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A turning point undoubtedly came in October of last year, when Nat le Roux was appointed to the board...
Scotgold is developing its flagship Cononish gold project
The turning point for Scotgold Resources (LON:SGZ) undoubtedly came in October of last year, when Nat le Roux was appointed to the board as a non-executive.
Le Roux, a Scot by birth, made his money alongside Stuart Wheeler when IG Index floated on the stock market some years ago.
Since then he’s familiarised himself with the world of mining and commodities to the extent that he now sits on the board of the London Metal Exchange.
But he’s also the man who stopped the drift at Scotgold by providing a significant cash injection and strengthening the board.
Le Roux’s now non-executive chairman and his key hire, Richard Gray, has firmly taken the reins.
And the effects of all the changes are self-evident, says Gray.
Since October the company has hit every one of its targeted milestones, from updating and improving the overall gold resource at the flagship Cononish gold project to providing a detailed plan for its development in a bankable feasibility study delivered at the beginning of August.
“The study’s given us a solid platform,” says Gray. “It shows the project does stack up.”
Indeed, it does more than that.
The key - for investors twitchy about going into an out-of-favour sector – is that Cononish works at a much, much lower gold price than the US$1,100 or so currently prevailing in markets.
“We’ll break even at a US$700 gold price,” says Gray. “Our all-in sustaining costs per ounce are US$689 over the life of the mine.”
So here’s a gold project with plenty of insulation against the vagaries of commodities markets, a strengthening dollar, and a general weakening of sentiment.
What’s more, the overall price tag, at just £24mln including contingencies, is more than manageable.
Fair enough, at a planned production rate of just over 23,370 ounces of gold equivalent per year, this isn’t exactly large.
But it’ll be profitable and, more to the point, it’s financeable.
On that score, Gray is keen to emphasise that Nat le Roux’s role as a direct funder of Scotgold going forward is likely to diminish somewhat.
Le Roux already holds around 40% of the shares, which is a long way ahead of the next biggest holder.
So it’s unlikely that more equity funding will come in from Mr le Roux.
But what he will do is help open doors.
“There’s a range of people we’re talking to,” says Richard Gray.
“There’s an £18.5mln requirement to get the project built, and we’re looking to get the maximum amount of debt that we can. Because we’ve got a 45% IRR the project is very bankable from that perspective.”
We’ll have to wait and see precisely what deal gets done.
Scotgold has given itself until the end of the year to put the full funding package in place, and Gray exudes a calm confidence that can pull it all together.
But will there be any hedging, given the new uncertainties surrounding gold.
“It’s a possibility,” he says. “Some of the debt providers would require it. We would like to minimise it because we’re bullish on gold. But we recognise that it makes sense to make sure we can pay back the debt.”
One possible outcome is that some form of hedging runs for the first year or two and then drops away as the cash flow from production allows the company to be more self-sufficient.
By that time, there’ll be plenty of other fish to fry too.
Gray is keen to reactivate work on Scotgold’s extensive exploration portfolio. For a start, he reckons that ultimately Cononish will have more to give than the currently planned eight year mine life.
But Scotgold has a significant swathe of ground running right across the south west Grampians and the plan is to get in amongst it with airborne geophysics.
“We’ve got smoke everywhere,” says Gray. “We’ve got gold showings all over the place.”
The ideal outcome would be for the company to identify one or more Cononish lookalikes, and to start working up the next mine.
But all in good time.
The principal current priority is to assess the options for debt and to put a package in place.
That, so the thinking goes, should provide a positive boost to the share price, as investors realise that development is a realistic proposition.
And that in turn will make more palatable an equity raise to provide the final portion of the necessary funds.
Along the way, sentiment towards the gold price will undoubtedly play a part although, as Gray points out, the real time to pay attention to the gold price will be once the mine is in production in 2017.
At that point, if gold is still trading at around its current levels or has gone higher at all, then the margins on offer will be very healthy indeed.