How much of an uplift will African Gold Group Inc (CVE:AGG) get from its current round of drilling at the Kobada project in southern Mali?
A fair amount, probably, given what’s at stake.
The company already has a definitive feasibility study for Kobaba, which shows it’s capable of producing 100,000 ounces of gold per year for the first five years of mine life at all-in-sustaining costs of less than US$800.
During the overall nine year life envisaged in the study, African Gold is slated to produce over 725,000 ounces of gold, and to generate net cash flows (after tax and capital expenditure) of US$327mln.
It’s a tidy sum, and produces a handsome enough internal rate of return of just over 40%, using a pretty conservative gold price assumption of just over US$1,500 per ounce.
But chief executive Danny Callow comes from a world of big mines and big projects, and he reckons Kobada can go bigger and better.
Accordingly, a significant chunk of the C$11mln that African Gold Group raised in June of this year has been allocated to a major drilling programme designed to push the mineable reserve to over a million ounces.
That Callow has the flexibility to do this is testament not only to the quality of the Kobada asset, 85% of which remains untested by the drillbit, but also to the strong sentiment in the gold market, which is more than willing to support such an undertaking.
“We’re not deviating from the plan to build a mine as quickly as possible,” says Callow. “But the best and quickest way possible to be value accretive at this point is by increasing the resource and the reserve.”
Indeed, there’s a certain magic in gold mining circles associated with that million ounce mark, and it’s not just sentimental.
Some investment and debt committees won’t greenlight anything with a reserve below that level, and Callow is clear that an increased reserve will in turn give him more manoeuvrability when it comes to negotiating on the debt package that will be needed to get Kobada constructed.
And how long will it be before that debt package is put in place?
Not too long, by the looks of things. It’s estimated that it will take around US$136mln to get Kobada built, which by gold mining standards isn’t a particularly hefty sum.
“We’ve started talks with senior debt providers,” says Callow. “We’re three-to-four weeks in. And these talks are running in parallel with negotiations with private equity.”
In fact, the situation he’s describes is the optimum one you want when trying to raise funds to get a mine built. The company already has the metrics needed to demonstrate a robust project, so it can go into talks confident of its position.
But at the same time, in the background, work is going on that is likely to generate considerable positive newsflow. This means that the shares are unlikely to languish, as might otherwise be the case when financing talks stretch out from weeks into months. And that in turn creates a positive feedback loop with lenders and other potential sources of funding: they see a company that’s in rude health and making progress on several levels.
It’s a dynamic that allows Callow to stress that the company can make its own timetable. “We won’t take debt at all costs,” he says.
“We’d rather put the money in the ground, improve the economics and demonstrate that we can generate some very nice free cash flow. Every hole you drill adds more value to the project.”
The results will start coming in in the next few weeks, and at that point African Gold can start running the numbers to see whether pushing out the mine life or pushing up the production rate, or both – makes sense.
“I think there is a fantastic opportunity to grow this company quite rapidly,” says Callow.