Low capital intensity projects with good operating margins continue to find financing solutions despite the overall equity markets in the mining sector remaining at stagnant levels. Mark O'Dea's West African gold developer, True Gold (TGM:TSX) fits this description and two of the major gold royalty companies agree.
Last night, Franco-Nevada and Nolan Watson's Sandstorm Gold (SSL:TSX) announced they would provide $100 million to True Gold for the development of the Karma gold project in return for 100,000 ounces of gold over a 5-year period and 6.5% of gold production thereafter in exchange for payments equal to 20% of the then spot price.
Based on the current feasibility study, the company is now fully-funded for the development of Karma. The capital cost is estimated at $131 million in the current report and the company currently has over $45 million in cash on hand.
The package includes a $20 million expansion option which would require the delivery of an additional 30,000 ounces of gold. This is available for the next 18 months.
"It is a pleasure to welcome Franco-Nevada and Sandstorm, and their high-calibre management teams as our newest partners on the Karma project," said Mark O'Dea, executive chairman of True Gold. "Their participation provides a strong endorsement of the project and the quality of our team. We feel this is a highly attractive funding package that is well aligned with our development plans and we look forward to working together.
"I would also like to thank our cornerstone investors, Liberty Metals and Mining and Teck Resources, for their leadership roles in supporting the advancement of Karma over the past year. Since May, 2013, during one of the toughest financing environments in recent history, True Gold has arranged approximately $200-million in funding," said Mr. O'Dea.
At $1,300/oz gold, True Gold would be giving up just over $25 million per year in revenues by delivering the 20,000 ounces of gold annually. Furthermore, based on the current 97,000 ounces of annual gold production as outlined in the feasibility study, the 6.5% stream thereafter would represent only 6,305 ounces of gold delivered annually.
The deal represents a relatively small ticket size for Franco-Nevada but one that could provide significant upside in the latter portion of the deal should the Karma project grow in scale. I think its safe to assume that the Franco-Nevada and Sandstorm teams believe that Karma is in its infancy and could prove to grow much larger.
"We are pleased to be partnering with both True Gold and Sandstorm in supporting the development of Karma, a robust project with low capital and operating costs on a property that has excellent exploration potential," said Paul Brink, senior vice-president, business development, of Franco-Nevada. "True Gold has assembled an excellent operational team to build and operate Karma, in one of the fastest-growing gold jurisdictions in the world today."
The company is working towards and remains on schedule for a 2015 first gold pour.
Upcoming catalysts include:
- Construction - September
- Procurement process underway - Q3/2015
- Ore from Rambo to leach pad - Q4/2015
- First gold pour - Q4/2015
- First full year of production (more than 150,000 ounces of gold projected in year 1) - 2016
True Gold is also working on a scoping study on the North Kao deposit as well as ongoing regional exploration in their endowed land package in Burkina Faso.
With the financing overhang removed and barring any major setbacks in construction and ramp-up (unlikely given it is a straight-forward heap leach project) the company should continue to re-rate to the producer category. Although the deal is relatively inexpensive when you dig into it, it may take investors some time to digest the details. This may be your last chance to buy shares at these levels.
True Gold will host a conference call on Aug. 12, 2014, at 8 a.m. Pacific Time (11 a.m. Eastern Time) to discuss the financing. The call will be hosted by Mark O'Dea and other key management personnel.
Access to the conference call may be obtained by dialing the following numbers:
- Toronto at 416-340-8527;
- Toll-free North America at 800-766-6630;
- Toll-free international (dial country code) at 800-2787-2090;
- International (not toll-free) at 416-340-8527.