The pain of finding gold

African Eagle's redux unveiling of a gold resource in Tanzania may be good publicity, but would it even feature on Barrick's radar screen?

Author: Barry Sergeant
Posted: Wednesday , 13 May 2009

JOHANNESBURG -

London- and Johannesburg-listed mining junior African Eagle, which finds itself mainly in the nickel space, has announced its intention of finding a partner for its 75%-held Igurubi project in Tanzania, where an outlined resource has been increased by around 200 000 ounces to 700 000 ounces of gold.

The main challenge for African Eagle, like so many other mining companies, looms up in its relative inability to access appropriate levels of capital. Over the past year, African Eagle's market value (capitalisation) fell back from $28m to $4m, but has recovered sharply in line with the global mining sector's comeback, to around $18m. The news out on Wednesday prompted a rise of 25% and more in the stock price.

While gold-related publicity never does any harm, the quantum intensity of mining capital investment was shown last week when Barrick, the world's biggest gold miner, by value and production, announced the go-ahead for the $2.9bn Pascua-Lama gold-silver-copper mine that straddles high country in Argentina and Chile.

In April, fresh information on mining Alaska's Donlin Creek was released, including a capital cost of $4.5bn. Barrick has some funding relief for the latter, given its status as a 50:50 joint venture with Novagold. This gives Barrick potential exposure of $4.1bn of capital expenditure for Pascua-Lama and Donlin Creek.

There is no go-ahead as yet for Donlin Creek, nor for some of Barrick's other huge potential new gold mines such as 37.5%-held Reko Diq (Pakistan) and 51%-held Cerro Casale (Chile). The capital required for new mines is, of course spread out; at Pascua-Lama, for the next three years or so.

For Pascua-Lama and Donlin Creek, the average capital invested per ounce of gold contained in reserves computes at $156.69/oz. While the numbers for Igurubi will take more time and work and money to convert into the reserves category, assuming that 700 000 ounces do indeed emerge, the full capital requirement would compute at $110m, given the averages from Pascua-Lama and Donlin Creek. Igurubi would, however, be a far smaller mine, and likely require more off-mine investment than at the two massive projects mentioned.

It is highly unlikely that African Eagle would be able to raise $100m, and more, by way of a capital issue of shares. Even if successful, the issue would be hugely dilutive. Where African Eagle holds a current market value around $18m, Barrick's applicable number is $30.7bn, about 1 700 times more than African Eagle's.

Mines need deep and wide pockets, and there is relentless pressure for gold miners to replace ounces as in situ ounces are mined out. On March 31 2009, Barrick maintained the gold industry's highest credit rating, a cash balance of $2.1bn, $1.5bn in undrawn credit, and net debt of $2.9bn, with scheduled repayments of less than $300m over the next four years.

For some measure of comparison with gold developers, it can be assumed that Igurubi is African Eagle's only project (which is most certainly not the case; the Dutwa nickel project in Tanzania is only one example of other promising prospects). On such a basis, the market values African Eagle's attributable gold ounces at Igurubi at $33.36/oz. Looking at 40 listed gold developers across the world, some of which are in production, the average computes at $36.25/oz, on a weighted basis.

Igurubi is a small deposit by comparison, with just over 500 000 ounces attributable to African Eagle. Other examples include Northern Dynasty's monster 47.10m attributable gold ounces at Alaska's Pebble project (primarily a copper deposit), rated at $13.57/oz, Seabridge's Kerr-Sulphurets-Mitchell project in Canada, with 34.50m ounces of gold (and 8.5bn pounds of copper to boot), rated at $27.28/oz.

At the "expensive" end of the scale may be found Osisko's Canadian Malarctic project, where 8.93m ounces of gold are rated by the market at $145.27/oz, and Andean's Cerro Negro project in Argentina's Patagonia, where 2.30m ounces of gold are rated at $234.64/oz.

At the "cheap" end of the scale can be found the likes of Terrane's Mt Milligan, in Canada, mainly a copper deposit, where 6.70m ounces of gold are rated at a mere $3.51/oz, and Western Copper's 8.05m ounces of gold contained in the Yukon's Casino copper deposit, rated at $4.30/oz.

Barrick already mines in Tanzania, at Bulyanhulu, where reserves are 12m ounces of gold; at North Mara (3m ounces of gold); at the small, 70%-held Tulawaka joint venture, and at Buzwagi (3.3m ounces), which was recently completed at a capital cost of $400m. In Tanzania also, Barrick is involved in a 50:50 joint venture with diversified miner Xstrata at Kabanga, one of the world's largest nickel sulfide projects. Barrick also continues to operate an extensive exploration division.