JOHANNESBURG, South Africa – The light bulb moment came afterwards. After I had seen Great Basin Gold’s Burnstone Mine for a second time in two years.
Two of us popped in on Great Basin Gold’s (TSX: T.GBG, Stock Forum) and (AMEX: GBG, Stock Forum) CEO, Ferdinand Dippenaar, in his office just across from Nelson Mandela Square in Johannesburg’s Sandton City. Ferdi was worn out after two weeks of Africa metals conferences and multiple Burnstone tours that drew nearly 100 investors, writers and analysts.
My colleague, a New York City analyst, was there vetting her $5-plus price target with Mr. Dippenaar. I was there, after our 90-minute bus ride from Burnstone in the South Rand Basin, to discuss Great Basin Gold’s assertion that 3 1/2-year-old Burnstone this quarter will reach commercial production of gold.
I received the assurance from Mr. Dippenaar, whom I have known since his Harmony Gold days almost 10 years ago. (Photo: Mr. Dippenaar today at headquarters – Thom Calandra photo) I also filed away at least three factors that likely will help Great Basin Gold’s Canada and USA-traded shares surpass quickly analyst Imaru Casanova’s one-year price target. (I will share some of these revelations here and others with our Ticker Trax subscribers.)
“The idea of commercial production is something that is fixated in the mindset of investors,” Ferdi Dippenaar says today (Friday). “As it should be after the delays we experienced last year (power shortages, World Cup euphoria, political unrest in nearby Balfour).”
Ferdi and his team are on record as of today for South Africa’s Burnstone, which carries a mine life of about 25 years. Their innovative long-hole-stoping method will yield commercial production of 125,000 metric tons of ore per month by October of this year. That’s a pace of 500 kilograms per month or 16,000 ounces. Head grade: 4 grams per ton.
The blow-away metric here derives from the precision of on-reef stoping that is almost entirely mechanized and advances drilling 5 meters each day vs. about 1 meter in traditional mining. The grid cut of the long hole stoping method is made possible because of the flat reef at Burnstone. (GBG, by the way, also uses long-hole stoping at its Nevada property. Longhole stoping at the Hollister Mine in Nevada is used occasionally when the vein width and straightness enable efficient application of the method. Right now, that is just two of about 20 stopes.)
Here, just beside rolling fields of 10-foot tall corn stalks, some 28 chunks, or panels, of the Burnstone grid are set to be blasted each day if the operational schedule holds.
The efficiencies of miner-free mechanized stoping at shallow Burnstone will raise the gold grams producer per employee to 428 vs. 130 a month for the industry average. This is what GBG and its team contend. I tend to agree. Some say cost per ounce eventually could drop to $450, maybe lower.
GBG shares have roughly tripled in the 24 months or so since we have tracked the company for Ticker Trax subscribers.
Highlights from today’s tour and the chat with Mr. Dippenaar:
- Burnstone’s metallurgical plant is recovering about 85 percent with a goal of 95 percent in sight once higher-grade rock from underground starts processing.
- Burnstone could produce as much as 140,000 ounces in 2011, COO Johann Oelofse tells me. The 2012 timeline for output is far more ambitious.
- Long hole stoping cuts out the humans; safety performances are on line to be among the industry’s best. Translation: no one is dying at Burnstone.
- One challenge from this horizontal type of mechanized stoping is the dilution of ore that can occur with blasting. Mine manager Jock Pywell says he sees little or no broken ore before water jetting. In addition, engineers are documenting the process underground with specialty cameras. “The review improves this method even more,” says CEO Dippenaar.
There is more to come for subscribers: metrics, milling, valuations vs. peers. In Nevada, where GBG operates Hollister and Esmeralda, 31,000 gold (equivalent) ounces were milled at Esmeralda and sold in the three months closing December 2010. Cash costs are dropping sharply – to $680 or so per ounce from $880 the previous three months in Nevada.
Ferdi says he would love to own the Newmont Mining Corp. (NYSE: NEM, Stock Forum) operated-Midas Mine and mill some 18 miles from the Hollister Mine. He says he is in discussions with Newmont Mining executives but thus far “there needs to be a willing seller and a willing buyer.” Newmont, one of the three largest gold miners in the world, is seen as loath to sell any mill that benefits a competitor, no matter how small.
Still, Midas has decreasing production in Newmont’s large scheme of things “and would be increasing in our smaller picture,” Mr. Dippenaar says.
Finally, the CEO, along with VP of Exploration Phil Bentley, says the focus right now is all Burnstone. Still, a fresh drill program at the company’s Tanzania property is likely as soon as this summer. Mozambique also is in the picture, exploration chief Bentley says. (Photo: Mr. Bentley peering up at the new 40-level Burnstone vertical shaft – Thom Calandra photo)
“Look, once we see a couple quarters of real income, we easily should match our peers in terms of trading at a multiple of net asset value,” says the CEO. Helping a $5-plus stock valuation, in my view and the view of at least two analysts, including Ms. Casanova at McNicoll Lewis & Vlak, will be the increasing worth of a gold resource in South Africa that is 20 million ounces in all categories yet priced in the stock market at less than $25 an ounce (my estimate).
The biggest bang for the buck is the rand, something few can control. The ferociously strong rand currency finally eased from a peak of what looks like 6.5 to the dollar to 7.1 or so to the dollar just this week. With a steady or rising gold price and a rand that weakens a tad more, the rand price of gold per kilogram could surpass its already lofty 317,000 rand per kg.
The “sliding” rand scenario, a boon for exporters and those who price their expenses in rand, such as GBG, would send Great Basin Gold shares into orbit and make many of the analysts and fund managers who came here this week, as rich as sin.
We are off this week and next to Africa to see three companies and their various properties in South Africa, Mali and Ghana. They are Great Basin Gold (TSX: T.GBG, Stock Forum) in Republic of South Africa, African Gold Group (TSX: V.AGG, Stock Forum) in Mali and Ghana and one or two other companies. I own shares of GBG.
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THOM CALANDRA of Ticker Trax helps his audience find value in a quagmire of investment choices. Thom was founding editor of MarketWatch, CBS MarketWatch and FT MarketWatch. He was the voice of Thom Calandra's StockWatch and The Calandra Report. Thom has been covering life-sciences and natural resources since 1988.
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