Deja Vu Again
Investors need to understand that when they buy into a company they are not buying a project; they are buying the philosophy of the management of that company. I've lost the most money investing by focusing on the quality of projects. The best projects cost me the most money. You are buying management, not dirt. Really good projects that can't be screwed up unless someone works 24/7 to screw them up are as common as dirt. I know a lot of people who managed to work 24/7 to screw up great projects.
In 2000 gold and silver mining was dead. Gold hit a low of $252 in August of 1999 before bouncing all the way up to $320 and wobbling for the next two years like a nine-month-old toddler who has been hitting the bottle. Rob McEwen, Chairman of a tiny gold junior in Canada, named Goldcorp, came up with an interesting idea. He would promote his company by sponsoring the "Goldcorp Challenge" to find the next 6 million ounces of gold in Red Lake at his mine.
The winners were announced at PDAC in early March of 2001. First prize of $95,000 went to a team of mining experts from Australia led by Vic Wall and Nick Archibald. 2nd place for a prize of $80,000 went to a young PhD geo from Canada named Mark O'Dea some 32 years old. That pissed me off to no end.
I entered the Goldcorp Challenge. I had seen pictures of the free gold and they were magnificent. My suggestion was that they should sell the specimens on the Internet for a premium. It was a low tech but high profit solution to finding the next 6 million ounces at Red Lake. While I can accept that maybe that idea wasn't good enough for 1st place, it should have been good enough for 2nd place. The judges felt otherwise. So Mark O'Dea took home the goodies.
Three months later, Rob McEwen started selling Goldcorp specimens on his company website without a nod to the guy that came up with the idea. He's a real piece of work. If you ever meet anyone who worked for him, you will hear an earful. He's the kind of guy who doesn't like sharing the marbles with anyone else. He made a boatload of money out of Goldcorp options but the guys who did all the work didn't share in the haul.
When I was a systems programmer, I worked for Ross Perot at EDS back in the early 1970s. He was the same way as McEwen. The company went public in 1968 and he made a billion dollars. Two other people in the company made over a million, his secretary and his #2 guy. No one else got anything.
Few people know who created the most number of millionaires in history. That would be Bill Gates. If you worked for Microsoft in 1992 in any function, even cleaning toilets, by the peak of Microsoft in early 2000, you were a millionaire. Everyone who worked for Microsoft loved that.
Mark O'Dea does the same thing. He creates wealth and spreads it around. Based on his victory in the Goldcorp Challenge, he found financing for a new junior named Fronteer in 2001. Under his leadership the company went from a market cap of under $2 million to a purchase by Newmont for $2.3 billion in 2011.
Mark does a couple of things exactly right. He's a very bright geo who can sniff out good projects but he's an even better picker of people. He hires people who can sniff out great projects, he shares the marbles with them and he knows how to monetize assets. That's a skill almost unheard of in the industry.
Most juniors collect projects like they are Beanie Babies; the more, the better. Mark O'Dea understood that sitting on projects is an expense, not profit. So he makes them beautiful and sells off the excess he can't use to those who can. While running Fronteer, he raised $351 million by flogging projects and doing financing.
Any company with Mark O'Dea associated with it has excellent people doing what they do best, top quality projects, and investors standing in line waiting to hand him money. He's one of the few guys in the business who actually understands the purpose of mining isn't spending money, it's making money.
There are two mining companies under the O'Dea umbrella. Newmont let Fronteer spin out the remaining projects to a new company named Pilot Gold. I visited them 14 months ago and wrote about them. As with all the other companies in the sector, Pilot has been hammered in spite of incredible results. They will be leading shares higher when investors realize we have had a major bottom this year.
A little while back I got a call from an old friend in the industry, Dwayne Melrose, who was President and CEO of another O'Dea company named True Gold (TGM-V) with a focus on near term projection in Burkina Faso.
I met Dwayne back in the spring of 2008. He was VP of Exploration for Minco Silver at their Fuwan silver project in China. As I recall, the project was up to over 150 million ounces of silver and was well on the way to production, needing only a few permits from the Chinese government. Minco is still waiting for those few permits. The Chinese seem to want the project and doesn't want some Canadian junior to make the money.
Rather than fight battles against stubborn governments, Dwayne took a position as President of Riverstone with two major projects in Burkina Faso in 2011. Riverstone was taken over by Mark O'Dea's Blue Gold in late 2012 before changing the name to True Gold. Dwayne continued as President of True Gold after the merger of Blue Gold and Riverstone.
Dwayne is best known in the industry for his discovery of the high-grade SB zone at Kumtor for Centerra Gold before going to work for Minco. Dwayne and the rest of the True Gold team are fast tracking the Karma gold project into production in western Burkina Faso with production expected in late 2015.
Karma consists of a giant land package of over 856 square km and five separate deposit areas so far. With a discovery cost of about $9.50 per ounce of gold, True Gold has outlined some one million ounces of gold in the indicated category suitable for heap leaching within the five different zones and an additional 2.1 million ounces.
Recent drill results for the North Extension target at Kao show a high grade addition that does not figure into the 43-101 released in late 2012. Between the oxide component and the sulfide component, so far the Karma program contains over 3 million ounces of gold. It will grow a lot higher.
True Gold is fast tracking to production. They do not want to just count ounces; they want to move forward to production as soon as they can. They expect their feasibility study to be released shortly. I would expect it be out in the first 10 days of December. The company will have project debt financing by the end of the 1st quarter of 2014 and begin construction at the end of 2014.
The numbers do not reflect what I saw on the ground. True Gold is talking about producing 70,000 to 80,000 ounces at first but the operative words are "at first." They have an unusual mineralogy where in some of the zones all of the material is leachable, oxide and sulfide.
Dwayne was talking one pad with ore being driven to the pad from various locations on the project but I believe the ounces will grow so quickly that a production rate of 150,000 to 200,000 ounces in the first couple of years certainly seems possible. I believe they will have at least three leach pads. It's a really target rich environment. The company has $30 million in cash and I'd like to see them doing a lot more exploration sooner.
The Karma project of True Gold is well advanced, significant events are on the short horizon, it's target rich for increasing the resource and it's less than 24 months from production. All those reasons add up to a company making gold project.
But in true Mark O'Dea fashion it got a lot better on my 2nd day in Burkina Faso. Our group, led by Senior VP of Exploration for True Gold Ian Cunninghan-Dunlop, went to see the Liguidi gold project in eastern Burkina Faso.
Liguidi is a 168 square km gold project containing the largest gold anomaly in Burkina Faso measuring 3 km in width and some 17 km in length. The company conducted mapping and rock sampling/trenching from 2005 to 2008 with about 430 short RC holes completed with over 5300 meters of drilling. A legal dispute between 2008 and 2012 stopped all work. That was resolved in 2012 with 100% title being vested in True Gold.
That's created an interesting opportunity for investors. Normally as a project advances toward production the price of shares drifts down as a lack of results bores shareholders. It would be perfectly normal for True Gold to focus on their core production story. But due to Burkina regulations regarding length of time allowed for exploration, True Gold must get cranking on the Liguidi project. They need to do a lot of drilling in the next two years and that's going to produce a regular news flow for investors.
Given that there are no hard numbers regarding a resource at Liguidi, I can't compare the size of the resource to the Karma project but what I saw on the ground certainly backs up the theory of a giant sheer zone hosting good gold. We saw artisan miners all over the place and you could pick up quartz float everywhere. Normally geos don't much care about visible gold but I do. I found visible gold in 3-4 pieces that I just picked up at random. No one on the project had ever looked for VG before.
Liguidi is not going to be a heap leach project. Unlike Karma, sulfides come right to surface. There are copper sulfides and arsenopyrite. This will be a flotation project. But it has the potential for being a world-class project.
The 5 million ounce Bombore gold project belonging to Orezone is just 25 km to the west on the same trend. The 6 million ounce Kiaka gold project is a mere 40 km to the SW still on the same trend. I'll climb right out on a limb here. Due to the size of the anomaly, Liguidi is going to be bigger than Bombore and Kiaka combined.
There are a few issues investors need to know about. True Gold will need to raise more money to get to production and for exploration. That's not a problem at all for anything led by Mark O'Dea. But it will dilute the shares. The company has about 265 million shares already outstanding because of the merger.
I'd like to see them do a 5-1 rollback and get the number of shares under control. I hate to see companies with hundreds of millions of shares or selling for pennies. True Gold is one of the best companies in the business; a roll back is not a reflection on the quality of either management or the projects.
While the Karma project is located only 25 km east of Burkina's 3rd largest city, saving a bundle in infrastructure, the grid does not at present provide enough power for the project. There are plans for getting power to the area in 2-3 years but True Gold will install generators for back up. Given the cost of diesel fuel, their power costs will be in the $.40 a Kw using Gensets.
A PEA based on $1250 gold released in September of 2012 was robust showing a Capex of $125 million to get into production at Karma with an IRR of 37% and net payback of just over 2 years and a NPV of $192 million at a 5% discount rate. Naturally as the price of gold increases, True Gold is well leveraged. At $2000 gold, the project becomes, well, it's a gold mine.
I can't quantify Liguidi with any numbers other than a lot of great short drill holes but I saw a lot of gold and I saw it across a lot of ground. Liguidi is going to surprise the industry once True Gold dumps some money into drilling core holes.
I would have to rank Mark O'Dea as one of the top three guys in mining. He's young with a bright future ahead of him. With all the gray heads retiring, he will be running the industry in five years. What he did with Fronteer was a mere shadow of what he is going to accomplish with True Gold. Dwayne Melrose is the perfect guy to execute in Burkina Faso and I was impressed across the board with all of the people I met. They have two world-class projects and a world-class team. It doesn't get any better than that.
True Gold is an advertiser and as such I am biased. As always, you are responsible for your own due diligence.
True Gold Mining