Interview with CEO of Terraco Gold Corp.

The most valuable asset for Terraco Gold is its Spring Valley project in Nevada.

The following article of the CEO of Terraco Gold’s Todd Hilditch was conducted by phone and email on January 8-9.

Please describe Terraco Gold to investors who don’t know your story.

Terraco Gold (TCEGF) is a gold focused company with assets in the western U.S. that gives investors and shareholders exposure to gold equity ownership through gold royalties and gold in the ground.

Please describe Terraco’s capital structure, including cash and debt.

Terraco has 134 million shares issued and outstanding and 146 million shares fully diluted. The company has no traditional debt but does have an option to consolidate a royalty position of up to 3% on Barrick Gold’s (ABX) Spring Valley project for approximately USD$16 million which equates to buying gold at $184/ounce. The options expire at the end of 2016. The company has current assets of approximately $500k including cash. The issued and outstanding shares have not changed, as a result of financing, in 5 years based on creative cash infusions with royalty transactions.

Who are Terraco’s largest shareholders? How much equity is owned by the management team and Board?

Terraco is largely held by retail shareholders, which has been one of its strengths in a very tough junior market. Insiders own 9% collectively with the CEO, Todd Hilditch owning near 5% of the 9%.

Has there been any insider buying lately?

From January 1, 2014, until January 6th, 2015, Terraco insiders bought 1,020,000 shares including the CEO buying 775,000 shares. Non-Insiders and strong shareholders continue to add to their positions.

What is Terraco’s quarterly cash burn rate?

The current quarterly burn rate is approximately $100,000.

Terraco’s most valuable asset is its (up to) 3% Net Smelter Royalty “NSR” option on the Barrick/Midway Gold (MDW) Spring Valley project in Nevada. Please describe that particular asset.

Terraco negotiated the purchase (from royalty owners) and financing (from large private equity firms) of over $30 million in gold royalty assets on Barrick Gold’s Spring Valley project, where Barrick has now spent over $70m to take the project to pre-feasibility. As part of the multiple transactions Terraco negotiated, it also financed itself without issuing a single share of dilution to shareholders of over $6m in order to advance its Idaho Project and general working capital.

The resulting asset to Terraco is direct royalty ownership and royalty options to acquire up to 50% of the acquired Spring Valley NSR royalty (up 6%) for a net benefit to Terraco of up to 3% NSR. Terraco’s option exercise price (free debt in other words) is roughly $16m which equates to less than $184/ounce gold as a price to Terraco. The best way to see how the NSR royalty covers Spring Valley is to go to Terraco’s website and view the Spring Valley presentation on the home page.

Is there a way to roughly and conservatively estimate the value of the (up to) 3% NSR options based on a given gold price and the current number of measured & indicated ounces at Spring Valley?

There is a rough way to estimate value but it does require one to rely on certain mining market and typical mining assumptions for this type of deposit. A simple, albeit not bullet proof way, is to take the number of ounces outlined/expected to be mined times expected/typical gold recoveries resulting in a rough number of ounces produced and multiply that figure by the NSR royalty (in Terraco’s case up to 3%) for the attributable ounces to the royalty owner and finally, multiply that by the price of gold you are comfortable using.

Based on certain assumptions and parameters available in the market, some of which is directly provided by Barrick JV partner Midway Gold in their most recent NI43-101 report filed on SEDAR and others from research reports by Canaccord and Cormark, Terraco management feels that based on an assumed 14 yr mine life, assumed 80% recoveries and a $1,250 gold price, that future cash flow from Spring Valley would be between $100-$150 million to Terraco. Of course these assumptions are open to change / substantiation based on Barrick’s mining parameters and also on more gold found, but if you applied a NPV(5%) discount to the above (as a research report did) the valuation for Terraco far exceeds the current market capitalization.

Barrick is clearly interested in expanding in Nevada. Is there evidence that Barrick is more likely to pursue Spring Valley over a number of its other Nevada interests?

Barrick has been highlighting Spring Valley for the last 5 months in its investor presentations (available on their website) to which Spring Valley is profiled as one of their few Nevada based focused PFS projects. In the last year alone Barrick has spent over $17m at Spring Valley and we don’t see them slowing down as Barrick spends more time back in Nevada.

How will you raise the $16.1 million exercise price required to pay to Barrick by 12/22/16?

Our royalty transaction is not with Barrick, it’s with two private equity firms who wrote the large checks, but we have several scenarios that we can employ prior to the option exercise deadline. Keep in mind that our royalty option is a hedge on gold at less than $184 per ounce based on the Barrick resource so funding the required option payments is not expected to be a problem.

We are also are not in a rush as we have time and it is better for us to, “option the car with no payments” versus, “buy it” in today’s market. Our options to fund closer to the end of 2016 could include: an equity raise, a debt instrument, a combination of equity/debt or selling a portion of the currently held royalty to fund the option exercise. In the meantime, we have an interest free debt/option at the equivalent of $184 per ounce of gold….which we think is pretty valuable.

Can Barrick meaningfully slow its development work at Spring Valley or does it have to hit annual development milestones?

Barrick has earned its interest from Midway of 75% ownership and the project is a flagship PFS Nevada asset with over $70m spent to date so we don’t believe Barrick will slow its development. That said, that is up to the Barrick/Midway Gold joint venture. Terraco is not privy to the joint venture agreement so we cannot comment on whether Midway can require continued spending after the earn-in.

According to your corporate presentation, “Terraco’s royalty portfolio in Spring Valley results in a cost base to Terraco of $283/oz.” Please explain.

At the conclusion of the 3 royalty acquisitions, the aggregate amount of money required by Terraco to exercise all three royalty options by 2016 (again a free debt carry or hedge) multiplied over the number of ounces covered / applicable in that royalty (Spring Valley NI43-101) came to $283…in fact with the new NI43-101 report, with in excess of 5.4 million ounces of gold, the estimated new cost base, once exercised, to Terraco is $184 per ounce.

Can you give readers a description of both Terraco’s VP of Exploration and its consulting geologist?

We are blessed to have two gentlemen with strong geological pedigrees to which both have been discovered or co-discovered several economic gold deposits. Our VP Exploration, Charles Sulfrian, was involved in the original sampling/discovery of the deep post deposit which ultimately formed part of the ore body (Betze -Post) that Barrick operates under its flagship Nevada Goldstrike Mine. Ken Snyder, a consulting geologist to Terraco, discovered for Pierre Lassonde’s Newmont Gold (NEM), the Midas Gold (MDRPF) (Ken Snyder) Mine which was Newmont’s lowest cost producing mine for a period at Newmont.

Terraco’s corporate presentation describes Idaho’s Nutmeg Mountain Gold Project as, “advanced stage.” Please describe this project.

Nutmeg hosts a NI43-101 compliant gold resource near a million ounces. The deposit is open in several directions for resource growth and under better market conditions, Terraco will advance the project into a PEA, to which much of the work has been completed.

Please describe the earlier-stage gold exploration opportunity at your 100% owned Moonlight Project adjoining the Spring Valley Project.

Our Moonlight Project adjoins Barrick’s Spring Valley project to the north and is now sandwiched to the south side of Sumitomo Corporation in a joint venture with Renaissance Gold (RNSGF). Moonlight is on strike geologically with the major fault system (Black Ridge Fault) that structurally controls the two deposits on our south end being Spring Valley and the silver producing Rochester Mine that operates under Coeur Mining (CDE).

The project has blue sky in its 35sq km land package and is amongst numerous major mining companies. Once again, in better market condition, Terraco will spend a significant amount more time and money to test Moonlight for gold and silver. In an earlier drill campaign (2008-2009) Terraco encountered up to 2 ounce silver within a 10 meter intersection (see Terraco’s website), so we know the Moonlight project has mineralization, it is a matter of defining the silver in the north and the gold in the south of the project.

Can you name any companies besides Barrick and Franco-Nevada (FNV) that have the experience and financial wherewithal to acquire Terraco outright?

I think there are many companies that have that ability and can come in many possible forms. Our Spring Valley royalty options are a tremendous asset for any royalty company (Osisko Gold Royalties(OKSKF), Royal Gold (RGLD), considering Barrick is a good operator and has the financial ability to go to production in a great Nevada jurisdiction. In addition, there are other gold mining companies that may find our suite of hybrid type assets intriguing. Other players in the area include Pershing Gold (PGLC) and Rye Patch (RPMGF)

Are there any misconceptions about Terraco that you would like to address?

Not really though a few investors have hinted that it would be better for our valuation and market capitalization to exercise all the remaining NSR options so that we have full ownership today. Although I understand the opinion, I would argue that those investors and shareholders that have long term belief in the royalty would agree with us that it makes more sense in this very difficult, low share price, environment to not leverage ourselves today in ownership when we have the ability and time (free debt/option) to wait until market conditions/share prices improve before taking on equity dilution or debt required by the end of 2016.

The other argument in favor of not exercising is that while we have another 23 months before we need to exercise the remaining royalty options, the Spring Valley project will continue to be de-risked by Barrick which also helps our value proposition by Barrick adding more ounces and moving into pre-feasibility. These items should help our share price. …..thus the ultimate reason to not exercise too early.

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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