Galane Gold Ltd. (GG.v) (GGGOF) is an unhedged gold producer and explorer with mining operations and exploration tenements in the Republic of Botswana. The company is committed to operating at world-class standards and is focused on the safety of its employees, respecting the environment, and contributing to the communities in which it operates. Galane has been producing gold from the Mupane operation since 2005. Galane’s operations are just an hour’s flight from Johannesburg and are endowed with the infrastructure to produce up to 50,000 ounces of gold per year. 2015 is an especially good time to consider an investment in this undervalued company.
Gold Companies Like Galane Gold, Currently in Production, Warrant a Premium Valuation
Gold companies that are currently in production, generating free cash flow warrant a premium valuation to those in development. Intuitively we all know this to be the case. The leap to production from development is much more difficult then investors recognize. In many cases, development companies still need to raise large sums of capital, which is no easy feat in today’s financing environment. Even if successful, development companies remain in the mode of repeated equity dilution or entering into expensive and risky debt arrangements with onerous debt covenants.
However, the challenges don’t end with obtaining financing, a development company has to hire an operating team, get final permits, foster a strong social license to operate with locals, nail down all of the infrastructure (roads, airstrips, rail, port) and resources (water, labor, power) and integrate this myriad of factors. Ramping up to nameplate capacity frequently takes a years, not months. The timing of reaching commercial production. Time is money, for example delays could mean another dilutive equity raise. Free cash flow generators like Galane Gold have been through all of these challenges and are demonstrably less risky.
New Management Team in Place
In 2014 Galane received a $5.0 million pre-payment against future gold deliveries from a strategic partner, the Korean multinational Samsung. Galane will deliver approximately 1,600 ounces of gold per month to Samsung for 2 years, at 98.5% of prevailing spot price in the first year, and 99.5% of spot price in the second year. The company has no explicit need to dilute shareholders ever again… unless for an accretive tuck-in acquisition. Galane’s mine has been successfully producing gold since 2005.
A new management team is in place, led by Rovi Sood, a financier and venture capitalist. He has founded several natural resources based businesses including Feronia Inc., one of Africa’s largest employers, where he serves as Chairman. Mr. Sood was also a director of Elgin Mining Inc, a 45,000 oz per year gold producer, not dissimilar to Galane. Elgin was sold to Mandalay Resources in a deal that closed September, 2014 valuing the company at [$72.0 million], a price nearly ten times Galane’s market cap. Therefore, in addition to a tried and true operating team, Mr. Sood provides the deal making experience in Africa and abroad to grow Galane through opportunistic acquisitions of cheap or distressed assets. I would not be surprised to see an acquisition this year.
2015 Should be a Strong Year for Galane Gold
Even without growth though acquisition Galane is poised for a strong 2015. One of the key achievements of the Galane management team has been to slash operating costs. In 2015, the company is expected to produce greater than 45,000 ounces of gold at an all-in cost modestly below $1,000/oz. That means if the gold price were to average $1,300/oz, the company would make roughly $300/oz x 45,000 ounces = $13.5mm of operating cash flow. Importantly, Galane’s unhedged position means that every $100/oz increase in the gold price equates to about $4.5 million of incremental cash flow. Ascribing a 5x multiple to that extra cash flow alone would produce a valuation uptick of nearly three times the current market cap! This leverage to the gold price is unheard of among peer producers around the globe.
One reason for this pure-play on gold being so undervalued is that Galane has not been touting its operations and prospective acquisition opportunities. Few people know about the company. Instead, Galane has been entirely committed to lowering operating costs and optimizing the mine plan. In 2014, Galane experience a SAG Mill motor outage that set it back several months as the company acquired and installed a new one. Now, the company has a spare motor because they were able to successfully refurbish the old one. As a testament to the operating skill of the team, Galane was able to operate the damaged SAG Mill at a diminished rate such that the company did not burn cash in the second and third quarters of 2014. All systems are go for 2015.
How significant are the valuation figures outlined above? Very. The capital structure includes moderate debt and 52 million outstanding shares at a current share price of C$ 0.15 for a market cap of C$ 7.8 million. Factoring in positive working capital, the Enterprise Value, “EV” [market cap + debt – cash) is meaningfully below the market cap. All of the upside, not just in the price of gold, but also from the firm executing on 45k + ounces, is in place to capture this year. To reiterate, this is a near-term catalyst that could propel the stock meaningfully higher. Galane is not promising initial gold in 2017 or 2018, it’s right here, right now. With operations stabilized, senior management is ready to start telling the story. A higher stock price, which seems like a no-brainer, would give Galane a stronger currency with which to make acquisitions in Africa and abroad. Finally, if the company can’t find cheap and distressed assets to buy, it could institute a share buyback program later this year or next.