The Gold Report: Gold has traded this year in a range close
to $1,200 per ounce ($1,200/oz). Do you expect gold to maintain this range
for the rest of the year?
Geordie Mark: Yes. Our 2015 outlook is $1,250/oz, and thereafter we
project a flat outlook to manifest a more agnostic view on the commodity. We
employ this approach as it facilitates greater correlation between cash flow
expectations and our view of operational performance.
TGR: What are the factors keeping gold at $1,200/oz?
GM: We see gold demand support predominantly arising from Asia,
particularly in India and China, but also note recent rhetoric from Russia
outlining the potential of increasing the country's metal inventory.
TGR: When we spoke last year, you said you anticipated a gold-silver price
ratio of 60. Today, the ratio is 70. What's your forecast for the price of
silver for the second half of 2015, and what's your forecast for the ratio?
GM: Our silver forecast is $18/oz, which translates to a ratio of
about 70. Silver's supply/demand fundamentals are somewhat different than
gold's, as much silver is derived as a byproduct from base metal production.
Even so, we are seeing ever-increasing supplies of silver moving into various
investor-oriented vehicles. For example we have seen the silver balances
within exchange-traded funds (ETFs) hold more support compared to gold ETFs
in recent years. The evolving supply-demand picture for silver shows that
this metal is becoming more and more like gold in that its demand is
increasingly reliant on investor participation.
TGR: Is gold production sustainable at $1,200/oz, and, if so, for
how long?
GM: Gold production costs have come down over the last couple of
years, due to mine optimization, lower staffing levels, cheaper energy and
the strength of the U.S. dollar across a basket of currencies. Global gold
production appears to have actually increased relatively steadily since 2008,
albeit in a more recent pricing environment where the metal price has
exhibited notable headwinds. Gold at around $1,200/oz should result in
sustainable production for some time, particularly in operations outside the
U.S., such as Canada, Australia and New Zealand, but ultimately the sector
needs additional discoveries to replace the currently depleting reserves
base.
TGR: You mentioned mine optimization. To what extent are gold
producers now skimming off the top: rearranging their mine plans to get at
the easiest part of their ore and the ore that is of the highest grade?
GM: Ultimately, mine-plan optimization is a dynamic process. The
first notable change happened in 2013, but there remains a steady evolution
in the cost structure of individual operations and the mechanisms (e.g.,
mining plan modifications, cut-off grade variations and staffing profiles) in
which they moderate overall costs. Thankfully, and in addition to the
aforementioned, many input costs (e.g., fuel, reagents and steel) have
winnowed more recently to foster operating margin protection and/or
expansion.
TGR: To what extent are gold producers benefiting from the collapse
of the price of oil?
GM: We've witnessed some significant changes in cost structure from
many producers as recorded in Q1/15. They certainly have been saving
significantly on the operational cost side as oil slid into the $60 per
barrel range. This precipitous drop in oil prices helped those producers with
a significant mining fleet, as well as those sourcing power via on-site fuel
generated power. In conjunction with the recent stability in the gold price,
this pricing drop has allowed for the protection of operating margins.
TGR: For how long can gold producers expect to benefit from low oil
prices and a strong U.S. dollar?
GM: We view these as short-term phenomena, but do not project a
specific date or catalyst to change the status quo. Our team sees oil prices
moving higher over time, certainly in the mid-term. As for the U.S. dollar,
we project the currency holding its strength against the basket of other
currencies over the near term. That is good news for resource companies with
operations in the European Union, Asia, Australasia, South America and those
countries linked to the South African rand, like Namibia.
TGR: Of the companies you follow, which are your favorite gold
producers?
GM: If you're looking for free cash-flow generation and producing
yield with some growth, we like Tahoe Resources
Inc. (TAHO:NYSE; THO:TSX) for exposure to silver and gold in the
Americas.
If you're looking at Asia and Australasia, we like OceanaGold
Corp. (OGC:TSX; OGC:ASX). This company boasts modest growth in the near
term and delivers solid operating margins while also offering modest dividend
yield.
If you're looking for significant growth and a gold producer looking to
put another operation into production over the nearer term, we like B2Gold Corp.
(BTG:NYSE; BTO:TSX; B2G:NSX). It has operations in the Philippines,
Nicaragua and Namibia and has begun infrastructure development at a fifth
potential mine, Fekola in Mali.
These companies have all witnessed recent operating cost reduction arising
because of lower energy costs and weaker local currencies.
TGR: Earlier this year, Tahoe bought Rio Alto Mining. How does the
new Tahoe differ from the old company?
GM: The takeover of Rio Alto and its Peruvian assets, the La Arena
gold mine and the Shahuindo gold project, have bolstered Tahoe's production
profile and its technical expertise profile and given it jurisdictional
diversification. The company is now producing a significant amount of
gold—220,000 oz (220 Koz) from La Arena last year—to add to the silver it
produces from Escobal in Guatemala. It has come close to doubling
silver-equivalent production as a result of the merger. It now has
significant free cash flow that it can put to work to developing Shahuindo,
which is scheduled to begin production in early 2016. Bringing Shahuindo
on-stream is expected to aid cash flow generation that ultimately could be
used to fund further acquisitions.
TGR: What's your opinion of Shahuindo's prospects?
GM: It looks to be a low-cost build, with a modest capital
expenditure (capex) for an initial Run of Mine heap leach operation that
would likely move to a larger scale multi-stage crush, heap leach mine.
Senior management from both Tahoe and Rio Alto has heap-leach experience, and
with La Arena relatively proximal to Shahuindo, they have significant
operational experience within Peru. These synergies certainly boost
Shahuindo's performance and growth potential.
TGR: B2Gold is another company with jurisdictional diversification,
with mines in Nicaragua, the Philippines and now, Otjikoto in Namibia. Having
visited Otjikoto, how do you rate its ramp up?
GM: Otjikoto began commercial production last quarter, following a
first pour in December 2014. This project was basically on time and on
budget. That's rare for mining projects. We see Otjikoto as being the
platform for the company's production expansion within Africa, and reportedly
appears to be operating ahead of budget year to date. Next up is Fekola in
Mali. Team members that built Otjikoto are in Mali now, developing the
project's infrastructure, and further team members are expected to migrate to
Mali over time as the Otjikoto expansion is completed next quarter. The Fekola
feasibility study was just delivered, and we believe that B2Gold's board will
likely make a formal development decision soon given its anticipated low opex
and life expansion potential beyond the currently outlined 12.5 years.
TGR: On May 20, B2Gold announced it had secured a $350 million
($350M) credit facility. What do you make of this?
GM: It resolves a perceived overhang. The market had believed that
the company would be forced to tap the equity market to fund its development
and expansion plans. We see the $350M facility negating the need for the
company to issue shares to fund growth in the near term. The new facility,
which is now closed and the first $150M draw, is expected to be used
primarily to fund work at Otjikoto, such as the development of an underground
mine at the Wolfshag zone, as well as the development of Fekola. The revolver
facility also has the capacity to be expanded to $450M, which gives further
support to the company's argument for not needing to draw on the equity
markets. In our view, if commodity prices remain stable, we believe that
B2Gold can fund its development projects with its new revolver facility and
cash flow from its existing portfolio of assets.
TGR: Moving on to OceanaGold, how is this company evolving?
GM: It has three producing mines, one of which, Reefton in New
Zealand, will close this year. Oceana has shifted its focus to the
Philippines with the commissioning of Didipio, which will produce 100 Koz
gold and 14,000 tons copper annually at significant margins.
New Zealand remains important to Oceana, however. In June, the company
announced that it had entered into a definitive agreement to acquire the
Waihi gold mine and surrounding exploration ground from Newmont Mining Corp.
(NEM:NYSE) for $101M plus other considerations. We consider this as a
positive step, as it adds critical mass to its New Zealand operations. Waihi
has potentially three or more years of production and that could expand even further
depending on its success in exploration at Correnso and elsewhere. This is a
prudent, small-scale acquisition that adds to Oceana's existing operational
base. One of the worries that people had about Oceana was that it would
acquire an asset that was inconsistent with the current market environment
and the team's current production philosophy. Instead, Oceana made a
synergistic acquisition that was aligned with the team's focus of delivering
margin, and which has demonstrable exploration upside that could be
integrated into future production.
TGR: Oceana now owns 14.9% of Gold Standard
Ventures Corp. (GSV:TSX.V; GSV:NYSE). What is the reason for this
investment?
GM: Oceana wanted to consolidate its presence in the Americas, and
in particular within one of North America's primary gold-producing states,
Nevada. To that end, Gold Standard Ventures has a significant footprint in
that state, and defined some very intriguing systems at the Railroad-Pinion
gold project in the Carlin Trend. Oceana's technical team likes the potential
of the holdings that Gold Standard has put together in that state over the
last several years.
TGR: Newmont and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) have been
ridding themselves of a fair number of properties recently. Will this trend
continue?
GM: Yes. Across the mining space, the larger companies have been
divesting smaller-scale assets and assets with lower-defined mine lives in
order to deleverage, and harmonize operational management. The smaller
companies that buy these assets have the potential to improve the operating
cost structure at these assets, refocus the local workforce and test for
future reserve potential.
TGR: How big do Tahoe, OceanaGold and B2Gold want to become?
GM: That's a good question for their respective management teams.
These companies have been buying assets that marry well with the practical
capacity of their operating teams. I believe that the reasonable plan for
these companies is to grow at a modest pace that is commensurate with their
capacity. There is a dearth of mid-tier gold producing companies, and so
that's probably a reasonable space to grow into whether by organic growth,
acquisition or a combination of both.
TGR: Has your rating of any of these companies changed recently?
GM: After Tahoe's purchase of Rio Alto and its Q1/15 performance
was announced, our rating changed from Hold to Buy. We like the team and its
near-term focus to support production growth and bolster operating margin.
Tahoe has a world-class asset in Escobal that provides a cornerstone free
cash flow generator that will enable management to consider pragmatic and
timely future acquisitions.
TGR: What are your two favorite African gold development projects?
GM: One that is at the front of the list is Asanko Gold
Inc.'s (AKG:NYSE.MKT; AKG:TSX) Asanko gold mine in Ghana. We visited it
last month. It's likely more than 50% complete now and on schedule for its
first pour in February 2016. Phase 1 is on track to meet its capex of $295M.
That said, we expect that Asanko is supported by a $40M liquidity buffer
(cash and debt) beyond the project contingency within the $295M capex figure.
We like the jurisdiction, and the onsite development team has considerable
experience in building mines across Africa.
With phase 2, Asanko has the capacity go from about 200 Koz annually to
400 Koz starting in 2018–2019. Altogether, Asanko has more than 4 million
ounces (4 Moz) in reserves and more than 10 Moz in resources across its
Asanko gold mine asset portfolio. We believe that the company trades
relatively cheaply compared to its underlying net asset value, and our target
price projects the company's market price to move toward the net asset value
per share as the mine moves closer to production.
TGR: So you were impressed by the economics of the phase 2
expansion announced May 14?
GM: Certainly. Asanko looks to utilize the synergies inherent in
the project given the proximity and characteristics of the deposits to be
exploited in a phase 2 operation, as well as the infrastructure already being
built for phase 1 (e.g., processing plant footprint, tailings dam). These
synergies greatly improve on the economics of phase 2 rather than it being a
standalone operation. We are looking forward to the full feasibility report
due next year, so we can review other potential the company has been able to
squeeze out through further optimization.
TGR: What other near-term gold project do you follow in Africa?
GM: Orezone
Gold Corporation (ORE:TSX) and its Bomboré project in Burkina Faso. This
company has a very experienced management team that discovered and put into
development the Essakane mine that was sold to IAMGOLD Corp. (IMG:TSX;
IAG:NYSE).
The Bomboré feasibility study was released in April. The feasibility
outlined a capex of $250M and an after-tax internal rate of return of 24.4%.
Bomboré is a low-grade deposit, but it contains more than 5 Moz gold, of
which the aforementioned project only touches the surface in exploiting a
portion of the oxide material and leaving the underlying larger sulphide
resources. The company has developed an elegant processing approach that
would employ integrated heap-leach and carbon-in-leach (CIL) processing where
scrubbing of the ore material would result in the fines material (containing
~50% of the gold) going to the CIL plant, whereas coarse-grained tails report
to the heap leach pad for processing. This processing plant is expected to
lower the risk to gold recovery, and significantly reduce average recovery
times versus employing a simple heap leach processing model only.
Operating costs on a per-ton basis are expected to be relatively low given
the aforementioned processing plan and a low mining strip ratio of just over
one. I think there's potential for additional resource growth within the
oxide profile, which could add to mine life. All together the Bomboré
presents as quite a decent project.
TGR: How stable a jurisdiction is Burkina Faso?
GM: It is in a state of political flux at the moment. It doesn't
have an elected government, but it is looking at an election in Q4/15.
Despite the uncertainty, a number of companies have recently gone into
construction. Roxgold
Inc. (ROG:TSX.V) was the most recent operator given a decree for mining,
and True
Gold Mining Inc. (TGM:TSX.V) has just announced that it is back in
construction mode. Orezone submitted a mine permit application for Bomboré in
May, and this could be approved before the election. That would be very
positive for Orezone management.
TGR: What are signs investors should be looking for to indicate an
upward shift in market sentiment?
GM: Fundamentally gold price is a significant determinant on sector
sentiment, so we look for development of pricing stability to improve sector
sentiment on the equity side. In addition, success breeds success, where
pricing support is also expected to be aided by the improvement in
operational performance from the producers, as well as continued
consolidation in the sector. Together these factors could foster renewed
interest in the sector.
TGR: Geordie, thank you for your time and your insights.
