I am sending this to both my newsletter and corporate readers in order to clear up recent errors in the media that reflect on me negatively despite my unblemished fifty year history in the global financial industry.
In the process of addressing a misunderstanding in the media regarding the business plan of my public company, I asked my Special Advisor, David Duval, to utilize his vast experience to discuss in very general terms the old fashioned method of bringing a gold deposit into commercial production, assuming the economic and related considerations were comparable to those in the past
It is my respect for those time-tested ways that has always guided my business judgments. Since 1999, I have taken a very public position that gold companies should not consider themselves banks, OTC derivative issuers or trading companies, all with mines in their backyards. I believe I have been vindicated in that opinion, given the huge losses that many companies have reported and the fact losses are still accruing because my counsel was not always accepted.
Even today, short of gold OTC derivatives are a primary criterion for large development loans of the modern day gold mining finance model. They are no longer on the books of the producer but rather contained in the indenture of the note. It is a misassumption to feel that we all need massive funds to accomplish our goals even if they are sizeable in the end.
If the present gravel testing at my company’s Kigosi/Ushirombo project allows it, we will approach development much the same way Homestake Mining did at the beginning, moving from surface deposit mining to financing part or all of underground exploration and development with cash flow from initial surface production.
In addition, it’s worth noting that 84% of my company’s current property holdings are designated for royalty option arrangements. Sixty percent of these are subject to royalty agreements and the remaining properties are being reviewed under confidentiality agreements that could see them become royalty transactions.
Please review David’s editorial piece so you can be assured that those pundits who mistakenly said we will need vast amounts of money to accomplish our goals have not done their homework or fact checking as thoroughly as they might have.
With Commodity Prices Trending Upward, Near-Surface Mine Development and Royalty Model Become Options for Junior Explorers
By David Duval
The contemporary wisdom that “bigger is better” has taken a well-deserved beating since the credit crisis unfolded and destroyed some of the world’s largest financial institutions in its wake.
With large-scale project financing options limited or non-existent because of the credit crisis, many of the smaller players in the global mining industry have been forced to review their growth strategies, a trend that could see historic mine development practices making a comeback and less mainstream business models adopted.
Perhaps not since the turn of the 19th century has the appeal of “small” become so attractive. Indeed, today’s examples encompass a broad range of industries including power generation (wind turbines, small hydro, solar etc.) and small mining operations that provide feedstock to portable or centrally located process plants and refineries, a practice that is relatively common in Asia and Africa.
Not being major enterprises with large industrial footprints, long permitting periods, and high capital costs, these businesses can be developed incrementally from ongoing cash flows, substantially reducing the risk to investors. In the “good old days” this scale of development was the rule rather than the exception and most of the world’s major gold camps were discovered and developed on this basis over a century ago.
In his book titled, "History of Dakota Territory" George W. Kingsbury describes the development of the Homestake Mine in these words:
“When the claim was purchased by the Homestake Mining Company the exploration consisted of small surface pits only and some mining men considered its value as doubtful although there were a number of favorable surface indications. The company immediately began the further exploitation of the property and two shafts equipped with hoisting engines were sunk and various drifts were soon under way.
By July, 1878, or the year after the purchase of the claim, the first mill of eighty stamps was constructed and in commission. With the first dropping of stamps it was proved that the mine was a producer and from that small beginning the mine has steadily expanded, breaking all records and setting a new pace in the world of gold mining. Although it is a very low ore, illimitable tonnage is at the disposal of the company and large mills, the most improved mining machinery and great mechanical power enable the mine to pay large dividends.”
It’s worth noting that Homestake was listed on the New York Stock Exchange in 1876 and its now dormant South Dakota mine produced approximately 40 million ounces of gold over a 120 year period before the mine’s economic reserves were exhausted in late 2001.
Mimicking the discovery of other major gold finds at the time, Homestake began as a surface showing with gold values occurring in vein material that was easily distinguishable from adjoining wall rock. Pick and shovel mining provided a bulk sample for metallurgical test work and grade estimation.
First off, however, the miners recovered gold from alluvial gravels that were eroded from the hard rock vein material. Exploration shafts were then sunk to evaluate the vein material at depth, producing gold in the process to offset exploration costs.
In many parts of the world (including Africa and Latin America) artisanal miners have already gained access to sub-surface vein material by hand sinking small shafts and mining along the vein structures. In fact, you would be hard pressed to find a major mine in Africa that didn’t have such workings within its property boundaries. These old workings facilitate target selection and the development of a resource base for production purposes.
Because of its high specific gravity (gold’s relative weight to that of water) gold concentrates in stream beds within alluvial gravels and it can be extracted by mechanical methods that take advantage of the fact it is 19.3 times as heavy as water.
Gold occurs in many different geologic settings but two basic types of occurrences or deposits are recognized: primary and secondary. Both rely on similar chemical and physical processes to produce economic concentrations of gold ore.
The Homestake discovery didn’t have the advantage of present day drilling technology to confirm the existence of an orebody whose life would extend for more than 100 years. Instead, the economic viability of the mine was established by mining and processing the easily extractable surface material with equipment that used gold’s specific gravity to produce a saleable concentrate. In the late 1890s, cyanide was employed to recover fine gold from rocks and is still used under carefully controlled conditions.
Even today, gravity separation is the best proven and accepted technique of concentrating minerals due to its high efficiency and low cost. In addition to gold, gravity separation remains a primary means of concentrating iron, tungsten, tin and coal ores.
Process plants (mills) for gold need not be large and in fact they are often manufactured and assembled in large industrial centers where skilled trades people are readily available. By employing modular construction techniques, equipment can be brought into a mine site by truck, air transport and in the case of tidewater locations, by sea barge. The various modular sections are simply joined together like a kid’s Lego set on the mine site. As the operation expands, new modules can be shipped to the site and added to the existing plant facility.
In order to reduce capital requirements, companies often employ contractors to mine their mineral deposits at a fixed price, locking in costs for the term of the contract. With contract mining, a company need not acquire in-house mining expertise or equipment that would only be utilized on a seasonal basis in any event. For smaller operations, contractors can provide services for a sufficient length of time to develop a stockpile for year round milling operations.
What’s surprising about today is the reluctance of many companies to consider the small scale, staged development of mineral deposits which is much less risky from both a financial and technical standpoint. In gold’s case, some of that reluctance no doubt relates to the belief by analysts that any company producing less than 100,000 ounces won’t get adequate market recognition. But as we’ve seen during the global financial crisis, analysts sometimes make a habit of being just plain wrong.
Nonetheless, in an escalating commodity price environment, the appeal of these modest-sized operations is certain to increase, especially where possibilities exist for multi-sourced production that will boost consolidated output to even more attractive levels. This has been a feature of China’s mining industry for generations and is certain to catch on in the West before too long.
Physical gold output – even on a small scale basis – provides price leverage to companies in the marketplace, especially for situations where the exploration potential leaves room for future production growth.
The Royalty Model
Less mainstream perhaps but even more attractive to the market are royalty companies who either purchase royalty interests (and gold production) in producing mines or seek to acquire royalty production through exploration successes.
Companies bringing new mines into production are sometimes willing to sell Net Smelter Royalty (NSR) interests in their operations to offset some of the capital costs. But these royalties are prohibitively expensive for junior companies with limited access to such capital.
This is not an issue for royalty companies that employ an exploration model, however. In these situations, companies with strategic land positions in established gold belts deal off their holdings to third parties in exchange for a royalty interest should the property achieve commercial production. In the interim period, the royalty partner agrees to make staged exploration expenditures and property rental payments (usually escalating) until commercial production is achieved.
The premise behind this royalty strategy is that companies can discover gold at a much lower cost by utilizing their exploration expertise and core assets as opposed to purchasing production on the open market. Clearly, it’s a strategy whose time has come!