TERANGA Gold intends to start mining the Massawa orebody in Senegal for a fraction of the $333m pre-production capital Barrick Gold estimated for the project.
Richard Young, president and CEO of the Toronto-listed firm said his company would spend about $30m establishing access to Massawa, a modest outlay because it was already producing gold from its nearby Sabodala mine. Teranga has forecast gold production of between 215,000 and 230,000 ounces from Sabodala this financial year.
Barrick Gold announced on December 10 it would sell Massawa to Teranga Gold for $430m in cash and shares as it considered the prospect non-core. In Teranga’s hands, however, the project will vault the company into mid-tier gold producer status.
“Adding Massawa to Sabodala makes us a mid-tier gold producer on its own but we are also near a feasibility study on Golden Hill; we can grow organically from that,” said Young of the firm’s Burkina Faso greenfields project.
In addition to some 130,000 oz/year in production from Wahginon, also in Burkina Faso, Teranga has the basis for annual gold production of 500,000 oz plus. “More important than production, is that we will become a tier one cash cost producer,” he said.
Shares in Teranga re-rated from about May this year, and currently value the company at C$670m (US$509m). The market saw the firm’s low cost potential “… and that we need little capital to grow production”, said Young.
Debt will increase to more than $400m, but the expectation was that this would be repaid “in a very short time”, said Young. The plan then was not to chase merger and acquisition, but to set about organic growth projects.
Massawa grades at double that of Sabodala, therefore the margin expansion of incorporating Massawa ore through Teranga’s existing mills was obvious, said Young. The company would build a Biox plant, however, at a later stage.
The Massawa sale, which is for 90% of the project, consists of $380m which comprises some 20.7 million shares in Teranga shares at a price of $3,85/share – equal to about 12% of the firm’s share capital – and a cash payment for the $300m balance.
“Barrick said they wanted a meaningful stake [in Teranga] because they saw us re-rate,” said Young. “They have been talking three years out.
“This is beyond the time horizon of most investors so I don’t think the Barrick shares will present any overhang,” he said.
Young said he had been impressed by the Randgold Resources model of adding “value through the drill bit” and said the firm was considering the potential benefits of a listing in London. Randgold delisted from the London Stock Exchange late last year prior to its merger with Barrick Gold in January.
Bristow founded Randgold Resources in 1991.