Gold Forum 2013

After reviewing most of the corporate presentations from last week’s Denver Gold Forum, some repetitive themes arose:

1.)    Focus on returns: Almost unanimously, the producers claim to be focusing on high-quality operations only and have already, or will look to, dramatically reduce capital spending as well as divest assets that do not meet the margin requirements going forward.

2.)    Don’t expect a wave of M&A activity: M&A will be limited as most of the seniors, with the exception of Goldcorp (G:TSX) and Newmont (NEM:NYSE), focused on cleaning up their existing assets and building up cash reserves.  Most of the M&A action is anticipated to be with a few of the most cashed up mid-tier producers who are trading at premium valuations with strong balance sheets and who will look to allocate capital and/or their shares to pick up cheap pipeline projects (among others, these include: AGI, BTO, RIO).

3.)    The gold price revisited: Finally, the gold price assumptions used in most assets are either currently being re-evaluated or will be re-evaluated soon in order to accommodate a $1,000 to $1,200 per ounce gold price.  This means industry production will, in all likelihood, be less in 2014 then 2013.  However the margins and returns per ounce should be improved over the next few years as production is focused on quality and not volume.  This could also help put some much needed downward pressure on the inflated input costs at these mines such as labour and equipment as the industry increases slack.

After weighing through the videos and trying to come up with our Top 3 Picks, we came up with more than three names; however, the three we chose were the names that provided some colour on their upcoming catalysts.  Below are the picks:

Continental Gold Ltd. (CNL:TSX)
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Key Updates:

  • Management remains confident in their ability to grow the resource at Buritica to over 10 million ounces of gold and emphasized that the deposit remains open at depth, even after drilling down 1,300 vertical metres.  The continuity of grade remains even at depth and the fact that the deposit is largely inside a mountain means that the vertical component is not as daunting as it may otherwise be.
  • With regards to permitting, management is hopeful that they will receive their environmental permit in 2014, which would keep them in line for their 2016 anticipated production start-up.  Mr. Sussman reiterated the permitting process in Colombia and that they already have an environmental license because they currently operate small scale mining at Buritica.  As a result, they will only be completing two amendments to their existing license and one of the license amendments has already been granted (for an access road).  The other is expected to come by the end of 2014.
  • The company has only two major prefeasibility study inputs left to complete; one is the civil engineering for the mine site and the other is for water infrastructure at the base of the mountain where the Buritica deposit sits.  These are currently being estimated for costs and are expected to remain consistent with other projects of this scale and scope (approx. 25% of total initial capex).
  • Overall, the company has a number of significant and critical catalysts upcoming over the remainder of 2013 and into 2014.  First, the company anticipates putting out an updated resource estimate by the end of the year, around the same time the company expects to file its final environmental license.  Into 2014, the company expects to release another updated resource estimate before finalizing the prefeasibility study and receiving the ‘ environmental go-ahead’ from the Colombian authorities to build the Buritica mine.

Investment Thesis:

  • Continental offers exposure to one of the highest-quality gold exploration assets in the space today and is fully-funded with $130 million in cash and a proven management team.  Management has been successful at de-risking Buritica so far, and with a number of key catalysts upcoming, the next year could prove to be transformational for Continental and its shareholders.
  • Buritica should become a cash cow, with low operating and all-in costs due to its topography and low capital intensity.  Due to the fact much of the deposit is inside a mountain with the processing facility being at the base of it, the company anticipates using gravity to their advantage in the mining process.  Furthermore, there is already over 4,000m of lateral underground development and another 200m of vertical workings.
  • Finally, the metallurgy and processing characteristics of Buritica are well-understood after being in small-scale production over the past 21 years with LOM average grades of 22g/t gold.   Management believes the grades seen in the resource estimate underestimate the head grades they will encounter once mining and indicates that the proof of this lies in the fact that measured grades are greater than indicated grades which beat inferred grades.  Overall, grade dilution remains a risk given the nature of the deposit (narrow veins), however given recent exploration successes we believe this risk is mitigated (but the updated resource estimate should give clarity on this).

Watch Ari Sussman’s presentation HERE

Rio Alto Mining Limited (RIO:TSX)
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Key Updates:

  • Management is excited about a recent discovery of two areas of mineralized material at the surface of the Calaorco pit which was previously delineated as waste material.  They believe they can blend the material from these two areas with the current ore from Calaorco and could extend the oxide mine life by 200,000 ounces (one year of production).   There is also a colluvial zone south of Calaorco which the company believes has economic ounces in it.
  • The company is currently in the process of revisiting the gold price assumptions used in their pit designs using a $1,200 per ounce gold price.  It is anticipated that using a $1,200 per ounce gold price for the design of the pits will provide total LOM post-tax cash flows of $155 million at $1,100 per ounce gold sales price (this grows to $340 million using $1,500 per ounce gold).
  • Management expects to reduce sustaining and operating costs by minimizing the mining fleet in half, from 4 to 2 fleets by 2015 while continuing to produce at current levels.  This not only reduces maintenance and labour costs, but will also significantly reduce the energy input costs which Mr. Black claims to be one of the biggest hurdles facing the mining industry today (and we agree).
  • Management is underway on its feasibility study for the La Arena Phase II copper-gold sulphide which they expect will be put into production in a staged processed, starting at 18,000tpd for initial capital of between $200 and $250 million.  They ultimately see a manageable spend to increase throughput to 36,000tpd just as they are doing with the oxides at La Arena Phase I.  Management is guiding their EIA permit for the Phase II project to be completed by the end of the year this year and construction permits by Q2/2014.

Investment Thesis:

  • Rio Alto has underperformed its peers as the price of gold decreased, and is coming off its most challenging year of production due to some expected pit engineering developments which were simply a part of the mine plan, but that added to the costs.  As the gold price increases, RIO should outperform its peers as it offers some of the best leverage to the price of gold.  Even at current spot prices the company is generating free cash flows which should grow, regardless of the gold price, given their plan to reduce capital and operating costs further.
  • The new discoveries of near surface oxide material are anticipated to add over one year to the existing oxide mine plan and there remains significantly more near-term exploration potential to increase oxide reserves even further.  Phase I of La Arena should continue to grow its mine life, especially as the price of gold increases.  This will help to increase cash flows and result in lower all-in costs for RIO.
  • Cost reductions and increased margins from current operations will help offset the capex hit to develop the the sulphide component of La Arena and will set the stage for the company to grow low cost gold and copper production to become a free cash flow machine.
  • Once Phase II is underway, the company will be able to take advantage of its strong cash flows and financial flexibility which should enable them to acquire ounces nearby or diversify outside of Peru through M&A.  Mr. Black said they are currently looking for strategic M&A opportunities inside and out of Peru.

Watch Alexander Black’s presentation HERE

B2Gold Corp. (BTO:TSX)
BTO Chart

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Key Updates:

  • Clive will be meeting with Gramalote JV partner AngloGold Ashanti to decide what the appropriate steps forward are on that project, and hinted that the project may be sidelined due to the current gold price environment.  The partners intend to release the prefeasibility study on the project by year end before making a decision. 
  • Management is excited about their Otjikoto project in Namibia and expects to see the resource there grow, believing they will be able to increase production from the currently planned 140,000 ounces per year to 170,000 ounces per year by spending approximately $20 million in development capital.
  • Management is remains consistent on their view of M&A and didn’t rule it out saying they like assets that will add significantly to BTO’s current resource base (+13 million ounces) and that are in the prefeasibility or feasibility stage.  Clive did address the recently issued $259 million of convertible notes stating that the main reason for the raise was that the terms were attractive and can be paid back in cash within five years.  He confirms that the raise was not done for a specific M&A transaction, saying that their goal is to keep cash of $100 million on the balance sheet and that the raise was specifically done to strengthen their financial position to withstand gold price volatility.

Investment Thesis:

  • BTO is run by one of the best management teams in the resource space, delivering consistently on guidance as well as beating market expectations.  They have a loyal following of institutions and employees which stem from their Bema days making BTO a favorite among resource investors (rightly so).
  • BTO is coming off a successful acquisition of CGA Mining and their Masbate project in the Philippines which added significantly to their resource base and production profile adding 200,000 ounces next year and growing to over 250,000 ounces by 2017.  They now have a stable of three consistent gold mines in two countries; Nicaragua and Philippines.  Production is expected to grow from ~370,000 ounces of gold per year in 2013 to over 550,000 ounces of gold per year by 2015, after commissioning Otjikoto.
  • Although Clive is not willing to announce an acquisition at this time, given the time allocated to the topic, we wouldn’t be surprised to see BTO making another accretive acquisition for something similar to Masbate (but smaller).  With $250 to $350 million to spend, the list of quality assets is long.

Watch Clive Johnson’s presentation HERE

This is opinion and NOT investment advice. Do your own due diligence.