I just got back from a three week trip to Vietnam, China and Inner Mongolia where I managed to visit three great projects in production or soon going into production, from three interesting companies. This is the first of several reports to come.
My first visit was to the Grand Opening Ceremony at the Bong Mieu gold project belonging to Olympus Pacific Minerals [OYM-T] on April 6th in Vietnam. This project is one of those overnight success stories which took 1,000 years in the telling.
The Cham hill people of the western hill county of Vietnam have mined gold for over 1,000 years from stream beds and surface ore bodies. Following them, the French operated an underground mine from 1896 until the early days of WW II forced the closure in 1942.
Bong Mieu is south of the port city of Da Nang, Vietnam, about 45 miles. Olympus Pacific has drilled and proven about 587,000 ounces of gold in 43-101 categories and built a 30,000 ounce per year mill on site. I was there, along with about 400 guests, on April 6th, for the formal opening even though they have been milling and producing gold prior to the official opening.
I suspect the market and ordinary investors are being blinded by the 30,000 ounce per year production figure. Olympus Pacific has a tiny market cap of about $114 million which would be about right if that's all there was to the story but there is a lot more there than simply 30,000 ounces per year.
In any case, they held the official ceremonies marking the opening a couple of weeks ago. Two of the Vietnamese government representatives speaking of the behalf of various government agencies made the very pointed observation that they would like to see Olympus Pacific do more to get their second major project, the Phuoc Son gold project, located some 20 miles further west, into production. While Phuoc Son has fewer official 43-101 gold ounces (221,000 M&I, plus Inferred) Olympus is starting a major drill program shortly to increase both the quantity of ounces and the quality of those ounces.
The Chairman and CEO of Olympus Pacific, David Seton, listened to the speeches and translations with a smile because the only thing holding up the building of a mill capable of producing 100,000 ounces a year at Phuoc Son is government planning permissions. If the policy of the government of Vietnam is to get Phuoc Son into production as soon as possible it's fine with OYM.
Olympus Pacific owns 80% of the Bong Mieu project and their Vietnamese partners own the remaining 20%. Olympus Pacific owns 85% of the Phuoc Son project with their Vietnamese partners owning the last 15% with an option to buy up to 50% of the project at a fair market price.
The economics of either project are at the very least robust. David Seton did his numbers on Bong Mieu at $400 gold. Based on a total production cost of $210 per ounce over the life of mine, the pay back was 17 months with a 86% Internal Rate of Return. Their operating figures guessed $350,000 per month cash flow to finance the drilling and exploration program at Phuoc Son. My figures show that they can add on about $575,000 to that figure with $630 gold.
Seton's program calls for construction of a new mill at Phuoc Son with plans for going into production beginning in about 18 months. The 100,000 ounce per year plant should require about $10 million in Capital Costs with a life of mine production cost of about $145 per ounce. Initial production will be about 50,000 ounces for the first two years. At $400 gold, this project showed a Pay Back period of only 5 months with a pre-tax Internal Rate of Return of 180%. At $630 gold the cash flow increases by almost $1 million per month.
Olympus Pacific is very much a family run company. There are three Seton brothers, Chairman and CEO David Seton, brother John is on the Board of Directors and brother Paul is a major investor in the company and used to play a major role in management. Colin Patterson is President. The entire family showed up for the opening including sons, daughters, cousins and all. David and his wife Sheryl have a daughter named Isabella who maintains that she is nine-years-old but Jim Hamilton and I discussed it and it's quite impossible that a nine-year-old have that much presence. We are convinced she is really 25 and a midget.
The stock is extremely tightly held with over 75% in family hands or tightly held by long term funds as investors. OYM just completed a major financing so they are cashed up for exploration, development and should the opportunity arise, acquisitions. I'm not enamored with the number of shares outstanding but with such a tiny float, the potential in the stock is great. OYM happened to have hit the sweet spot, just as gold began to rocket. They are unhedged and well positioned to take advantage of every dollar rise in gold.
I happen to be extremely biased. This cycle is unlike any commodity cycle in a long time. With demand coming online from both China and India (and Vietnam, naturally) the prices of all commodities are going up. And when the dollar crashes, as we all know it's going to, you will want to be in an actual unhedged producer.
When I visit a project, I'm always trying to figure out where they intend to go in the future. If Olympus Pacific looked at a 30,000 ounce per year mine and mill as a destination, it would be a small but interesting project. I'm thrilled to know they intend to develop the larger potential Phuoc Son project but while we were changing into rubber boots for the mine tour, I saw on a wall, a 10-year Vision Statement.
As a former Marine, I understand that one of the most basic elements of marksmanship is that you have to aim at the target. If you don't aim at the target, you aren't about to hit it. I visit a lot of properties and one of the things I look for and rarely see is a long term outlook. Novagold has it and had it when they were a five man company five years ago. Most mining companies don't look much further than the next project.
OYM posts their ten-year Vision Statement so everyone in the company understands where they are aiming. In ten years, they want in excess of five million ounces of resources and want to be producing more than 500,000 ounces of gold a year.
Bong Mieu is in production now. Phuoc Son is in development and should be in production in 18 months or so. They have other projects in the pipeline and what's more important, they have a franchise in Vietnam. Vietnam is a country coming out of a 40 year period of constant occupation and war. There isn't all that much mining going on in Vietnam even though there is great potential. Olympus Pacific and the Vietnamese government officials have had to write the rule book as they have gone along. And let there be no doubt, at times it's been frustrating, slow and expensive. But OYM succeeded and now knows the ropes. They have a franchise and that will be of increasing value as they progress. While there are other mining companies with prospects in Vietnam, Olympus Pacific is for the moment, Vietnam's Gold Company.
I can't say if they will hit it in ten years or in three but I do know that when you aim at a target, you considerably increase the chances of hitting it. I'm a betting man and we have owned OYM shares for months. I reasonably expect them to go higher.
Olympus Pacific is an advertiser at 321gold. We own shares, we like the company, the management, the future prospects and the midget is kinda cute.
Olympus Pacific Minerals
When I was planning my trip, getting there was a little difficult and I actually had to leave for Vietnam a couple of days earlier than I had planned or I would miss the April 5th mine tour and April 6th opening. So I opted to spend a couple of extra days in Vietnam as a tourist.
I served in Vietnam as a Marine from July of 1968 until March of 1970 and haven't been back since. And really didn't have any particular desire to visit. But since I was there, I thought I should revisit some of my own stomping grounds. I had very mixed emotions about my visit. When I was there some 36 years ago, a lot of them were trying to kill me and vice versa.
The first change any Vietnam War era returnee will see is the mass of people. The population of North and South Vietnam was about 41 million when I left. A high birth rate has doubled the population to about 83 million, higher than that of the UK or Germany or France. You see people everywhere in Vietnam, the streets are swarming with people. Most of them on tiny 125 CC motorbikes. (You can't operate a larger size cycle than 125 CC. And that's a very very good thing. Japanese Kamikaze pilots have nothing on the average Vietnamese motorcycle driver).
Jim Hamilton of Olympus Pacific, their IR guy, was kind enough to loan me a driver and vehicle for a weekend so I could travel to the Northern I Corp region where I did so much flying in the Birddog in 1968 and 1969. We drove north on Route 1, the major North-South artery of the country, through the Hai Van pass, contested as a major supply choke point from 1946 until the end of the American war.
Interestingly enough, while I wanted to know how I would feel about seeing the areas where I had participated in major battles many years ago. I was interested in how the Vietnamese felt about returning American war vets as well. One Vietnamese told me that they didn't feel any particular animosity toward American troops, it was the American government they blamed. And after all, he said with a smile, it was just one of the five wars the Vietnamese fought during the last century, kicking the booty of all those who thought they could invade Vietnam. The Viet Minh fought the French prior to 1941, then the Japanese, then the French again until 1954, the Americans until 1975 and the Chinese in 1979. While we think of one war as "The Vietnam War," they have five to choose from.
My driver and I continued up Route one, passing one rice paddy after another. The rice paddies are both the source of Vietnam's wealth and the reason all of their neighbors invade them now and again. Vietnam was the rice basket of SE Asia once before and now that all the wars have ended, is the rice basket once again.
At Dong Ha, just south of the old DMZ, my driver and I turned left onto Route 9 and headed west towards Laos. From Cam Lo west, the entire road was contested during our Vietnam war. Just north of the road there is a valley we called "helicopter valley." I participated in probably 15 major battles over hill tops in the area and hundreds of American choppers were shot down during our war. While the 2400 or so Americans have died in Iraq based on lies from our government, it's important to remember that during Vietnam we were losing 80 people a day in 1968. During the war we lost over 10,000 aircraft.
We continued all the way to western most Quang Tri province to Khe Sanh, host to the battle in early 1968 where thousands of men died on both sides fighting over an airstrip which the American military walked away from at the end of the battle. Today it's a thriving village with a coffee plantation sitting where the Marine Air Field used to sit. I took pictures at the museum and in town at a scrap iron dealer. Each day a truck or two is filled with unexploded ordinance and scrap from battles fought to achieve nothing but the murder of young soldiers on both sides. These trucks have been removing scrap iron from the area for over 30 years and still continue.
While I was at Khe Sanh I came across a group of students from an international college in Hanoi studying Vietnam history. Two of their professors were escorting them down the country on a bus tour so they could see the battle fields they had only read about. I spoke to them for about 10 minutes about the battle and my experiences. They all had concluded that the war in Vietnam was pretty stupid and we haven't learned anything from it and if anything, the war in Iraq is even more stupid. And more expensive.
Little remains of the battlefield except the scrap iron and rusty rifles brought to the surface by farmers plowing their fields daily. In the background I could see a pair of hills which featured so strongly during the battle, 881 and 861 South. Hundreds of Marines died there, all believing the lies they had been told by their government. Nothing much changes except the date on the calendar.
We drove back in silence to Quang Tri where we spent the night. The next day we drove up Route 1 across the Ben Hai river, where the Temporary Line of Demarcation had been drawn in Geneva in 1954. It was called temporary because the peace accords called for nationwide elections to be held across Vietnam in 1955. You may not have heard of those elections or their results. They never took place. It seems the thug favored by the US would have lost so the United States made sure the people of Vietnam couldn't vote. Nothing changes but the thugs.
Just north of the northern side of the DMZ, along the beach bordering the Gulf of Tonkin, there is a small village where the people began construction of an underground tunnel system in 1965 when the US began bombing. The villagers constructed 14 KM of tunnels in total and lived underground during the day until it was safe to come out in 1972. If we had only known how determined and brave they were. I was stationed only 10 miles south of there and never had any idea of what we were doing to the Vietnamese.
In one of the pictures there was a 16 inch shell which could have only been fired from the Battleship New Jersey brought over in late 1968. The shell didn't explode which is why it's possible to identify it. Only the New Jersey fired 16 inch guns, the shells and powder for the guns were made in 1944. I may have fired that round, I used to control the New Jersey when it was up north. I'm kind of glad the shell didn't go off. We killed enough people, a few more wouldn't have accomplished anything.
Later that day we drove back to Da Nang. Nothing was the same. There were miles of rice paddies where once the land looked like the surface of the moon. The Vietnamese stood up, got back on their feet and have constructed one of the most dynamic economies in the Far East. They may be Communist but I didn't understand what that really meant in 1968 and I don't now. Nor do I care about the label.
We drove around the entire Da Nang airport and other that a few Mig-21s where I once parked my F-4B, I recognized nothing. The entire country has been rebuilt in the last 35 years and anyone wanting to go back to revisit old haunts will be disappointed.