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Construction at True Gold's Karma mine has been halted since late January following local civil unrest and a demonstration that caused damage to the company's equipment.
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However, progress is being made to restart operations and damage to the company's properties was less serious than I thought it'd be.
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I think shares have been beaten down a little too much here and I'm a buyer.
True Gold Mining (TGM.V on the TSX; RVREF on the OTCQX)
TGM data by YCharts
Shares of True Gold Mining (OTCQX:RVREF) have been under pressure since January after the company reported civil unrest and a local demonstration that caused damage to the company's property and forced True Gold to halt construction activities at the project. The company's Rambo pit at Karma is located 1.18 kilometres from the Ramatoulaye Mosque, and the potential impact to this mosque was one of the concerns raised in the local community, according to True Gold. Karma had been expected to reach initial production by late 2015, but this timeline will likely be pushed back.
However, the company just released a positive update on the project on March 2, which showed they are making progress toward resolving the issues and restarting construction. The company estimates equipment and site damages at Karma to be approximately $6.1 million as a result of the demonstration, with previous estimates ranging from $4 to $8 million. However, the company took out insurance policies on the project, so approximately $2 million will be reimbursed, according to the release. The fact that there was just $4 million in net damages to True Gold's properties is a better outcome than what I previously feared, and it doesn't have a huge impact on the company's financial situation as the project is still fully funded to production.
More importantly, True Gold continues to work with local groups, including leaders of government and religious groups, to improve community relations. The Burkina Faso Minister of Mines hosted a news conference last month to reassure the community that mine construction and operations will not impact the mosque, according to the company. Since Karma will deliver roughly $162 million in revenue to the government of Burkina Faso during the life of mine (according to the company's feasibility study through the country's 10% carried interest, a royalty and taxes on the project), it's also in the government's best interests to get this issue resolved. The Karma Project also will provide 300 permanent local jobs during operations, according to the company, so it should provide a nice boost to the local economy.
As of right now, True Gold has spent $61.7 million of the $131.5 million in capital requirements to get Karma to production. The company has $40 million cash on hand and has a remaining $43 million to be drawn from the gold stream financing arrangement with Franco Nevada (NYSE:FNV) and Sandstorm Gold (NYSEMKT:SAND), so the damage to its property shouldn't set the company back financially and I don't see the need for further funding here. Also, True Gold has an option to draw up to an additional $20 million from the gold stream financing if the company faces cost overruns and needs the money. To limit capital expenditures during the construction, the company has implemented a technical shutdown of Karma, which allows True Gold to provide financial assistance to its employees while also preserving capital.
Shares Remain Attractively Valued
True Gold shares have been slaughtered and the bad news at Karma has been more than priced into the stock in my view.
With a share price of $.20 (on the TSX) and 398 million shares outstanding, True Gold carries a market cap of $77 million. But the Karma project is worth far more than that in my opinion. Once in production, Karma should produce an average of 97,000 ounces of gold annually over an initial 8.5-year mine life. With a gold price of $1,250, the project carries a net present value (5% discount, after-tax) of $178.2 million, according to the feasibility study, which is more than double its current market cap.
At $1,250 gold, the project carries an internal rate of return of 43.1% and payback of just 1.4 years. All-in sustaining costs are estimated at just $700, which means the project should be profitable at far lower gold prices.
Recent drilling success indicates that there is great potential to add further open-pit leachable gold ounces to the mine plan, and the feasibility study does not take into account drilling and exploration conducted in 2013 at the Kao North, Rambo West and Watinoma properties. The company has a total of 2.6 million indicated resources and 2.36 million inferred resources, but just 949,000 ounces of reserves are included in the feasibility study, so there's a ton of potential to prove up these resources to include them in the mine plan.
Insiders also must think shares are undervalued as they have been using the recent share price drop as a buying opportunity: the company's Chief Executive Mark O'Dea purchased 390,000 common shares at prices between $.164 to $.267 from Jan. 30 to Feb. 12. O'Dea now owns more than 10.1 million shares of the company, according to filings posted at CanadianInsider.com.
The bottom line is the market has fully discounted shares of True Gold due to the recent issues at the project. However, if the issues are soon resolved - as I believe they will be - shares hold considerable upside potential as Karma will be a low-cost, profitable gold producer. I continue to buy shares.
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