For an ascendant gold mining company, it represents a serious game-changing validation.
Not only does it empower an emerging gold miner to burnish its brand with investors by significantly raising its corporate profile.
So too does it typically translate into a more robust balance sheet by way of greater cash flow and ultimately escalating earnings.
These are key reasons why Toronto-headquartered Teranga Gold Corp. (TSX: T.TGZ) (TGCDF, Forum) believes that the time is right to ‘up its game’ by becoming a mid-tier mining company.
In a revitalized bull market for bullion prices, Teranga’s timing indeed appears to be optimal.
Presently, the company’s core business is its Sabodala gold mine, which is the only one of its kind commercially producing gold mine in the West African nation of Senegal. An “open pit” (quarry-like) operation, it yielded an impressive output of 216,735 ounces of gold in 2016.
The company is also moving forward with a feasibility study (a comprehensive blueprint for a mine) at its fully permitted Banfora gold project in neighbouring Burkina Faso.
Company president and CEO Richard Young says Teranga ultimately also wants to bring a third West African gold deposit into production.
Thanks to its strong balance sheet, steady stream of free cash flow, and supportive cornerstone investor, Teranga is able to move forward with company-builder initiatives.
Teranga plans to organically develop and commercialize a third gold deposit through exploration success on its three prospective gold belts or potentially acquire another asset.
“Five years from now we would like to have three deposits in operation,” Young says.
“Between organic growth and M&A opportunities, we’re hoping to target output of up to 500,000 or more ounces from three mines about five years out. But ideally the third mine will come organically through project development, rather than another acquisition.”
By executing on its expansion plans in three West African nations, the company aims to catapult itself into the more favourably-rated ranks of the world’s small handful of mid-tier gold mining companies.
This starts with the successful development and start-up of the Banfora gold project. Such an eventuality has several mining analysts proclaiming their enthusiasm for the company’s future prospects. They include Richard Gray and Andrew Khov of Cormark Securities.
In a recent research report, they asserted, “We believe there is considerable room for the shares to move higher as the company delivers on operational milestones at Sabodala and advances Banfora to development and ultimately production.”
Other analysts concur that such an eventuality will provide the company with what’s known in industry parlance as a “re-rating”. This merely means that a company’s production metrics warrant a higher share price valuation.
Why 2017 is a Lever to a Share Price Re-Rating
This all said, the company already has an impressive pedigree. Its operational profile and balance sheet metrics certainly attest to that.
For instance, Teranga has produced 1.2 million ounces to date in Senegal and earned around US $26 million last year. It also benefits from US $95 million in cash-on-hand and only has US $15 million in debt, which is drawn down from a US $30 million line of credit.
The Sabodala mine also has a resource of 4.4 million gold ounces in the very reliable “measured and indicated” category, inclusive of 2.6 million ounces in proven and probable reserves.
Sabodala has a mine life that extends until 2029 with annual production of approximately 200,000 ounces until at least 2024.
Opportunities to further boost production at Sabodala could come from increased material movement, resource conversion at its highly prospective Niakafiri deposit on the mine license, and possible new discoveries in Senegal. “All-in-sustaining cash costs” (total costs) for production stand at around US $900-$975 per ounce but are expected to decrease somewhat over the mine’s life.
However, the main catalyst to a higher share price valuation for 2017 will be the aggressive development of the company’s recently-acquired, advanced-stage Banfora gold project in Burkina Faso.
Banfora has the potential to host several open pit deposits on its mine license within close proximity to the proposed central mill.
“We expect to complete a feasibility study at Banfora by the end of Q2 of this year. Assuming it is positive, we should be able to increase production by 2019,” Young says.
An additional mine at Banfora stands to increase the company’s annual output to around 300,000 to 350,000 ounces. This approximately 50% boost in output alone would be an impressive accomplishment.
In fact, the Banfora mine could ideally be operational as early as the first half of 2019.
“This will give us two producing gold mines in two different jurisdictions,” Young says.
On the exploration front, the company is scouring large swathes of exploration properties in Senegal, Burkina Faso and Côte d’Ivoire, situated among well-defined gold belts and in the vicinity of other gold mines in production or development. With a lot of high prospective ground to cover, a renewed focus on exploration, a strengthened team and a budget of about $15 million, Teranga expects to yield some newsworthy exploration results this year.
“We anticipate lots of exploration success this year,” Young adds.
Mining’s New Imperative: Winning Hearts and Minds
Teranga is going to great lengths to improve the view of many investors -- particularly those under the age of 40 – with its outstanding record for corporate social responsibility (CSR), rightfully earning its social licence to operate.
In fact, the company won the prestigious 2017 Environmental and Social Responsibility Award from the Prospectors & Developers Association of Canada earlier this month. And last year, the company received the United Nations Sustainable Development Goals Award for CSR initiatives that are strongly tied to the UN’s global sustainable development goals.
The growing list of global awards affirms Teranga’s position as a leader in corporate social responsibility, particularly for enhancing the social fabric of the underdeveloped communities where the company operates. This includes promoting better health and education, agriculture and food security, sustainable income-generating projects, as well as local hiring.
“CSR is fundamental to our business model and our success. In fact, we believe in having a strong social licence in West Africa,” Young says.
“This helps us to operate and grow our business model. We want to end up leaving the communities in which we operate better off than when we first arrived.”
Some hard-nosed investors may regard CSR as merely feel-good window dressing that drains a company’s treasury and misdirects corporate energy. But in reality, CSR is fast-becoming absolutely integral to the long-term survival of any mining company that operates in Africa and other emerging economies.
So suggests a 2012 study carried out by Tima Bansal, executive director of the Network for Business Sustainability at Western University’s Richard Ivey School of Business.
CSR is also more important to a company’s image with the investment public than branding and other marketing ploys, according to the International Institute for Sustainable Development.
In other words, it’s no longer good enough to just build basic infrastructure as a way of “giving back” to underdeveloped communities.
Most important is the need to earn ongoing community support. Having a good social licence can make or break projects.
Notably, community support can make approval processes easier and more efficient, according to Pierre Gratton, the president and chief executive officer of the Ottawa-based Mining Association of Canada.
“Community acceptance is one of the top three risks companies face today,” he says. “It’s a huge risk and something major players take seriously.”
Jean Vavrek, executive director of the Canadian Institute of Mining, Metallurgy and Petroleum, the not-for-profit society of professionals based in Montreal, agrees with CSR’s increasingly important role.
“Management teams and investors understand that unless there’s acceptance and engagement with local communities companies are not setting themselves up for the best chance of success.”
To this point, Teranga is proving to be an excellent corporate citizen, which certainly mitigates political risk in the politically-stable, mining-friendly nation of Senegal.
“A strong CSR program and safety record, along with environmentally-responsible mining, gives us a good rapport with the government,” Young says.
He adds that the company is equally committed to maintain these high ethical standards in Burkina Faso and Cote d’Ivoire.
Investment Summary
Teranga’s growth trajectory is destined to establish the company as a multiple-asset, mid-tier gold producer within the next five years – which represents a very powerful value driver.
In the interim, 2017 promises to be a springboard to the next game-changing event for Teranga. And that involves the prospect of a favourable construction decision for the Banfora deposit on the heels of the publication of a feasibility study, which is scheduled for late Q2 of this year.
The prospective commissioning of a mine at Banfora is expected to boost Teranga’s production profile to 300,000-350,000 per annum, starting in 2019 in two jurisdictions. This will clearly demonstrate to the investment community Teranga’s ability to execute on its ‘big picture’ expansion plans.
It also represents a major de-risking lever in that the company’s revenue stream will no longer be reliant on one single asset in one single political jurisdiction.
Furthermore, the advent of ramping-up output by around 50% following the commissioning of Banfora promises to leverage to great effect the ascending price of gold. This is expected to have a very positive impact on the company’s earnings growth.
Ultimately, it’s Teranga’s mission to continue to diversify and increase the scale of its asset portfolio in a manner that supports free cash flow generation and creates shareholder value. Such an eventuality will also graduate the company to the prestigious ranks of the world’s few standout mid-tier gold producers.
In so doing, Teranga Gold should enjoy a value-boosting re-rating within the investment community, which ordinarily translates into higher share price multiples.
FULL DISCLOSURE: Teranga Gold Corp. is a paid client of Stockhouse Publishing.