Nino underground mines at South Arturo and the advanced stage development at Cove. 

So currently for these projects that are near term, expectations we have for cash outflow we’re well funded to do those.  That will mean drawing from our facility.  However, Hard Rock, our Greenstone Gold joint venture, if we do make a production decision for that project, even though we have joint ventured half and we’re currently being free carried, ultimately once it goes into construction we will have to contribute and some time in the future we will look at different means of how we would finance that project. 

However, at present we haven’t made a decision whether to go ahead with that property and don’t expect to do so until late this year or early next year.

Matthew Gordon: Even with the Gold price rising?  Well, tell us, what’s your expectation of the Gold price?  I guess, If I’d asked you two months’ ago, it would be a very different answer.  Now what are your thoughts on that because that’s got to effect the timing of when you’re even considering raising capital, because it’s going to be cheap money now.  If the price drops again, money gets more expensive.  Your decision making gets harder. 

Ewan Downie: I believe that we’ve assembled a number of assets that would be on the lower side on the production cost scale.  So we should generate good cash no matter where the price of Gold goes.  Over the last four or five, six years, we’ve seen Gold test the $1,350 several times and not break it, so after several attempts sometimes you lose a bit of your gung-ho.

Matthew Gordon: Maybe that’s a wise stance to take, certainly. But on that, you say whatever the price is you’ll make money.  If I look at Mercedes, you’re indicating AISC of $900 – $950.  Is that what you’re going to be expecting at South Arturo as well or is it a different price point?

Ewan Downie: I’d expect South Arturo will be a lower cost operation.  The Phase 2 pit, the all-in sustaining when that was in production was less than $400 an ounce.  Very high margin ounces.  We’re not expecting Phase 1 in El Nino to be quite as low cost but we expect them to be quite low cost.

Mercedes, last year and this year continue to be transition years as we are developing several new deposits.  However, the new deposits that we develop, the largest of those, Diluvio, is one of our lower grade deposits.  Has a bit better wind span, lower grade, and we’re currently drilling off Marianus, which is our higher grade – and what we anticipate to be our higher grade – zone at Mercedes, but we won’t see the benefits of Marianus until late this / early next year, and then we should see hopefully the analysis grow slightly because of the influence of higher grade material and with that, we’d hope the cost can get down. But Mercedes is a moderate grade, a moderate cost operation and we are optimistic in Marianus we’ll be able to improve on the operations starting next year and we continue to focus on exploration with the hopes of identifying new higher grade deposits than the current operation.

Matthew Gordon: That gives me a sense of what the management team’s focused on – the hot topics in your monthly meetings that you’re discussing.  You want to make sure it’s a much more smoother ride going forward.  With South Arturo coming onboard, you expect obviously one) start to be cash flowing from that, 2) you’ve got cash reserves, $45M, plus a facility of you said $50M, something like that. You feel that you’ve got enough in the armoury to move the exploration assets, which have possibly got the biggest chance of shareholder enhancement.  Is that the way your mind’s working or are there things that more than that are keeping you awake at night? If so, what are they?

Ewan Downie: Now with the new Barrick Newmont joint venture in Nevada, once that’s consummated – and I believe it was just announced yesterday that the deal has been consummated – Barrick, who’s the operator, will have to look at all of their operations and how are they going to fill the mill and all of those facilities and what deposits are going to go where?  We haven’t provided, I would say, very good guidance in terms of the future at South Arturo even though we’re constructing two new mines because of a bit of the unknown that’s coming with this joint venture.

However, we are building two new mines because we expect them to be good new mines, and so that’s going to be a big part of our future this year – seeing those new operations come online.  For Hard Rock part of the main deposit at Greenstone, our feasibility study was completed in 2016 and a substantial amount of work has been completed since then, including several drill campaigns and we are expecting in the second half of this year, a number of catalysts to come out of Hard Rock because of what we’ve been doing over the past two or three years at that property.

And then lastly, we are going to be drilling at a property that we’re acquiring from Barrick, called Rye, in Nevada, that we’re quite optimistic is going to return some really good – some of that sex appeal type thing you were taking about for shareholders. “Hey, what’s the next new thing, more than maybe a production coming.”

Matthew Gordon: If I look in chat rooms and forums and online platforms, people aren’t talking about you very much.  There’s not a lot of conversation, not a lot of chatter, and what there is, is not a lot of new information. I just wonder what you’re going to be doing to…  I guess, talking to people like me to start, but what’s the plan here in terms of explaining what is…?  There’s a lot of moving parts and it’s trying to break that down for investors to help them understand where the upside’s going to come from.   You mentioned the word ‘catalyst’ a second ago.  A lot of the regular catalysts that you and I have been used to over the past 10, 15 years, weren’t working last year.  Why are they going to work now?

Ewan Downie: I think one thing, we’re trying to simplify our story.  As you said, there’s a lot of moving parts.  Some people may get a little confused of where is this company going and how is trying to achieve?  I liken ourselves to what Agnico Eagle was years ago.  They grew several projects to go from being a small pay stock to a major producer.  To do that they went through their trials and tribulations over the years and built out operations.  We’re trying not to have anything that really…  We’re trying to smooth out our growth profile going forward rather than try to see the spikiness that you might see as an explorer.  Everybody’s excited about the exploration beyond the chat rooms, but ultimately if nobody buys you, then reality sets in and how much money do you need to build that etc?  You know, that rises up in exploration and development and then when you get into mining and hopefully profitable mining, then you should actually see your highest growth in your share price through that initiative.

So we try to be somewhat humble and steady on how we deliver news.  Obviously if we make a major discovery somewhere, we’ll talk about it, but our main thrust is saying we have one operating mine, two in construction, with one coming online later this year, the other one in 2020, and two additional projects in full permitting for future development.  So in terms of long-term production growth, I think there’s very few companies who offer the opportunity that Premier Gold does.

Matthew Gordon: So you think that all things being equal, the assets that you’ve got will allow you to deliver meaningful growth over the next couple of years.  That’s the message to investors, retail and institutional? Tell me, how do you balance worrying about the share price – because that’s got to be a key driver for you – and running a business.  How do you manage that?  Which is more important to you?

Ewan Downie: We have some very large shareholders.  We have several in the 5% to 12% range, so we’ve got some long-term steady shareholders.  Keeping those shareholders informed of what we’re doing and how developments are is very important.  We don’t want to lose our bigger shareholders, but we do spend a lot of time on the road marketing to new institutions, new retail groups. 

We’re trying more and more to get retail interest in our stock, given so many institutions have potentially closed their doors over the last few years.  I think we’re a bit more of an institutional star historically because of our growth profile and production rather than just being out there screaming our exploration results.  We kind of tuck the exploration behind the production growth rate.

So just trying to simplify the story. Instead of telling different stories in a presentation, trying to make it maybe a bit more like Barrick and Newmont are doing in Nevada, making Nevada in mind, rather than talk about Turquoise Ridge, Gold Strike and Lea Vale individually.  So we’re trying to package up our projects so that Nevada is a production centre, growth centre, for us.  Ontario is separate and then Mexico.  So really dumbing it down to three stories rather than eight stories.

Matthew Gordon: It would be interesting to see how you do that because I think right now when I was researching this, it just felt like there’s a lot of moving parts and mapping it out was more difficult than I think it perhaps needed to be. What I did like was the team’s attitude to building.  How do you get Barrick involved in a conversation with you?  When that happened? You were a small company.  How did you do it?

Ewan Downie: We identified, and we really found a relationship with some of the people in Barrick through the Greenstone or the Hard Rock acquisition.  Back in 2008, more than 10 years ago, we spent a lot of time approaching Barrick over and over.  I’d say very persistently we pestered them and they sold us a project not too far from our Head Office here in north western Ontario. 

So we got to know some of the people there and then formulated an even stronger relationship with Barrick when we acquired Gold Corp’s interest in South Arturo, and founded the building of a mine with Barrick, I think Barrick started to give us some credibility.  And since then we’ve done a joint venture with them at McCoy Cove, at the property surrounding our Cove deposit and we’re acquiring the Rye project from Barrick subject to a backing.

So right now we have essentially four projects that we’re moving for on sort of relationship, but it grew from an early acquisition ten years ago.  What we’ve made an effort to do is stay in touch with these people whom we work because you never know what future opportunities may come out of these major producers going forward.

Matthew Gordon: It’s a very reassuring name to have there, and obviously with their recent merger there may be more spin offs to be had if they open the door to you. I’ve really enjoyed that as a first run through your company.  It was a pleasure talking to you and understanding a little bit about the thinking and mentality here.  I’m very much looking forward to seeing how South Arturo develops and Greenstone because that sounds key to the growth component of what you’re doing.  So thank you very much for your time.

Ewan Downie: Thanks for having me on and hopefully we can talk again in the near future.

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If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.