Low costs are the key to gold mining success, not ounces mined
Cost per ounce and profitability are important considerations before making gold investments.
It’s not easy to separate the lure of gold from the reality of running a gold mine as a business, which is why so many seemingly attractive investment opportunities fail with too much emphasis placed on the price of gold and not enough on the cost of production.
The mistake of focusing on the gold price and the number of ounces being mined is one found at every level of the industry and is a pet hate of mine when forced to listen to mining executives talking up their projects.
Rather than listening to boasts about tonnes of ore mined and ounces recovered, an investor needs to know about the cost per ounce, the profitability of the business, and its life expectancy.
A good example of getting the numbers lined up in the right order can be found in Emerald Resources (ASX: EMR), a low-profile gold producer featuring a rare combination of high asset quality, skilled management and low costs.
Rarely mentioned in mainstream media, Emerald has simply delivered on its promise of developing the Okvau mine in the south-east Asian country of Cambodia to be valued on the ASX at close to $1 billion, which means it is no longer a small cap.
Finding the next Emerald Resources
Finding the next Emerald is a trick which could actually be easier than it seems, especially after discounting the background noise emanating from over-promoted companies.
OreCorp (ASX: ORR), which has received a previous mention on Small Caps, is travelling down the same track as Emerald, albeit about three years behind.
But that timing difference means that OreCorp is valued at a fraction of Emerald, though if its development plan unfolds in a similar way it could catch up.
Like Emerald, OreCorp is operating in a country with a patchy mining record (Tanzania), which is an investment negative.
But offsetting the location is a similar combination of high-quality gold in the ground, a seasoned management team with a track record of success in Africa, and a mine development plan ready to go.
What completes the parallel is the estimated cost per ounce of gold with OreCorp’s studies pointing to gold from its Nyanzaga project being produced at US$954 an ounce (A$1,432/oz), almost in Emerald’s class of around US$800/oz (A$1,200/oz) – both being comfortably below the latest gold price of US$1,867/oz (A$2,803/oz).
OreCorp has had false starts with Nyanzaga and some early followers of the stock have lost interest, but latest news from the company, delivered during site visits to bankers and journalists after the Mining Indaba conference in Cape Town is that management is ready to proceed.
According to reports from project site in the gold-rich Lake Victoria goldfield which already hosts some of Africa’s biggest mines, Nyanzaga will cost US$474 million (A$711 million) to build with open pit and underground operations yielding 242,000 ounces a year for the first 10 years at the US$954/oz mentioned earlier.
Assuming a gold price of US$1,750/oz (A$2,627/oz) the capital cost payback can be achieved in roughly three and a half years.
Funding for Nyanzaga, which is 84% owned by OreCorp and 16% by the Government of Tanzania, is reported to be close to completion with proposals received from European and African banks.
OreCorp’s Tanzanian project derisked as advanced, high-grade development
Local research into OreCorp is thin on the ground, largely because of Nyanzaga’s location in Tanzania (the Africa discount) but one brave broker took a close look after the post-Indaba site visit with a buy tip and share price forecast which implies a potential future price rise of 170%.
Bell Potter is the OreCorp enthusiast with a note to clients predicting a share price rise to $0.93. At the time of that estimate (17 February) the stock was trading at $0.43 and heading into a slide which took it down earlier this week to $0.34 with the latest US banking crisis weighing on the stock.
But what the broker had to say last month is as applicable today as it was back then because Nyanzaga is being rapidly de-risked and is “one of the most advanced, largest scale and highest-grade developments among ASX-listed gold exploration and production companies”.
“It continues to screen favourably on key project and valuation metrics compared with its peers.
“Recent developments have further de-risked Nyanzaga as progresses towards key milestones of project financing (in the first half of 2023), the implementation of a resettlement action plan (by the end of 2023) and the commencement of construction in the second half of the year.”
Bell Potter said Nyanzaga had emerged as an attractive, significant scale, new gold project with strong financial appeal in a region experiencing a resurgence in investment by the world’s biggest mining companies.
To highlight that point the broker upgraded an earlier buy tip which forecast a future price of $0.84 to its latest tip of $0.93.
OreCorp is different in some ways to Emerald, but alike in most of the important ways – high-grade gold, lost costs and well-connected management with a proven track record of delivering success.