The disconnect between the £2mln market capitalisation of Armadale Capital (LON:ACP) and the US$55.3 mln net present value (NPV) of its key Mpokoto gold project is striking.
It’s a function, says executive director Justin Lewis, of “a lack of interest in these sorts of projects.”
By that he means it’s small and it’s in the Democratic Republic of Congo.
But it also has an internal rate of return (IRR) of 181%, is in a part of the Congo that is rarely troubled by the type of strife seen in the north east and, most significantly of all, is fully funded.
Armadale announced in early June that A-MCS, a major South African mining services company, has agreed to provide at least US$20 mln in debt finance in order to get Mpokoto up and running and into production.
The plan is to finalise a definitive feasibility study by the middle of next month, secure drawdown of the debt and press ahead into construction with the aim of producing first gold this time next year.
At this stage the plan is to produce at a rate of approximately 25,000 ounces per year at all-in sustaining costs of less than US$723 per ounce.
That allows for plenty of margin on the current gold price of around US$1,158 per ounce and means that the project debt should be paid off within about 20 months.
It’s a compelling prospect in many ways, if a little on the small side, but one that the market has yet fully to wake up to.
Alright the shares did spike significantly when news of the debt funding was announced last month.
But some of those gains have been pared back, and as Lewis points out, the company also has a £900,000 investment in a South African acid mine drainage treatment project.
Net the value of that investment out, and Mpokoto being valued at just over £1mln.
Perhaps unsurprisingly, several broking houses reckon the share price is likely to go higher.
Finncap is the most aggressive, setting a price target of 27p, while VSA settles for a more modest 15.45p.
Both seem pretty optimistic against the current 5p price in what’s widely recognised as a bear market for mining companies.
But, as Justin Lewis repeatedly emphasises, this is a project that’s ready to go.
“Everything’s done,” he says. “Everything is licenced. All the environmental work’s done. The financing’s done. There are no significant other hurdles.”
Indeed, within a couple of months construction should get underway.
News of that development should in turn lead to the type of re-rating ahead of production that is so typical of trading patterns for mining companies, and which has most recently been in evidence in the cases of Aureus (LON:AUE) and WOLF (LON:WLFE).
Of course, there are always things that can go wrong as a project moves from development into production, but at least in Armadale’s case the mining proposition is fairly simple.
Mpokoto is a very easy orebody to work.
It’s free digging, meaning that no drilling and blasting is required, and as far as processing is concerned, a significant portion of gold will be extracted using simple gravity circuits.
After that, a standard carbon-in-leach plant will account for the rest of the recoverable gold.
It’s that simplicity which has attracted a name as significant as A-MCS into the project.
The project financing structure is notable for its lack of an equity component, although as Lewis points out, plenty of equity has gone into the project over the years, not least from former owners Gold Fields, which sunk in more than US$20 mln.
Ulimately Mpokoto didn’t meet Gold Fields’ size requirements, but that doesn’t mean it won’t satisfy Armadale’s or A’MCS’s.
And if, as some punters are speculating, the gold price does weaken further, that won’t derail the project’s ability to throw off cash.
“The NPV at US$1,100 is around US$38 mln,” says Lewis. “And the project still makes plenty of money at over US$1,000.”