Teranga Gold: An Inexpensive Speculation Stock

Gold

Investors looking for an inexpensive speculation stock in the gold mining space should consider Teranga gold (TGCDF.PK). Teranga Gold has a market capitalization of $206 million. The company owns 90 percent of the enormous Sabodala property in Senegal (the Senegalese government owns the remaining 10 percent), where it is producing gold and exploring targets for further production. It also has $32 million in cash, but $80 million in debt.

The company is focused on producing, developing, and exploring its Sabodala gold project in Senegal. The Sabodala project is a huge, 1,400-plus square kilometer property in eastern Senegal. It produces around 200,000 ounces at one part of the Sabodala gold project at relatively low costs of just $1,060/ounce. It is also developing the Gora deposit, which it will be able to mine for at least four years, and this will add 50,000 ounces of production annually. Finally, the company recently merged with Oromin Explorations, which owns part of the nearby OJVG project that can bring attributable production up to 300,000 ounces per year.

What I find compelling, however, is that Teranga Gold has incredible exploration potential on its enormous land package. While the company’s exploration budget fell to $10 million this year from $46 million in 2012, its strong cash-flow going forward should put it in a position to explore far more aggressively than most of its peers. The company has 10 exploration permits for its Sabodala land package that permit it to explore over 1,000 square kilometers.

The company has already located several targets away from its existing mine with NI 43-101 compliant resources.  This means that these targets have undergone geological analysis and a licensed geologist put together a report demonstrating the high probability that a certain amount of gold exists at a given target. Further, the company has found many drill holes containing ore with a lot of gold.

These resources and drill holes shouldn’t be extrapolated to the entire Sabodala property, but there is a good chance that Teranga Gold will find other mines that will help it reach its stated goal of 500,000 ounces of annual production. If the gold price rises, and if  the company uses its increased cash flow to explore aggressively, then in 5 or 10 years there is a distinct possibility that the company will be producing far more than this.

Resources and Production

The Sabodala Project has roughly 3.65 million ounces of gold resources (3.3 million ounces attributable to Teranga). The company currently produces at “Sabodala,” which is a small portion of the Sabodala gold project, and it is developing the Gora area.Attributable  production is slightly down from 2012 with 2013 production at 171,000 – 189,000 ounces, although this figure is up around 50 percent from 2011. Given that the area’s reserves are just 1.1 million ounces the mine life is limited to around 5 years unless the company is able to find more gold. It estimates that production will remain steady here, with cash costs steady as well at about $1,060/ounce.

The Gora region on the Sabolala property is expected to go into production later this year at roughly 50,000 ounces of annual production with costs about the same as the “Sabodala” mine. It has development costs of just $50 million, so Teranga Gold should have little trouble financing production using its cash flow.Teranga Gold expects to produce here for four years, although the area has a lot of exploration potential and I would not be surprised to see the company extend the life of the mine as it continues to explore.

By merging with Oromin, Teranga acquired  43.5 percent of the OJVG joint venture property. OJVG has roughly 2.3 million ounces of gold reserves (1 million attributable) at a fairly high grade of 2.59 grams per tonne.  The project is expected to produce 73,500 attributable ounces annually for the life of the mine.  It will do so at about $900/ounce.

Cash Flow Estimates for Teranga Gold

Teranga Gold is slated to produce around 225,000 attributable ounces next year with costs at about $1,060/ounce. In 2016, this should rise to about 300,000 attributable ounces with OJVG producing, and overall costs should come down to about $1,025/ounce. With the price of gold trading at $1,250/ounce the company will generate $67.5 million in annual cash-flow.  If we assume a 30 percent tax rate this figure comes down to $47.25 million. This is a lot for a company valued at $206 million. But the real opportunity in Teranga is in future exploration.

Exploring Sabodala

What makes Teranga Gold an intriguing investment opportunity as opposed to just another undervalued gold miner that was dragged down with the rest of the sector over the past two years is Sabodala’s size and the company’s intent to explore it. The company has done a lot of exploration already on its Sabodala property, and it has identified several zones with significant amounts of gold. Some already have geologically defined resources.

  • Niakafiri: 290,000 ounces of reserves, 400,000 ounces of inferred resources (includes Niakafiri West)
  • Masato: 710,000 ounces of inferred resources
  • Sutuba: 17,000 ounces of reserves
  • Soukhoto: 20,000 ounces of inferred resources
  • Diadiako: 120,000 ounces of inferred resources
  • Majiva: 50,000 ounces of inferred resources

The company also has an extensive compilation of drill results that indicate the company has even more gold. These results can be viewed here and here. Investors who are seriously considering a long position in Teranga Gold should peruse these documents, particularly the first one. In it, one sees the company’s successful drilling near its “Sabodala” mine. Note that it has found several drill holes of at least 10 – 20 meters containing high grade gold. Thus, we can see the company’s clear path to its 500,000 ounce production goal, which can be achieved by expanding the resource near its “Sabodala” mine.

Ultimately, Sabodala has a lot of exploration potential, and there are already indications that there may be several mines in the area. Not only can the company likely expand its existing mine, but it seems to be in the early stages of declaring additional mines. Assuming that the downward price movement in gold has ended, the company should have the cash flow to determine this.

The Perceived Risk of Mining in Senegal

Africa in general has a poor reputation when it comes to mining. This is due to headlines that western investors read regarding poor labor conditions in deep underground gold and platinum mines, mostly in South Africa, but also in Eastern Africa (e.g. Tanzania). It is also the result of the problems that many company’s have had cooperating with African governments.

Teranga Gold’s properties are in Senegal, and they are open pit surface mines that don’t put laborers into extremely dangerous conditions deep underground. Thus, I don’t think that mining in Senegal poses a huge risk. Furthermore Teranga Gold has agreements with the Senegalese government, which owns 10 percent of the Sabodala property. While this limits the upside slightly, the fact that there is a partnership makes it more likely that Teranga Gold will have no issues going forward in mining and exploring its Sabodala property.

Conclusion

Teranga Gold offers a unique opportunity for investors to buy a quality exploration property in Senegal with the free cash flow needed to explore it for the time being. In the short-term, the company is a very inexpensive, highly profitable gold miner that trades at a low multiple to its estimated future cash flow. It will also likely be able to increase production fairly significantly over the next couple of years. But longer term, the company’s defined resource base appears to be depleting fairly rapidly.

Fortunately, Teranga Gold has a lot of land to explore in order to replace and expand its resources. While exploration has declined as of late due to lower gold prices, the company will almost certainly be a very aggressive driller on its enormous Sabodala property. As I suggested above, the company’s exploration potential is virtually unparalleled, and shareholders are positioned to benefit. While there is no guarantee of success in exploration, I don’t think that the company’s goal of reaching 500,000 ounces of production is out of the question — and it could very easily reach a higher level.

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