As An Ungeared, Unhedged 400,000 Ounce Per Year Producer, Resolute Mining Holds Plenty Of Attraction For Gold Bugs By Rob Davies
Fortune favours the brave, and Peter Sullivan, managing director of Resolute Mining, deserves full marks for taking the bold move last October to close out Resolute?s hedge book. That has left it fully exposed to the rise in the gold price since then, and the impact of that will be fully reflected in the company?s operating profits for the year when they are announced in a few months? time.
On top of that, Resolute has an aggressive debt repayment programme that will see all its loans repaid by the end of this calendar year. An ungeared, unhedged 400,000 ounce a year pure gold miner is a pretty attractive investment these days and it might be thought such virtue would be rewarded by the market. Alas no. The shares have drifted down from A$1.50 to the current A$1.00 level over the year to date. Peter doesn?t take this personally, as he knows that the whole sector has fallen from favour and has been derated. Even so, a company capitalised at A$466 million that made a A$20 million net profit in its first half does not look expensive.
The outlook for gold remains good and Peter is not minded to lock in revenues by hedging gold at today?s prices. So the company?s fortunes are now tied to the spot price of the yellow metal. That doesn?t mean the company can?t drive up profits and drive down costs, though. At its flagship Syama mine in Mali Resolute is working with the authorities to bring grid power to the site. Once that project is completed, and expensive diesel generators are replaced by mains electricity, Peter estimates that operating costs will fall by US$75 an ounce. That will make a significant difference to the economics as total costs are currently running at about US$1,100 an ounce and cash costs US$850.
Negotiations with the Mali government on the details have not been completed yet, but Peter thinks a Memorandum of Understanding is not far away. Once agreed it is likely the US$42 million cost will have to be picked up by Resolute. The other downside is that the power comes from Cote d?Ivoire, where conditions have been somewhat unsettled of late, and where Resolute?s exploration programme has now been suspended.
Fortunately, the area around Syama is throwing up plenty of exploration targets and Peter says these are crying out for more drill-holes. He has little doubt that the a new reserve estimate that?s coming in a few months time will show a net addition to the resource after the new discoveries from the satellite exploration prospects are added in.
Around the Syama camp Peter reckons the discovery cost is around US$5.00 an ounce and across the group as a whole it is about US$10 an ounce. With spot gold hovering at around US$1,500, that is a true measure of value added. In the short term the company is moving about 900,000 ounces from resource to reserve as a result of a revising the pit design and making it deeper. That still leaves over two million ounces in resource below the pit that could be accessed from underground at some time in the future.
Meanwhile, in Tanzania the company?s Golden Pride mine is working towards exhaustion in a few years time. That doesn?t mean, though, that Resolute is losing interest in the country. There is a good resource at the Nyakafuru deposit which could be exploited by using the plant from Golden Pride once it is no longer needed.
The news in Queensland is encouraging as well. The company?s deposit at Sarsfield is the subject of a feasibility study that will examine the potential for deepening the open pit and extending mine life by ten years. That study will be completed later this year. In the meantime an initial resource estimate at the newly discovered Welcome Break deposit has revealed that it contains 208,000 ounces. And the close proximity of Welcome Break to the existing Ravenswood plant makes the economics very attractive.
No one knows what will happen to the gold price, but a pure gold miner that is making such good progress to reduce costs and increase mine life surely still offers the best way to get exposure to the metal for those that think it remains the ultimate store of value.
RSG Price at posting:
$1.09 Sentiment: None Disclosure: Held
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