The Gold Report: Newmarket Gold
Inc. (NMI:TSX) has a significant, well-known team with a strong track
record. What brought all of you together?
Doug Forster: The founders of Newmarket Gold are friends. We
decided it would be great to work together on a mining opportunity. After
gold dropped about $100/ounce ($100/oz) one day in April 2013, we agreed that
we had not seen valuations for gold assets at this level for many years. So
we decided Newmarket would acquire gold-producing opportunities, and our
strategy would be to roll up quality gold production assets. Great gold
assets don't walk through the door. You have to literally dig them up. So
having Lukas Lundin, Randall Oliphant, Ray Threlkeld and Blayne Johnson as
founders of Newmarket brings an incredible contact base and scope of
relationships to our business, which we will leverage to find and acquire
those undervalued, potentially unrecognized quality gold assets.
Our first acquisition, Crocodile Gold Corp., was an unrecognized,
undervalued gold production opportunity that our team identified, negotiated
terms and closed. It has worked out very well for our shareholders. Bringing
this team together was the seed of the success that we're now reaping for our
shareholders.
TGR: Nothing shows more belief in a company than investing one's
own money. Can you share management's ownership percentages and how much
they've invested to date?
DF: The founders and management of Newmarket own about 8% of the
company, and we have collectively invested CA$12 million (CA$12M) of our
money. It's tremendously important that management and founders of public
mining companies invest their own capital alongside shareholders. When we closed
our first acquisition in July 2015, we completed a CA$25M concurrent
financing at CA$1.25/share. The founders of Newmarket invested CA$9M, or 36%,
of that financing, and this attracted other investors to join us in making
Newmarket an outstanding success.
TGR: You have a unique performance share unit (PSU) investing plan
and lower-than-average general and administrative expenses (G&A) that are
aligned with your shareholders. Can you explain?
DF: Our PSU plan is unique in that the PSUs are not time-based
vesting. Rather, they vest according to certain share price hurdles. We have
aligned our incentive programs with what is most important to shareholders:
share appreciation. There are approximately 4.0M PSUs granted to the
management, board members and founders. The first one-third tranche vests
when our share price hits $2.25 on a 20-day, volume-weighted average basis.
The second tranche vests when the shares hit $3, and the third tranche is
vested at $3.75. In this way management and founders' incentive are directly
aligned with shareholders.
Our G&A is about $27 per annual ounce of production, and that's about
half of our junior producer peer group, which averages approximately $56/oz
of annual ounce of production.
TGR: Newmarket Gold launched on a significant acquisition in May
2015, lifting the company to a 200,000+ ounce (200+ Koz) per year gold
producer. Would you tell us about that?
DF: We had been following the progress of Crocodile Gold and its
three producing gold mines in Australia. We watched its production stabilize
above 200 Koz per year, and we also watched its operating cost decline
approximately 40% over three years.
The barrier to acquiring Crocodile Gold for anyone, let alone Newmarket,
was a free cash flow sharing deal that was in place with AuRico Gold Inc. In
January 2015, Crocodile renegotiated the deal with AuRico, and this made
Crocodile a high priority acquisition opportunity for Newmarket.
The other bonus to negotiating the deal was the fact that one shareholder,
Luxor Capital Group, owned 56% of the outstanding shares of Crocodile Gold.
So we really had just the one shareholder to deal with in negotiating the
deal with Luxor and with the Crocodile board of directors.
TGR: Jurisdiction is very important to most investors out there.
Can you explain your jurisdictional choice in Australia, considering you're a
Toronto Stock Exchange (TSX)-listed company?
DF: You go where the gold is. Australia is the second largest
gold-producing jurisdiction in the world, behind China. Australia is also a
stable mining jurisdiction with a long track record and history. Security of
mining tenure is really an important factor in choosing jurisdiction to
invest our capital and the capital of our shareholders. The weak Australian
dollar is also a great benefit for our production cost profile, and this is
an added benefit for being a gold producer with all of our production located
in Australia. I believe Australia is one of the safest, most cost-effective
and prospective gold mining jurisdictions in the world.
Newmarket inherited the TSX listing when we purchased Crocodile Gold. I
have spent a ton of time in Australia and we have contemplated listing our
shares on the Australian Stock Exchange (ASX). It's truly a bull market for
gold stocks on the ASX Exchange. We may consider an ASX listing in the
future. If the opportunity came available, it would likely come through an
acquisition of a gold producer in Australia, where we would inherit the
listing and their shareholder distribution.
TGR: Newmarket did a significant amount of drilling in H2/15. Can
you tell us about the drilling and how it benefited Newmarket?
DF: In 2015, we completed approximately 42,000 meters (42,000m) of
drilling in almost 200 drill holes, focused on the Phoenix and Lower Phoenix
gold system at the Fosterville mine, our flagship asset. We invested a total
of US$12M across our operations on growth exploration and development. That
has really led to a number of significant discoveries at our Fosterville
operation, including the high-grade, visible, gold-bearing Eagle Fault and
East Dipper zones. This drilling has increased our gold reserves at our
Fosterville gold mine by 34% from last year to 244,000 ounces and our reserve
grade by 25% to 6.95 grams per ton (6.95 g/t).
We just tabled the new Measured and Indicated (M&I) Mineral Resource
for our current mining front in the Phoenix and Lower Phoenix gold system at
our Fosterville operation, which contains 673 Koz grading 8.33 g/t gold. Mill
grade during 2015 at Fosterville averaged 6.11 g/t, so we have seen a
significant increase in our reserve and resource grade from last year's
average grades. Our new discoveries during H2/15 have significantly increased
the grade of our gold resources. This M&I resource base has the potential
to significantly extend the reserve life of our Fosterville mine, so it's
been money well spent.
In addition to Fosterville, we also have been working at our Stawell mine.
Our investment in growth in 2015 led to the discovery of the new Aurora B
gold zone. We've published a maiden Inferred Mineral Resource for Aurora B, a
discovery of 30.4 Koz grading 3.5 g/t gold. This initial grade of the Aurora
B discovery is 42% greater than the current Stawell underground reserve
grade, which is 2.47 g/t gold.
There is excellent potential for expanding the Aurora B discovery through
additional drill programs, which are now underway. We've made a big
investment through drilling at our Fosterville, Stawell and Cosmo mines, and
it's paid off significantly in reserve and resource increases, as well as new
discoveries.
TGR: You have a few other development-phase gold assets that could
potentially add to the organic growth of the company. Do you want to
elaborate?
DF: Our Big Hill project located at our Stawell mine is the
open-pit expression of the Stawell underground ore body that's been mined
continuously for 30 years. A feasibility study has been tabled that envisages
open-pit mining of the oxide deposit that hosts an M&I Mineral Resource
of 166 Koz grading 1.52 g/t gold. The Stawell mine is located adjacent to the
Big Hill deposit, so capital and development costs will be very low. The
proposed mine development is currently under review by regulators in
Victoria, and we're waiting for a decision on development. As the project is
subject to receiving these permits, we don't currently have it in our Stawell
mine plan, but we'd certainly like to extract that oxide ore and put it
through the Stawell mill since the mill is right next to the deposit.
The second development project is the Maud Creek deposit in the Northern
Territory, which hosts an M&I Mineral Resource of 724 Koz grading 3.46
g/t gold. We're currently completing a preliminary economic assessment (PEA)
on that project. The PEA will have two development options, a stand-alone
operation and an option using our Union Reefs (UR) mill. Our UR mill
currently has 1.2 million tons of excess milling capacity, so it makes sense
to see if we can utilize this excess capacity for processing Maud Creek ore.
The Maud Creek project is located about 110 kilometers from the Union Reefs
mill, which is currently processing ore from our Cosmo mine. That PEA for
Maud Creek will be published early in Q2/16.
TGR: We noticed that you have strengthened your balance sheet by
redeeming your convertible debentures, leaving you essentially debt-free. Do
you anticipate growing your cash reserves?
DF: By the end of March 2016, we'll be essentially debt-free with
the conversion of our $34M convertible debenture into Newmarket common
shares. A strong balance sheet is important, especially when we're
experiencing volatile gold prices. Not many producing gold companies have
unhedged production, essentially no debt, only 175M shares issued and
outstanding, and approximately US$36M in cash. We're a real standout in all
of those categories.
Free cash flow and growing our cash reserves really are very important to
Newmarket. We will continue to focus on maintaining and growing our production
profile and decreasing our operating costs while generating free cash flow.
The money saved on not paying the interest on that debenture will be of good
use to Newmarket as we advance our new discoveries.
TGR: What is your strategy for 2016?
DF: Given that we no longer have that debt to service, we intend to
invest US$5-10M in our growth discoveries across our operations during 2016.
We have plans to advance our Eagle and East Dipper discoveries at our
Fosterville gold mine, our Aurora B discovery at our Stawell operation and
our Western Lodes discovery at our Cosmo mine in the Northern Territory.
Our shares have increased approximately 75% since the start of 2016, but
we really think that we can do much better. If you look at any valuation metrics-price/cash
flow or price/net asset value or enterprise value per ounce of annual gold
production-we're still significantly undervalued with respect to our gold
producer peer group.
Given the weak Australian dollar and low-cost profile, the Australian-listed
gold producers are trading at their all-time highs at valuations that are
well in excess of Newmarket Gold. That valuation gap between Newmarket and
our peer group is our challenge and our shareholders' opportunity. To move
forward, given the grade increases at our flagship Fosterville mine, the
discovery of the Aurora B zone and our Stawell operation, we really see the
potential for organically growing our production. Organic ounces really are
the most cost-effective production ounces, and these ounces can really
increase our market valuation.
Ultimately, Newmarket wants to be the next quality midtier gold producer.
We'll achieve this by acquiring additional gold production opportunities in
Australia and North America. For us, being a midtier gold producer is
approximately 400-500 Koz annual gold production so we are halfway there.
Given the prospects of our organic growth and our acquisition strategy, we
are very focused on creating shareholder value moving forward.
TGR: Do you have any final thoughts?
DF: Newmarket has only been a public company with our three
producing gold mines in Australia for approximately eight months. We feel we
are only just starting to create value for our shareholders. With sustainable
gold production of over 200 Koz, a decreasing cost profile and both an
organic and an acquisition-based strategy for growth, we believe the future
for Newmarket and our shareholders is very bright. I would like to thank our
800 Newmarket employees and contractors because it is through their dedication
and operational excellence that we've been able to lead Newmarket on the path
to success for both our employees, and of course, all of our shareholders.
TGR: Thank you very much.
Douglas Forster is the president and CEO of
Newmarket Gold Inc. He has been associated with the mining industry for over
30 years as a geologist, senior executive, director and company founder.
Forster has been involved in a number of large-scale Canadian mine
development projects including the Mt. Milligan gold-copper mine, the Kemess
South gold-copper mine, the Golden Bear gold mine and the Legacy potash
project. He holds a Bachelor of Science and Master of Science in economic
geology from the University of British Columbia, Canada.
Graphics courtesy of Newmarket Gold.
