Tanzania-focused Katoro Gold PLC (LON:KAT) made its AIM debut earlier this week, raising £1.5mln in the process – money that boss Louis Coetzee believes will place the group on the fast-track to production.
Followers of the natural resources sector will know chairman Coetzee from his more familiar role as chief executive of Kibo Resources, which has spun out its Imweru and Lubando deposits in the country to create Katoro.
Together the two assets, located in the Lake Victoria Gold Fields, have a combined resource of just less than 755,000 ounces of the precious metal.
The gold projects were reversed into a cash shell called Opera Investments and relisted as Katoro. Kibo currently holds 57% of the new, independent gold business and is locked in hard for the next year (and for another 12 months thereafter under an orderly market arrangement).
Demerger makes life simpler
The demerger is part of the strategy outlined by Coetzee when Kibo was first set up around four years ago: to incubate promising opportunities before setting them up as independent companies.
The deal allows Kibo to focus on the Mbeya coal-to-power project, which has the potential to be utterly transformational.
Katoro, meanwhile, is an opportunity that too holds plenty of promise as the company focuses on the development of Imweru, which is sitting on an indicated and inferred 515,110 ounces at grades of up to 1.43 grams per tonne.
This is near-surface mineralisation, which a preliminary economic assessment determined could be mined as an open-pit and processed using cheap and simple heap leaching.
The idea would, initially, be to produce 50,000 ounces of the yellow metal a year, with output doubling over time.
Analysts suggest the capital investment needed for a simple heap leach operation would likely be below US$50mln, making Imweru eminently financeable (likely using a mix of debt and equity).
We won’t know the exact expenditure involved until the pre-feasibility and feasibility studies are completed in September and December respectively.
The work currently underway towards those goals will also indicate the all-in sustaining costs (AISC) of the project, which according to Coetzee should be modest given the straightforward nature of the mineralisation.
“It is basically free gold in laterite and saprolite,” he told Proactive Investors.
So how modest is modest? Well, Coetzee isn’t giving much away.
However, at under US$1,000 an ounce, Imweru’s AISC more than wipes its face at the current gold price; below US$700 and it is prodigiously cash generative.
But with Coetzee keeping shtum and the feasibility study still some way from completion we will be left guessing for some time.
Drilling on the project (the infill, geotechnical and metallurgical variety) has already commenced as have the environmental and social impact studies.
The results will be fed into the feasibility studies, which will then be the basis of talks with potential funders of the project.
Not wishing to reveal his hand so early in the game, Coetzee won’t be drawn on the mix of debt, equity and project finance. All options are still on the table, he says.
With around £1.9mln in cash (the amount raised on listing plus the cash left in the Opera business), the company has the financial runway to see it through the tricky negotiations with financiers to construction, which is slated to begin towards the latter end of 2018.
The potential of Imweru isn’t necessarily capped at the current resource estimate - far from it. There are “two or three” potential satellites of a similar scale to the main deposit.
Meanwhile, the exploration work onsite (and the inferences drawn from AngloGold Ashanti’s Geita mine 15km down the road) suggests the mineralisation continues at depth.
However, while the grade improves as mining heads underground, so it is suspected the ore becomes a little trickier to process. Nevertheless, Imweru could very easily become a 1mln-ounce gold mine, analysts point out.
At that scale it then gets onto the radar screen of other producers in the Lake Victoria Gold Fields area – Ashanti is no doubt looking on with interest.
So, how do you value a gold business at this formative stage of its development? Well according to the broker Beaufort Securities, Imweru is worth US$35.6 per ounce in the ground currently.
That’s US$14.5mln in total (although that does include Lubando). The company’s current market capitalisation is half that figure.
In 18 months’ time, when the grunt work has been done and the mine is ready to go into the production phase (and where the chance of success is put at 90%), that per ounce in the ground figure jumps to closer to US$100 for Imweru, analysts reckon.
Now that’s the investment in theory – the reality is the journey from today to production may not be plain sailing.
AIM is littered with projects that failed to land debt and equity funding; negotiations tend to be protracted.
The mining right application is expected to be submitted in October or November, and while this is politically-stable Tanzania, not some tin-pot former dictatorship new to the natural resources scene, many chief executives I have spoken over the years under-estimate the impact of bureaucracy on the whole process.
And the current scenario envisages the capital markets remain open for business and willing to deal with the bosses of smaller, apparently riskier, projects.
As we know, these are uncertain times with Donald Trump at the helm of the world’s largest economy.
Even with these caveats, Imweru remains one of the few oven-ready, fast-track gold projects on the market at the moment.
And without judging the outcome of the formal feasibility studies, it looks to be as cheap and straightforward as they come.
Coetzee smiles and nods as this point is put to him. “A lot of the hard work has been done,” he concedes.