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Investors eye African gold ounces

After a spectacular 2008, Red Back has developed momentum to add gold ounces, be it by exploration or acquisition.

Author: Barry Sergeant
Posted: Tuesday , 03 Mar 2009

JOHANNESBURG -

Red Back Mining, which operates gold mines at Chirano (Ghana) and Tasiast (Mauritania), has reported net income of $61.9m for 2008, following a 76% increase in gold production to 260,847 ounces, and a 48% increase in its average realized gold price, at $866 an ounce, up from $587 an ounce in 2007.

The year was also positively marked by a 64% increase in proven and probable reserves at Tasiast, and a 55% increase in proven and probable reserves at Chirano. Having produced some 127,196 ounces of gold in 2007, Red Back is now anticipating, for 2009, around 170,000 from Chirano and 230,000 from Tasiast, for a total of 400,000, rising by a further 100,000 ounces in 2010.

With investors acutely sensitive to liquidity issues, Red Back points out that in 2008 it financed its capital projects from treasury, cash flow from operations and an equity financing of CAD 60m. On 31 December 2008, Red Back had working capital of $47m, including cash of $22m. Subsequent to year end, Red Back closed a CAD 165m bought-deal equity financing, disposed of its investment in Mineral Deposits, and repaid the related $28m bank loan.

The decision to sell out the Mineral Deposits stake may come as a surprise, given that when the deal was announced in September 2008, Red Back described the 13% acquired stake as "strategic". In its latest results, the company states that "Red Back, with its strong treasury, expanding production profile and growing cash flow is well positioned to pursue other corporate and asset initiatives".

Red Back's production growth profile is, and remains, highly attractive, but its ounces in the ground may be relatively modest for a Tier II gold producer. At the beginning of 2008, Tasiast had indicated and measured resources of 1.89m ounces, a 65% increase from the previous year. This resource converted to 1.64m ounces of proven and probable reserves, an increase of 64% from 2007.

Also at the start of 2008, Chirano had indicated and measured resources of 3.22m ounces; after adjusting for the May 2008 revised estimates of reserves at Akwaaba Deeps, the resource converted to 2.42m ounces of proven and probable reserves, an increase of 55% from 2007. Both Chirano and Tasiast remain prospective, but investors may be anticipating more action from the Red Back stable.

Mineral Deposits holds a 3.5m ounce gold resource and a 1.5m ounce gold reserve at its Sabodala Project, in Senegal. Sabodala started crushing run-of-mine ore just over a month ago. Mineral Deposits also holds a world class, but unfunded, mineral sands project.

Where Red Back currently generates net cash from low cost gold mining, and holds net cash, Mineral Deposits currently holds net debt, and is only now on the brink of producing operating profits. While the Sabodala project remains fully financed, it has entailed the raising of debt, and also the raising of gold and energy hedges, where there was recent restructuring.

Mineral Deposits has fully drawn project debt of $25m, due at the end of March 2009. In conjunction with the restructuring of hedges, however, Macquarie Bank has agreed to extend the project related debt facilities to $52m.

The target for Sabodala is to produce around 170,000 ounces of gold in 2009 at a cost of around $400 an ounce. Immediately adjacent to Sabodala, Canadian junior Oromin has delineated 2.3m ounces at well over 1 gram a ton, allowing a regional gold story to start emerging. Mineral Deposits is seen as holding first mover advantage, with excess power, water and infrastructure, and a mill configuration which can expand substantially with only a modest capital outlay.

Mineral Deposits has signed a new joint venture with Axmin, a Canadian exploration company, covering three exploration permits within 30km of the Sabodala gold plant. Red Back carries a significantly higher market value than Mineral Deposits, which, in turn, carries a significantly higher market value than both Oromin and Axmin.

Investor appetite for gold stocks could have enabled Red Back to consolidate Mineral Deposits, Oromin and Axmin, subject to funding constraints, but it could be eyeing other targets, such as Moto Goldmines, which this week published an optimized feasibility study for its spectacular project in the Democratic Republic of the Congo.

This is risky ground, but Moto Goldmines currently sits on a resource of more than 20m ounces of gold. Beyond Randgold Resources, which has recently been connected to Moto, other gold names that may be particularly interested in Moto include AngloGold Ashanti, Harmony, Newmont, and Golden Star.