PERTH – Fresh from completing its all-scrip merger with Spinifex Gold, aspiring African-focused gold miner Gallery Gold [ASX:GGN] has wasted no time in kicking off the US$28.5 million Mupane development in Botswana. The Perth-based group is hoping to be in production in less than 12 months and has also launched an organic growth strategy involving accelerated exploration of advanced prospects inherited from Spinifex as well as resources and targets at and around Mupane. “The company is confident that continued exploration success, combined with the returns from the mining business, would justify a significant potential market re-rating,” Gallery stated in its annual report.
Timing of the merger – which was designed to bolster the merged entity’s African portfolio of assets and increase its access to capital markets – has been fantastic for Gallery, with the gold price again threatening to bust through the US$400 per ounce mark, which has seen investors trawling the sector for emerging and junior gold stocks given what some analysts would say are full or overheated valuations of the world’s biggest gold producers.
Consequently, a re-rating appears to have started to take effect with Gallery’s market capitalisation having already grown to over A$120 million, more than 20 percent higher than the anticipated nominal value (of about A$95-$100 million) for the combined issued capital (of 361.3 million shares).
And shareholders have been rewarded early, with Gallery’s managing director Hamish Bohannan confirming the Mupane development cost had been reduced by around 12.5 percent to US$28.4 million versus the bankable feasibility study (BFS) estimate as it plans to install refurbished major plant components (including crusher, mills and other plant and equipment), which in turn is expected to boost margins.
Assuming a (higher than previously used) gold price of US$360/oz, “the internal rate of return and (post-tax) net present value (at a discount rate of 8 percent) of the project have increased from 24 percent to 31 percent and US$15 million to US$20 million respectively,” Bohannan said, while the before- and after-tax net cash flow forecasts have been amended to US$47.7 million and US$32.6 million respectively.
As per usual in the case of debt funding new projects, Gallery has had to enter into hedging obligations, which cover 320,000 ounces of the multi-pit Mupane reserves (which currently stand at 6 million tonnes grading 3.22g/t for a contained 620,000oz of gold based on a revised life of mine model that supersedes the BFS reserves figure of 589,000oz) to satisfy the lending requirements of financiers Macquarie Bank and Investec Bank.
Mupane, located near Francistown in north-eastern Botswana, is scheduled to be commissioned in the September 2004 quarter and is budgeted to produce about 100,000oz per annum at an average cash cost of US$210/oz over an initial five to six years. Gallery hopes to extend mine life and improve the economics of the Mupane operation through minesite and near-mine exploration campaigns, which have just resumed.
In addition, Gallery has commenced an exploration program aimed at testing key Tanzanian deposits formerly held by Spinifex. “Buckreef is likely to be the basis of the company’s next project feasibility study,” said Bohannan, who added that initial drilling will investigate the underground potential beneath the known Buckreef open pittable resource of about 600,000oz.
Under the merger terms, Gallery issued 2.4 Gallery shares for every Spinifex share and 0.46 Gallery shares for each Spinifex option, which resulted in an expanded equity split of 53.9 percent and 46.1 percent between the Gallery and Spinifex shareholders respectively. Lion Selection Group [ASX:LSG], African Lion and Resolute Mining [ASX:RSG] were major shareholders in both previous company structures and wound up with about 32 percent, 17.5 percent and 12 percent in the new Gallery Gold.
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