The Gold Explorers
Earning Back the Love of Investors
Whereas producers can directly leverage a higher gold price, juniors have investment sentiment to leverage. This has been volatile in the last year, with the junior segment feeling gradually more “unloved” by the market, especially in the second half of 2021: “Sentiment has not been favorable for the most part of this year, the market seeing many redemptions and names trading at their 52-weeks lows, which clearly indicates that investors are on the sidelines,” said Nana Sangmuah, the CEO of Roscan Gold (TSXV: ROS).
Relative to 2020, investment sentiment is indeed weaker, some disenchanted investors moving out of this space after initial fears of a pandemic-induced economic and financial collapse didn’t materialize. Gold has also lost some investors to other commodities like battery metals as part of a more accelerated decarbonization trend. But sentiment remains imperfectly bound to the gold price which is still exceptionally strong. Relative to pre-2020 levels and the down cycle that had prevailed since 2012, sentiment stays moderately bullish.
Notwithstanding the disappointment of juniors, the boom market that took off in 2020 has positively affected exploration budgets. S&P Market Intelligence noted that gold exploration budgets jumped 43% year-on-year in 2021 to a total of US$6.2 billion. Budget allocations are expected to continue to grow in 2022 by 5-15%, before receding in the following years as economies stabilize. The TSX and TSXV, which represent 43% of the world’s public mining companies, also indicate record-setting figures for the first half of 2021, with the strongest IPO market in the last 15 years and the best half-year in the exchanges’ history for equity financing. The 100 African issuers in 34 jurisdictions, of which most are based in Burkina Faso and Mali, raised over US$1 billion in the first 9 months of 2021 – a considerable upgrade from the US$760 million raised the year before.
The challenge for explorers is that most of the equity tends to prioritize low-risk, often brownfield projects, whereas early-stage exploration accounts for only 26% of the global exploration budget share, according to S&P. By contrast, more than half of the exploration allocations belong to majors. Seeing low market valuations, small West African juniors find the equity part of financing the most challenging. “It is difficult to be a trading vehicle for all retail investors because our story is being measured in quarters rather than months, weeks, or days, so that daily trading volume does not translate. We execute our exploration plan over a year and then we plan for the next. To see the value developed over this time our investors need to analyze concrete, measurable resources rather than assessing notional value,” said Larry Phillips, the CEO of Compass Gold (TSXV: CVB), a junior formed in 2017 and developing the 850 km2 Sikasso property in Mali.
The incongruity between high gold prices and a lower-than-expected or below-the-market investment sentiment is also seen as an opportunity as both producers and juniors seem to be trading at a discount and getting better yields, which indicates rising market multiples. Producers are trading, in some cases, one or two times EBITDA, said Bert Monro, the CEO of Cora Gold (LON: CORA): “I see many gold producers with very large margins. I think this is a good time to invest in gold equities.”
Monro’s reading of current market dynamics is optimistic, and he does not expect the price to drop below US$1,500 anytime soon. Cora Gold has already secured a US$21 million conditional term sheet of equity financing for the Sanankoro gold project in Mali, provided the company can successfully complete the DFS. This is signed by Lionhead Capital Advisors as a lead investor. Other young juniors rely on loyal shareholders that have supported them with every capital raise. Compass Gold’s recent placement was entirely funded through pre-existing shareholders, including Endeavour Mining. Also listed in 2017, Awalé Resources (TSXV: ARIC) similarly counts on a strong insider base, including the shareholders of its former parent company, Mariana Resources, sold a few years ago to Sandstorm Gold (TSX: SSL).
Juniors are also seeing more institutional investors and large corporate investors on their registers. Newcore Gold (TSXV: NCAU) is another junior well-aligned with its shareholders, 27% of the company being insider and management owned, and Franklin Templeton bought 8% of the company’s shares in its most recent C$11.5 financing round, so that after this raise 40% of the juniors’ investors are institutional. In Ivory Coast, Mako Gold (ASX: MKG) added Dundee Corporation to its list, while existing shareholder, Delphi, increased its holding to over 12%. Mako also boasts high institutional ownership of 33%. With cash in the bank and a good financial endorsement, juniors have been able to advance their projects fast, trying in the last two years to make up for 10 years of underinvestment.
“The equity market has been quite disappointing and we are trading at a discounted value compared to the IPO price, but we are well funded for our work programs and so I see this as an opportunity more than anything else.”
Hugh Stuart, CEO, Montage Gold
Fast-tracked development journeys
West Africa is the third biggest recipient of exploration funding, after Canada and Australia. With only 10% of the global exploration budget, West Africa has massively over-delivered in terms of discoveries, 80 million oz of gold reserves having been found in the region in the last 10 years; more than anywhere else in the world. Many of these discoveries came about in previously unexplored countries, such as Mali, Burkina Faso or Ivory Coast, big parts of which remain untapped, while entirely new mining entrants like Nigeria, Senegal and Cameroon add thousands of km of untouched exploration ground. The potential of gold discovery in this region is reassuring for gold markets, as major gold discoveries have become increasingly rare and global production levels are reaching peak point.
For explorers active in the region, West Africa’s geological potential, proven time and again, is truly exciting. Minimal mining activity in all West African nations but Ghana, combined with close-to-surface deposits across the Birimian belt, make for easy and cheap discoveries. The average depth at which gold is found in Africa is around nine meters below the surface, according to Steven Poulton, the CEO of Altus Strategies (LON: ALS). Discovery costs are also very low, Chesser Resources (ASX: CHZ), for instance, reported a discovery cost of just US$12/oz at its shallow Diamba Sud project on Senegal Mali Shear Zone.
“Most gold projects make substantial margins at US$1,750/oz, so you don’t need US$2,000/oz gold to make very good post-tax cash flows – something which investors seem to forget sometimes.”
Danny Callow, President & CEO, African Gold Group (AGG)
West African gold is not only easy to find but also easy to mine and easy to process, with close to surface mineralization lending itself to simple open-pit operations with good recovery rates. Metallurgy can make or break a project, reminds Nana Sangmuah, the CEO of Roscan Gold. In West Africa, good metallurgy makes projects, sometimes offsetting lower grades. Montage Gold (TSXV: MAU), a new lister on the junior segment in Toronto, found relatively low average grades of 0.65 g/t Au at its flagship Koné project in Ivory Coast, but the deposit’s soft rock, its uncommonly wide ore body of 200 m and the fact that it dips at 45 degrees make Koné amenable to a large-scale, low-cost operation with an easy-to-mine and easy-to-process ore body. “We opted for a large, 11 million tonnes processing plant which allows us to realize economies of scale thus lowering the cut-off grade to 0.2-0.3 g/t and the strip ratio to less than 1,” said Hugh Stuart, the CEO of Montage.
Positive metallurgy results also allowed African Gold Group (TSXV: AGG) to increase the reserve base of its Kobada project by converting the 400,000 oz of measured and indicated sulphide resources into reserves. “Sulfides can be quite challenging to process, requiring finer grinding than the oxides. We were very pleased to find what we call ‘free milling,’ which means that the sulfide ore does not require ultra-fine grinding due to gold particles trapped in the ore,” said Danny Callow, president and CEO of AGG.
African Gold Group obtained 95% recoveries and proved that the sulfide ore can be processed through the designed gravity and CIL plant, without any major changes.
For Canadian junior Roscan Gold, metallurgical tests for the Kandiolé project came back with a silver by-product, together with very encouraging recoveries of 97% in the oxides and 92.9% in fresh rock. The project is also de-risked by the proximity with neighboring mines, including the Luolo-Guonkoto complex and the Fekola mine, which may allow Roscan to synergize with adjacent processing plants rather than building its own, something the company will have to decide later on.
On top of a great geological reputation, West Africa has also built a reputation for developing successful mines on time and under budget. One of the lowest-cost mining operators on the ASX, West African Resources (ASX: WAF) has evolved from junior to mid-tier producer after the greenfield Sanbrado gold project in Burkina Faso poured first gold in 2020. The deposit had been discovered just four years before. Sanbrado is expected to produce more than 200,000 oz/y at an impressive AISC of under US$800/oz, making it one of the lowest-cost mining operators on the ASX. In Ghana, Cardinal Resources saw two large producers competing for its takeover, Cardinal eventually accepting the offer from Shandong Gold. Cardinal’s Namdini project received the mining license to operate for a renewable 15 years’ period. Success stories of explorers-made-producers and assets commanding the attention of big majors in iconic takeovers send an encouraging message to other juniors in the region, waiting for their big hit.
“Gold is money and nothing else. In a world where fiat currencies get devastated by market forces, gold presents itself as a robust store of wealth. In the end, gold does nothing, it simply sits there, preserving value, while fiat currencies go up and down.”
Douglas MacQuarrie, President & CEO, Asante Gold
Exploration activity has certainly gathered pace in the last year, with many juniors resuming delayed drilling campaigns from 2020, or enthusiastically launching into new programs. Some are executing their biggest drilling campaigns to date. Newcore Gold is driving a huge 90,000 m drilling campaign, the largest in the company’s history, at its Enchi gold project in Ghana. The company’s 2021 PEA and resource update only includes 20,000 m of this program, and in the next six months, the company will be focusing on both on-strike drilling at its four gold deposits, as well as drilling below 150 m. “Historically, exploration at Enchi mostly focused on drilling the shallower oxide material with an average vertical depth of only 63 m. We have started hitting some high grades as we drill deeper, so drilling beyond the current pits and to depth will be a bigger focus,” said Luke Alexander, president and CEO of Newcore Gold.
London-listed Cora Gold has also completed its largest drilling campaign so far at its Sanankoro project - 43,000 m of drilling focused to grow the mineral resource. The company has announced an updated mineral resource estimate 200% bigger compared to the results of the maiden resource and plans to publish the DFS in 2022.
Other West African juniors have also made great progress towards presenting more concrete resources as well as publishing their feasibility studies. African Gold Group has published an updated DFS for its Kobada project, showing investors a reserve base 66% bigger compared to 2019-2020 results. The junior continues drilling: “We are now looking at a 1.25 million oz reserve with 16 years LOM and a production guideline of 100,000 oz/y for the first 10 years. As it stands, the project is very compelling, though we think there is significantly more there and we can keep drilling and add oz, but we thought it was the right time to present a detailed DFS,” said CEO Danny Callow.
In Ivory Coast, Mako Gold postponed the publishing of a maiden mineral resource at the Napié project, deciding to expand drilling at its main Tchaga project, but also re-start drilling at a second prospect, Gogbala, which is only 4-5 km away from Tchaga and has also returned great intercepts: “Reflecting on our vision to make a high-grade, world-class discovery we decided to keep drilling, expand our focus to include both Tchaga and Gogbala, and ultimately put a larger maiden resource out,” said Peter Ledwidge, founder and MD of Mako Gold.
While vivaciously advancing their flagships, West African juniors did not hesitate to expand their land tenures, sometimes buying licenses adjacent to their main project, and other times securing land in completely new jurisdictions to diversify their portfolios.
Larger exploration areas naturally give explorers more chances of success. Looking across the region, juniors in Ivory Coast tend to boast the biggest landholdings. StellarAfrica Gold (TSXV: SPX), a junior with exploration ground in Morocco and Mali, has just acquired from Altus Strategies a 770 km2 land package consisting of two permits. Other Ivorian-focused juniors boast very large land areas: Montage is developing a land package of over 1,400 km2, Awale holds 1,200 km2 at Boundoukou, while Tietto Minerals (ASX: TIE) ’s flagship Abujar sits on a 1,114 km2 license.
While some buy for scale and new prospects, others look at licenses that can add oz into existing projects. In Ivory Coast, Mako Gold obtained 100% ownership of the Korhogo permit, a pure greenfield project easily accessible from its flagship Napié. In Mali, Roscan is also looking for land connected to the main ground of its Kandiolé project. The junior acquired the Bantanko permit which is oriented west of the inferred position of the Senegal-Mali-Shear-Zone, right between the SMSZ and the Siribaya Mankouke Seko (SMC) corridor where Roscan’s Kandiolé is found.
The value of adjacent discoveries, be them small, is well highlighted by Hugh Stuart, the CEO of Montage Gold, which is developing the Koné gold project in Ivory Coast. “District exploration can transform Koné from a solid operation into something quite spectacular,” he said.
The company is focused on identifying satellite deposits and has its eyes on Petit Yao Central target, located about 8 km away from its main Koné project. “Once we have a large-scale, low-cost operation running, we do not need to find another million oz deposit,” Stuart said, noting that it is also a lot easier to find 50,000 oz than 1 million oz and that adding 50,000 oz to 100,000 oz from a smaller higher-grade deposit makes a huge difference in terms of project economics.
With a well-defined resource base, positive metallurgy and economics, and high upside potential, CAPEX financing is a final test for juniors who want to move their projects into construction. According to Danny Callow, this is a challenging financing phase because aspiring mid-tiers do not generate the same market movement as young explorers do with every drill hole that hits gold. Instead, construction-ready projects present investors with detailed, complex project data that require a more thorough analysis. “The market tends to forget more advanced developers,” said Callow.
According to him, coming to the market with a CAPEX financing need of US$150-200 million becomes a cat-and-mouse game as late-stage developers will require a catalyst, or a large chunk of money already secured typically in the form of debt, to get equity funds on board.
Tietto Minerals managed to find that catalyst for its fully permitted – and now fully funded – Abujar project in Ivory Coast, raising a total of A$130 million in a two-tranche private placement. Abujar is under construction with no debt and is expected to pour first gold in CY2022. Tietto brought in the same construction team that built the Sanbrado mine in Burkina Faso. Recognizing the great achievement, Tietto’s founder and CEO, Caigen Wang, reflects that CAPEX financing is particularly difficult for a company that is transitioning from being a junior to a single asset producer: “Indeed, many investors prefer to wait for the project to be mature and financed before putting their own money down,” he said.
But the bigger challenge Wang sees is reinventing Tietto from junior to producer, a transition that involves both an internal mindset shift, and an external one; in convincing the markets that a junior can build and run the mine.
The higher gold prices are helping project economics, reducing payback periods and supporting higher projected returns. At the beginning of this year, Orezone (TSXV: ORE) announced to have secured the US$189 million funding needed to bring its flagship Bomboré project into production by Q3 2022. Bomboré, Abujar and Namdini are next in line to become West Africa’s newest gold mines.
Image courtesy of Lycopodium