Afgold plots growth, ponders consolidation

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Neal Froneman, CEO Aflease Gold

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Afgold plots growth, ponders consolidation
Allan Seccombe
Posted: Tue, 03 Feb 2009

[miningmx.com] -- AFLEASE GOLD, the South African junior, is confident of overcoming the one remaining risk in its deal to gain a listing on the Australian bourse and perhaps consolidate the junior sector there as it ramps up its flagship Modder East mine in South Africa.

Its shares on the JSE have risen to 160 cents from 103 cents on 20 January.

There is another risk to some 20,000 oz of future production from Aflease�s second, smaller Sub Nigel mine if struggling junior Pamodzi Gold stops pumping water from its Grootvlei mine in the waterlogged East Witwatersrand Basin.

it will kill Sub Nigel

Aflease has also earmarked two of its assets as non-core and might have lined up another company to either take them over or enter a joint venture on them.

These are the Turnbridge and Holfontein deposits, which are said to have about a million ounces of resources between them, but they lack infrastructure and cohesion in the orebodies, said CEO Neal Froneman, who declined to confirm if a suitor had been found.

The Modder East mine will peak at 180,000 oz/year for three years and have low operating costs at around $250/oz because it is shallow and the Black Reef orebody is flat and predictable.

The first gold pour from the mine will be in the fourth quarter of 2009, giving the company 20,000 oz, ramping to 140,000 oz next year and 180,000 oz a year later.

Analysts visiting the mine on Tuesday raised concerns, which Froneman acknowledged, that Aflease Gold could continually pour its profits into the next development project instead of paying out dividends, which would keep the share price low.

T-Sec�s precious metals analyst Nick Goodwin argued that by paying dividends the share price would rise and growth could be funded by issuing shares rather.

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In the immediate future, however, is a vote by six or seven bondholders on a change of control agreement to finalise the deal with Australian junior BMA Gold, which will see the merged entity taking a primary listing on both the ASX and JSE and change its name to Gold One.

Asked by James Gubb, a director at Clear Horizon Capital, whether the bondholders� vote was not the biggest risk to the completion of the BMA deal, Froneman said he was sure it would be approved.

�The bondholders can hold us to ransom, but there�s a limit to what we can do. The deadline is late February. If this deal falls over, it falls over and we�ll look for something else,� Froneman said.

One of the terms of the convertible bond has been changed to R3.30 each from R4.11, but the coupon of 8.5% and the 2011 expiry remain in place. Aflease has also put in a once-off dollar exchange rate so that there is no currency exposure risk once that rate is set.

The value of the instrument is R660m if it is held until 2011.

The rationale behind the BMA transaction is to gain Aflease access to the Australian investment market and source additional funds to grow the company. Aflease has a fundraising target of R120m by June and it has already raised R38m of that.

It needs the money to complete Modder East as well as explore a suite of other assets in South Africa, Mozambique and Namibia.

�We�ll be the fifth largest gold company on the TSX in terms of resources base. We can consolidate the lower end of the Australian market. There are interesting opportunities there,� Froneman said.

However, the immediate focus within the group is to grow output to 500,000 oz/year over five years with the existing asset suite, including Sub Nigel, which will provide early ore to Modder East to iron out kinks in the plant until the mine there starts churning out ore.

It will take R200m to lift production at Sub Nigel to 20,000 oz/year from the current 6,000 oz. The price tag includes building a dedicated plant at the revitalised mine.

There is a threat to those plans though. The water levels at the mine are some 150 metres below current workings, but if those levels rise it will render mining at Sub Nigel unviable because it will be too expensive to keep dry.

�If Pamodzi stops pumping and no one else takes over it will kill Sub Nigel,� Froneman said, adding Aflease was taking full advantage of the mine while it can.

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