South
America has been a major beneficiary of the 2000s gold bull, party to some
big discoveries by the mining companies flocking there. Some of these discoveries
have already been developed, with top-three producers Peru, Brazil, and Chile
for example seeing their collective gold output increase by 25% since 2001. And
some are in the pipeline, with production on the horizon.
These
pipeline projects come in all sizes and are scattered across the
continent. Naturally there are many located within the borders of the
top three. But many reside elsewhere, including such exploration hot
spots as Argentina and Colombia. One of South America’s finest development-stage
projects belongs not
to the aforementioned major countries though. It resides in Guyana, a
small sparsely-inhabited nation that many folks are unfamiliar with.
The
few people who have heard of Guyana are the ones who recollect a key event in
modern US history. But I’m sure the Guyanese aren’t thrilled that the
event defining their country was the infamous Jonestown massacre, an ordeal
that involved the only-ever assassination of an active-duty US congressman.
Also
in the US, reality-TV junkies recently got familiarized with Guyana as the
backdrop for a season of Discovery’s wildly popular show Gold Rush. In
2013 Guyana produced in the neighborhood of 450k ounces of gold, mostly from
small-scale mines. If the artisanals could do it, so could Gold Rush
star Todd Hoffman and team right?
Hoffman’s
team failed miserably, producing only enough gold to pay the cab fare back to
the airport. Though this failure was mostly self-induced, and
entertaining, viewers did get to witness the challenges of mining in a dense
tropical rainforest. Guyana’s artisanal miners, known locally as pork-knockers, must work
very hard to scrape the gold out of the ground.
Guyana’s
artisanal success has attracted more than greenhorns like Todd Hoffman
though. It has garnered commercial attention from larger mining
companies seeking to find the source deposits. These geologically savvy
companies see the big picture of what Guyana has to offer. They
understand the prolific Guiana Shield, and its propensity to host greenstone belts
full of near-surface mineral deposits highly concentrated with gold.
And most importantly, they recognize how vastly underexplored this country
truly is.
Aptly
named Guyana Goldfields is one company willing to take on Guyana’s challenges
in order to score a source deposit. Founder and current Executive
Chairman Patrick Sheridan was an early mover into this country, with his team
commencing exploration back in the mid-1990s. And their watershed event
was the 1998 procurement of the Aurora project.
Gold
mineralization was actually discovered at Aurora over 100 years ago. It
even saw a bit of mining in the middle of the 20th century, to the tune of
approximately 100k ounces. But it didn’t really see any modern
exploration until right before Guyana Goldfields took over.
It
took several years to build up some exploration momentum considering the
state of the gold market around the turn of the century. But when
Guyana Goldfields hit its stride, it uncovered a 2.0km-long mineralized
corridor that it dubbed the Golden Square Mile. Significant to this was
the discovery of Aurora’s flagship deposit just to the east of where
historical mining occurred. And in 2007 it announced a maiden resource
estimate that showed Aurora to host one of South America’s largest
undeveloped gold deposits.
By
2011 Guyana Goldfields had performed numerous comprehensive exploration
programs that served to feed a series of positive economic studies.
That same year it was able to procure a mining permit, the first large-scale
gold-mining license issued by Guyana in 20 years. And within a few
months it completed Aurora’s long-awaited feasibility study.
As
you can see in the chart below, the markets didn’t take too kindly to the
results of this study. And GUY’s stock got simply obliterated, losing a
whopping 80% in
less than three months to its Q2 2012 low. Though the FS indicated
excellent economic potential, even management expressed their overall
disappointment with the results.
Aurora
was too good of a project for its operators to accept mediocrity though, so
Guyana Goldfields grabbed its bootstraps and set out to improve all aspects
of the proposed mining plan. As part of its efforts it revised the
resource estimate, which now sits at 8.4m
ounces in all categories. And it used a core portion of
this tally, 3.5m ounces in the proven and probable reserve categories, to
feed the updated FS that was announced in January 2013.
The
results of this updated definitive study were wildly positive, showing a
marked improvement over the previous iteration. And despite this
announcement coming at a time of rough sailing for gold and its associated
equities, Guyana Goldfields set its sights on developing its gold mine.
Affording
this confidence was a buildout that more
than halved Aurora’s pre-production capex requirements over the
previous study. It made sense operationally too, with projected all-in
sustaining costs that’ll have it producing in the lower quartile of industry
average. With AISC of only $698/ounce, this mine’s after-tax internal
rate of return is calculated at 25% using
$1150 gold.
Making
the decision to build this mine really was a no-brainer for Guyana
Goldfields. Patrick Sheridan thus set the gears in motion to move
forward with Aurora’s development. And this included staffing up, with
the mid-2013 hires of a new CEO and a new COO who both have
developmental/operational experience.
New
CEO Scott Caldwell was instrumental in helping to secure Aurora’s development
capex. And the first phase of the buildout (~$249m) is now fully funded
using a combination of hedge-free debt and equity. Mine construction is
now in full gear, and Guyana Goldfields is targeting mid-2015 for commercial
production.
Per
the mine plan drawn up in the feasibility study, Aurora will produce an
average of 194k ounces annually over a 17-year mine life. Mining will
initially occur via open-pit methods, and then an underground component will
be added in 2018. It’s estimated to cost approximately $151m to develop
the underground infrastructure and expand the mill. And Guyana
Goldfields hopes a big chunk of this will be funded via cash flow.
As a
follow-up to the feasibility study, Guyana Goldfields smartly ran an
alternative mining plan in case things really got bad in the gold
market. It can obviously remain profitable even at lower gold prices,
but it can choose to not go forward with the underground expansion if when
the time comes it would be imprudent to expend such capital.
An
open-pit-only scenario would obviously reduce the mine life, but it would
also reduce life-of-mine AISC since there would be less sustaining capital,
which would thus raise the IRR. In this scenario Aurora would produce
an average of 177k ounces annually over a 13-year mine life. Guyana
Goldfields doesn’t need to make up its mind on this for now, but it’s
certainly a nice option to have.
It’ll
also likely have more options as it continues to advance exploration at its
Aurora project. Not only are there about 5m ounces of resources not
included in the mining plan, the deposits are still open in several
directions and there are numerous targets that have still yet to see
drilling. I suspect Aurora will easily be a 10m+ ounce project down the
road.
What
an opportunity investors have to take part in one of the world’s premier
development-stage gold-mining projects! There aren’t many out there
that are fully funded, fully permitted, and that are in line to operate
profitably even at lower gold prices. And as you can see in the chart below,
investors can gobble up this stock at bargain-basement prices.
This
chart plots the daily prices of gold (in red) and GUY (in blue) since
2011. And as would be expected, it’s pretty ugly. Following its
2011 all-time high, gold pulled back and consolidated in healthy fashion.
But for a variety of reasons, primarily the Fed-backstopped levitating
stock markets, gold crumbled in 2013. This obviously crushed the
gold stocks, leaving most of their 4-year charts looking very similar to this
one.
Ultimately
with gold oversold and the stock markets overbought, a long overdue mean
reversion is on the horizon. And when gold does finally come back to
life, the radically oversold
gold stocks are poised to skyrocket. And the ones that will really
thrive are those with quality long-life high-margin assets that’ll greatly
leverage a rising gold price.
Research
analysts like myself attempt to find these stocks based on their fundamental
setups. And one thing that tends to support the fundamentals is recent
stock performance. Guyana Goldfields has spectacular fundamentals, but
how has its stock done relative to gold?
For
a non-producing junior, we need to focus on the future prospectivity of its
assets. If the future is bright, then investors ought to bid the stock
higher on gold strength. Gold of course hasn’t been very strong lately,
but it’s had four meaningful uplegs subsequent to its 2011 apex. And as
you can see, GUY’s overall performance amidst these uplegs is very
encouraging.
The
only chink in GUY’s armor was its performance during the first upleg in early
2012. Its 20% gain to gold’s 15% only gave it 1.3x positive leverage,
which is quite pitiful all things considered. To compensate/reward for
their many additional risks, gold stocks need to perform way better than gold
on the upside, otherwise they’re not worth owning.
Fortunately
this upleg was somewhat of an anomaly, one in which most gold stocks lacked
meaningful leverage. Any momentum GUY had was also short-circuited by
the release of its disappointing feasibility study in February. With
gold soon heading back down, investors sold this stock with reckless abandon.
With
the weak hands washed out and the prospects for a better-optimized mining
plan, GUY performed much better during gold’s second upleg. And its 68%
gain to gold’s 15% provided the kind of excellent positive leverage (4.5x)
you hope for when you buy gold stocks.
Gold’s
third and fourth uplegs came after GUY’s feasibility update. And with
the future a whole lot brighter, investors rushed into this stock when the
metal was bid higher. Gold’s respective 18% and 16% gains were met with
GUY gains of a whopping 96%
and 105%,
offering outstanding leverage of 5.3x and 6.5x. And though gold has
failed again following its early-2014 upleg, GUY has exhibited exceptional
strength as seen in an uptrend that’s held for nearly 1.5 years.
Overall
Guyana Goldfields’ spring is wound real tight. And its stock is poised
to launch when gold finally gets some legs. GUY will likely be an
outperformer considering its stellar fundamentals. And investors have a
rare opportunity to grab it at bargain-basement prices.
GUY’s
ascent will be accompanied by other elite gold stocks. And considering
how hated this sector still is, most of its compatriots are also trading at
silly-undervalued levels. At Zeal we’ve identified some of these other
elites as part of our exhaustive sector-level research. And like Guyana
Goldfields, their prospects are great and their stock prices are extremely
cheap.
We
fundamentally profile our dozen favorite stocks in a given sector in our
popular research reports.
And our three latest reports focus on our favorite mid-tier producers, junior
producers, and advanced-stage junior explorers. Buy your discounted
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moves higher!
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The
bottom line is one of the finest gold-mine development projects in all of
South America is located in the small country of Guyana. Guyana
Goldfields was one of the first movers into this underexplored gold
mecca. And its expert team rewarded it with the delineation of a
fantastic complex of deposits that now have 10m+ ounce potential.
Guyana
Goldfields overcame some adversity in getting to its final mining plan, an
operation that is now projected to have stellar economics even at low gold
prices. And its Aurora mine is now fully permitted, fully funded, and
under construction with a go-live target of mid-2015. Investors can
snatch up this stock for cheap right now. And based on its recent
behavior, it is poised to pop once gold catches a bid.
Scott
Wright
********
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