Galane Gold CEO Nick Brodie Explains his Compelling Risk/Reward Opportunity

Galane Gold owns the Mupane Gold Mine which is situated in Botswana. Mupane has produced over 650,000 ozs of gold since mining commenced there in 2005.

The following interview of Galane Gold’s CEO Nick Brodie took place by phone and email on February 24-25. The opinions expressed are entirely those of Mr. Brodie. I own shares of Galane Gold. Please see applicable discloses at the bottom of this article.

Can you provide readers with an overview of Galane Gold’s operations and prospects?

Galane Gold owns the Mupane Gold Mine which is situated in Botswana. Mupane has produced over 650,000 ozs of gold since mining commenced there in 2005 and it is our view that it has a long future in front of it. Ore is currently sourced from open pits, underground mines and historical low grade stockpiles and is processed through a mill and conventional CIL plant. It has matured into a mine with a forecast all in operating cost of $1,050 per ounce and a rolling 5 year plan.

Every mining company boasts that they have a superb management and/or Board. Can you describe your team?

Galane inherited a mine which had lacked continuity in senior management. We saw it as a critical part of the turn-around of the mine that we built a strong team with specific experience in mining and processing in the Greenstone belt. The first step was to find a new General Manager and we quickly identified Wayne Hatton-Jones as the most suitable fit. He is a mining professional with over 26 years’ experience in Africa, Asia and Europe. Having worked previously at Goldridge, Galaxy Gold, Avocet, Randgold and Harmony with the majority of his experience being in the greenstone belt in South Africa. His background and qualifications are Metallurgical which was critical for us to manage the fact we were transitioning from a predominately oxide ore to a sulphide ore.  In addition he had experience in managing the move from an open pit to underground operation. An example of what Wayne has brought is that before Wayne had arrived we were advised that the cost of moving to an underground operation at Tau would cost over $10m with his experienced we actually installed a force portal and the total cost was $500k.

As always in mining Wayne then gave us access to numerous strong individuals that he has worked with historically. In particular we recruited Geoff McLoughlin a metallurgist with 29 years’ experience in operation and plant design. He is currently in charge of implementing the gravity plant circuit which we has designed and will build in house. He also managed the screening plant construction which we acquired second hand for $30k and rebuilt at site and has given us access to over 2mt of previously considered low grade stockpile at a direct operating cost of $600 to $700 per ounce. Another new member of the team is Kevin Crossling who we recruited as the Business Development Manager and he is a geologist with over 16 years of experience especially in the Greenstone environment. His responsibility is identifying new opportunities at our brownfield mine sites as well as oversight of our mining operations. Finally and not to be forgotten we have managed to retain Charles Byron as our exploration geologist. He has been associated with the Greenstone belt in Botswana since 1995 and his experience is invaluable both as a repository of historic information but also as the individual who will assist us in our approach to replace resources and we deplete them.

On the board side I would say our strongest asset is Ravi Sood who has extensive experience and profile in the Canadian market. He is an active Chairman who takes a strong interest in the marketing of the Company and the long term strategy. He has raised over $1bn in capital for various projects and is always looking to see how he can assist with the operation.

February is almost over, are you able to reiterate 2015 production guidance of about 45k ounces of gold at all-in costs of roughly $1,050/oz? 

Our latest presentation on our new website, which I recommend you visit, shows guidance of around 45k ozs and a rough all in cost of $1,050 per ounce. It should be noted that in 2015 the first 6 months of the year sees us spending over $6m on capital projects and in particular the completion of development underground and the instillation of the gravity circuit. Therefore production will be low and costs higher than this but it will be corrected in the second half when we start stoping underground and process the Tekwane ore.

You mention from time to time that Galane’s all-in sustaining costs of roughly $1,050 are low by industry standards. Why do you think that? 

The $1,050 all in sustaining cost is based on our current 5 year plan. When running the plan we base it on the current gold price of $1,200 per ounce and we have the advantage that we have various sources of ore. We therefore can base production, pit sizes, cut off grades etc… on what we believe provides the optimum return to shareholders at a particular gold price. We have the ability to reduce the cost, but at lower production levels, if the gold price decreases. For example, we could just process the low grade stockpiles for 2 years at a direct operating cost of between $600-$700 per ounce (current plan $850-$950). We can also increase production as we have excess capacity in the plan at the plant but have decided not to mine certain resources as they are marginal. With a higher gold price this decision would be reviewed. Most small producers are dependent on one source of ore and do not have this flexibility. Therefore, at current production levels if gold price increased by $100 we would not only add $4.5m to the bottom line and cash balance we could also take advantage of increasing production.

Please describe Galane Gold’s capital structure, namely shares outstanding and fully-diluted shares. What is your latest reported cash and debt balance?

We currently have 53m shares outstanding and 7m options and performance shares outstanding. Of the outstanding shares around 41% are held by IAMGold, 9% Sprott and 12% by management/board.

As at the end of Quarter 3 2014 the company had net current assets of around US$ 8.4m within that there was a cash position of US$12m offset by a current loan balance of US $3m. In addition the Company had long term debt of US$ 6m payable to Samsung and the Government of Botswana.

Galane Gold recently entered into a two year gold prepayment agreement with Samsung. Can you describe that arrangement?

Samsung has provided a US$5m loan facility to Galane Gold in return for:

·        the sale and delivery of a minimum of 1,607 ounces of gold per month for a period of two years

·        gold payable by Samsung at a fixed discount rate to the then prevailing spot price upon delivery of 1.5% for the first 12 months and 0.5% for the following 12 months.

·        the loan facility is repayable by the Company in 18 equal principal payments

·        approximate cost of capital of 8.9% per annum. Capped at 14.7%

It should be stated that there was over 12 months of legal and financial due diligence and the facility by Samsung before the facility was drawn down in September 2014. The funds were used to repay IAMGold facility which removed restrictive covenants on dividends, share repurchases and corporate activity; and also to add to working capital. We believe Samsung represents an attractive, strategic, non-dilutive funding solution for future opportunities.

What do you say to investors who might be uncomfortable investing in a Botswana based gold producer? 

To be honest I am not sure why investors would be uncomfortable investing in a Botswana gold producer. It is ranked the best mining jurisdiction in Africa and in the top 10 in the world by the Fraser Institute. The country itself has a strong GDP with a AA rating plus no exchange control. The Government is a large stakeholder in Debswana and the Tati Nickel mine so understands the challenges faced by mining companies and as a result has created a transparent and well run mining code.  I have worked in some more of the challenging mining environments like the DRC and Zimbabwe and so I can honestly say that I have not worked in such a supportive environment for mining companies. That includes a well-educated and knowledgeable workforce.

2014 was a disappointing year. Can you tell readers why operating performance was below forecast? 

We had one major setback in the year which was the failure of the SAG mill motor. This adversely effected our milling rate for over 6 months while we sourced a new motor and repaired the damaged one. Fortunately part of our plan when we took over the mine was to make ourselves more flexible to gold price and adverse issues. The main way we did this is reduce the proportion of fixed costs of our overall operations from 70% to 30%. This enabled us to manage our production costs and mine from more economic sources. We therefore managed to sustain our cash balance during the period. In addition we had insurance cover for business interruption and we have agreed a settlement of $2m to cover the period while the SAG mill motor was down.

According to your corporate presentation, IAMGold Corp owns 41.5% of Galane Gold’s shares. Is this an overhang on the stock or a supportive long-term holder? 

IAMGold have been a supportive shareholder who have given us the time and the opportunity to turn this mine around so that we now consider ourselves as a low cost producer with a long term life. It is true that by holding such a large block they do depress the share price but we believe that this has been a necessary evil to date to assist us in the turn around. I think we are now in a position where we need to manage their holding and reduce the effect it has on our share price. We are in discussion with IAMGold on how to achieve this but maintain a strong relationship with them.

Is Galane Gold looking to make acquisitions? If so, please describe your company’s strategy in this regard. Might IAMGold be interested in participating?

Galane Gold is now in a position where it can consider acquisitions. We have a robust mine plan which we are continually adding to, a low all in cost and a strong/experienced management team. The most obvious targets for us our Companies that are in the same position Mupane was before we took it over. We have proved we can turn around a mine and add life so they would be a perfect fit. Our management team have experience across the globe so we are not restricting our review of potential acquisitions to just Africa but it will have to make sense logistically for us.

On the flip side, is there any evidence or reason to believe that Galane is a takeout target itself?

If you look at our current market valuation compared to cash in bank then the question is why aren’t we a takeout target. Companies have shown interest and as I alluded to having a large shareholder like IAMGold has been beneficial to us in this respect. Any transaction that may happen we will ensure that we achieve what we believe to be a fair valuation for our shareholders.

Is it possible that Galane would make open market purchases of stock or pay a dividend with free cash flow? Is that even on the table?

One of the reasons behind the Samsung facility was to repay the IAMGold loan which had restrictive covenants on purchasing of stock and dividends. We now have the flexibility to do both and it something we review at every board meeting with regards to the timing.

Your corporate presentation states that Galane’s mine life is about 5 years. Can mine life be extended over time? At what capital cost?

Galane considers Mupane to be a mature mine now and has moved to a process of a rolling 5 year plan. For the last two years we have rolled the 5 year plan and replaced depleted resources with new resources. It is our intention to keep on doing this into the future. We have over 1,600 km2 of exploration area which has had a full soil geochemistry and areo-magnetics. Our short term targets are all brownfield sites e.g. Signal Hill, Golden Eagle and Tholo where we are extending existing drilling to confirm our view that we can commence underground mining. On top of that we have long term targets where we believe that we will find the next big resource for example Orapa Road. We have currently forecast an expenditure of $2m a year to replace depleted resources and continue work on the longer term targets.

Presumably you feel that Galane is undervalued. Why do you think that might be?

Yes, Galane is undervalued. This is because of a number of reasons

·        Incorrect perception in the market over the cost of production and life of mine

·        Lack of marketing – we have spent over 3 years turning the mine around and concentrating on the fundamentals. We believed that only once we achieved this which we had promised the market we would be in a position to return to the market to discuss what we had achieved.

·        IAMGold shareholding this is perceived as an issue by potential shareholders who would like to understand what will happen to this block before investing.

As we have discussed we now believe that we have now in Mupane a low cost long term producer. We are addressing the issue of the IAMGold shareholding. So the only outstanding item is to re-educate the market through an extensive marketing program. We have plans in place to start this programme after the publication of the 2014 results. So in my view everything is in place to see a significant re-pricing of our stock.

Are there any misconceptions that prospective investors might have about Galane Gold that you would like to address? 

What I would really like to get across to potential stakeholders is that Mupane is a mature mine that we believe has a long life in front of it and the resources to ensure that it can continue at current gold prices and lower. It is perfectly positioned to take advantage of any positive change in gold price.

Disclosure: I, Peter Epstein, own shares of Galane Gold. Readers should understand that an investment in Galane is highly speculative and may not be suitable for all investors. Readers should conduct their own due diligence including reviewing Galane’s corporate presentation, SEDAR filings and corporate press releases. Readers should also consult their own investment advisors. Mr. Epstein is not a licensed investment advisor. The nature of this interview intended to give readers a starting point for investigating in Galane Gold. Mr. Epstein may or may not buy or sell shares of Galane Gold subsequent to the above interview being posted on epsteinresearch.net and other investment websites.

By Peter Epstein

In 2011, Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior analyst, to help increase awareness of a number of natural resource companies in which he's invested in. Mr. Epstein formed MockingJay, Inc., a consultancy for companies in the natural resources space and informal (non-licensed) advisor to high net worth investors. Mr. Epstein's areas of expertise include uranium, coal, gold, potash, copper and graphite.
He has published hundreds of articles / blogs on investment sites such as Seekingalpha, Au-Wire.com and the Motley Fool and some articles on Stockhouse.com and CEO.ca

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