At the Subscriber Investment Summit in Vancouver on October 9th, Red Eagle Mining‘s (RD.TSXV) CEO, Ian Slater, explained why his Colombian gold development company is undervalued.
Red Eagle’s Santa Rosa project has some of the best economics of any gold development project in the world, with a 52% after-tax internal rate of return (IRR) and a 1.3 year payback period on a small initial investment of approximately $74 million (assuming $1,300 gold price).
Permitting is seen as the major catalyst for Santa Rosa and is expected sometime in the next two quarters. If Red Eagle can stick to its schedule, the company says it will be able to generate free cash flow of roughly $60 million in 2016, its first year of operation. This number is considerable considering the company’s entire market cap today is approximately $21 million.
Liberty Metals and Mining owns 19.9% of the company. See our previous interview with management here.
Here is the full presentation transcript:
Ian Slater, Red Eagle Mining CEO,Subscriber Investment Summit
October 9, 2014 – Vancouver, Canada
Ian Slater: My name is Ian Slater. I am the founder and CEO of Red Eagle. So, when they told me I had ten minutes I deleted half of it and put in a picture. We went to Colombia four years ago. Colombia 400 years ago was the largest gold producer in the world but there has been no modern exploration. So, if you are looking for the next major gold deposit in the world Columbia is where you need to be.
We put the first drill hole in three years ago and in three years we have a resource estimate, a PEA, a EIA and three years really to the month to our feasibility study, which we released last month and a mine permit subject to the environmental license which we’re expecting in Q1. So, we have done everything we have said we were going to do on time in the last three years and the future is detailed engineering by Q1, permitting in Q1, and project financing by the end of this year. We will be in construction through 2015 and production in the first half of 2016.
This is where we are, we are an 1 hr 30 minutes north of Medellin, we are on the grid , we are half an hour bus ride from the local town of 45,000 people so we do not have to build camp. Good neighbours with Gramalote and Buritica. Gramalote is the closest deposit to what we have they are are both meso-thermal shear zones but we have a lot higher grade than Gramalote and a lot more drilling to do in the future.
What we have been focused on the last few years is consolidating this entire district. We started with you can see the red line in the middle of it is the shear zone which we have drilled to date. All these other area areas the ones with dotted outlines are three other broad targets which we have just started on. The green area in the middle which I will show on the next slide is where much of our exploration has been to date. There is multiple shear zones along here and we have only drilled one… is the point. The red area we acquired from Anglo Gold in April and that is an extension of the property.
Here is a close up of the middle of that area so every one of these black dots on here is a historic mine. There is 1700 of them just on this original property just think about that 1700 old mines they mined a lot of gold here only in the oxides. This is only in the top 20 metres and there was no modern exploration until we drilled it 3 years ago in the sulphides. All of our drilling has been so far been on the right hand of that screen where that red outline is. The blacks are the underground mines, the blues are the historical open pits which go for ten’s of kilometres, the pink is the anomalous gold where our targets are.
So far 400,000 ounces of reserves at 5.2 grams.This is a picture of the long section of the reserves. So you can see all of the reserves to date are in the top 200 metres lots of room to increase the reserves at depth and increase the mine life. Also along strike you can see the red dots on the right hand side of that the far eastern side of the deposit they are some of our highest drill hits. They are right on the border of the ground we just acquired from Anglo Gold so we will extend the mine life to the east as well.
We are starting with a 1000 tonnes per day CIL plant. We have designed it so we can increase production to 2000 tonnes per day for under $15 million. So $74 million CAPEX for phase 1 and $15 million for phase 2. We start with ~70,000 ounces production in first couple years and we will ramp up from there.
Our costs are under $600 cash cost and under $800 all in sustaining cost so in the second quartile globally of costs. The $74 million CAPEX it’s amazing when you compare it the first year of free cash flow is $60 million dollars. So we have a $20 million market cap today and we have $60 million a year in cash flow from 2016. It is one of the highest IRR projects in the world it’s 53% after tax IRR so there’s not that many with that kind of IRR that is not already owned by a producer.
What’s not in the Feasibility Study that came out a couple weeks ago is the upside as well as extending the mine life as I just explained we are also drilling those other areas during 2015 while we are in construction. The plan is to have multiple mines with a central processing facility.
Permitting – the key in Colombia is a social license and permitting and it comes up in every single meeting. From day one when we got there four years ago and when we bought this project 3 years ago we have had stakeholder meetings. We have had almost 80 now right from day 1 before we put a drill hole in and every stage along the way we explained to all the local communities exactly what we are doing and they are fully on side.We have a complete social license to build this mine. It’s an underground mine which is far easier to permit in Colombia and to get a social license for.
From a permitting perspective we submitted our application for the mining license in November and we acquired it in August so we already have that. It is only subject to the environmental license we have been working with Corantioquia the local environmental agency for the last couple years. We worked with them and the local university on doing the baseline work. Submitted the EIA in February and we are expecting that license by next February (2015) . So within 1 year of submittal. This is the timeline. We are at permitting and engineering design right now and starting construction in the first half of next year and production a year later.
It is hard to read but you can come by the booth and we have the presentations or see it on the website. I compare the project that we have so far which is just that one shear zone and just 200 metres remember to existing tier 2 gold producers globally and it compares very well to their existing operations. If you look at this slide as comparing two existing gold development projects that are with developers versus owned by producers and were at the very high end of the IRR and in the 2nd quartile of the cash cost. If you compare it to our colleagues the other companies near the top of that IRR their market caps are currently multiples of ours. There is definitely an opportunity here to invest at a low price before we get the permit.
So far we have raised $55 million dollars in the last two years and only have 74 million shares outstanding. Liberty Mutual one of the largest insurance companies in the US is our key shareholder where they own 20% of the company and will lead the equity financing we need to do to build the mine.
This is a comparison of Red Eagle share price compared versus all the Colombian gold companies and overlaid with the gold price. So first everyone invests in junior gold companies depending on the gold price which just depends on the US dollar… and it’s crazy. The gold price has been $1200-$1400 for 15 months now and is not changing in my view. You can see the black line the other gold companies in Colombia their share price goes exactly with the gold price. Since we issued our PEA in 2013 we have really broken away from that pack. If you look at the last 3 months since July the rest of the companies in Colombia have lost 50% of their market cap along with much of the junior sector where we have increased by 20%.
So to summarize its a simple project, simple geologically, simple metallurgically… it’s just a measure of implementation now. We have got a $600 cash cost and under $800 all in cash costs a high IRR. Lot’s of upside on the exploration which we are going to drill during 2015 while we are building the mine. Extremely undervalued compared to other top gold development stories globally and great shareholders to actually fund the development.
So this is us. We are one minute early.
Disclaimer and Disclosure: Readers are advised that the material contained herein is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The owner, editor, writer and publisher and their associates are not responsible for errors or omissions. They may from time to time have a position in the securities of the companies mentioned herein, and may change their positions without notice. (Any significant positions will be disclosed explicitly.) Author is not a registered investment advisor and this is not a formal investment recommendation. We are not telling you to go buy or sell this stock. We recommend that you do as much research as possible on every stock you purchase or sell prior to any action. We recommend that you consult your investment advisor or broker prior to any action. We are not liable for any transactions you make after reading this article. Do your own due diligence prior to making any investment decision. Additionally, we invest with a 12 month or longer time horizon. If your time horizon is shorter, you may consider other investments.
Copyright: This publication may not be reproduced in whole or in part, in any form, without the express permission of the publisher. Permission is given to extract parts of the report for inclusion or review in other publications only if credit is given, including the name and address of the publisher.