With gold prices soaring, junior miners with strong projects are in ultra-high demand.
The yellow metal pushed past eight-year highs against the US dollar on Monday 18 May to reach $1,762 per ounce (“/oz”). The same trading session saw the precious commodity smash all-time records against most of the world’s other major currencies. Strength has continued throughout the week.
In a market like this, one company, in particular, has a prime opportunity to make its investors a lot of money.
We sat down with Louis Coetzee, chief executive of Katoro Gold (LSE:KAT), to get the inside track on what’s next for Blyvoor – the firm’s exciting precious metals project in South Africa.
Aerial view of the Blyvoor project (Source: Katoro Gold)
Carltonville is a busy mining town west of South Africa’s capital Johannesburg. When gold was first discovered there in 1886, it transformed the country from a farming-led economy into the most industrialised nation on the continent. It also helped to create some of the world’s most profitable mining companies, like Anglo American (LSE:AAL).
The area is now home to Katoro’s Blyvoor project, a 50-50 joint venture with Blyvoor Gold Operations. At Blyvoor, Katoro and its partner will focus on processing “tailings” from previous gold mining schemes in the local area.
This is a lucrative niche.
Tailings are mineral loads that were once considered to be waste products. However, thanks to novel extraction techniques developed only in the last ten years, previously-overlooked gold in this discarded rock can now be extracted economically.
This approach has worked wonders for De Beers in South Africa. Thanks to advances in separating, sorting and crushing equipment, the world’s largest diamond miner famously managed to extract 815,036 carats of diamonds from several million tons of tailings in 2013 and operations will continue beyond 2030.
Outstanding scoping study
Earlier this month, Katoro took a huge step forward at Blyvoor when it released the results of its scoping study for the project.
The work assumes the asset will operate for 25 years, during which production capacity will build up to 500,000 tons of tailings ore per month and 35,000 ounces of gold production per year.
These rates translate into a net present value of US$131 million, a 25% internal rate of return, and a return on investment (“ROI”) of 260%. Meanwhile, revenues over the life of mine are expected to reach US$992 million against total capital costs of US$110 million. All-in sustaining costs are forecast to sit at just US$727 per ounce of gold.
These are already very impressive figures. However, they become even more impressive when you consider the extremely conservative measurements Katoro used to reach them.
One such example is the company’s assessment of Blyvoor’s recovery rate. Although test work showed this to be as high as 62%, Katoro used an average recovery of 52% - 10% lower.
Likewise, the ROI was calculated using a very conservative gold price of just $1500/oz. With gold now breaking record prices, this figure is free to rise exponentially.
“The context of the numbers is critical to consider,” explains Coetzee. “Our approach was not to see what is the best-case scenario, it was to say “If we pick this apart, and if we strip it down to the bare bones, does it still present us with a decent opportunity?" The answer is a clear yes, and this scoping study has demonstrated Blyvoor’s true integrity as a project."
Alongside the attractive economics of its contained resource, there are several other areas of potential financial upside to consider at Blyvoor.
For example, although novice investors often overlook the impact of currency on overseas operations, the exchange rate is essential for Katoro. See, the firm is paid in US dollars but incurs costs in South African rand. In the last 12 months, the rand exchange rate has surged against the US dollar- there is now 18.46 rand to the dollar, compared to just 14 a year ago. This means there’s no better time to undertake work in the country.
Meanwhile, another pivotal point is the fact that previous work completed at Blyvoor has been significant enough to allow Katoro to proceed straight to the definitive feasibility study (“DFS”) stage from its scoping study. In doing so, it skips the time burden and costs associated with the pre-feasibility stage.
Is this particularly common in mining?
“No,” says Coetzee. “It’s not common for projects like this at all, especially in the mining side. The historic work that was done on Blyvoor was more than enough in terms of quality and quantity that we can progress and proceed immediately with a DFS. This saves us both time and money.”
Finally, one of the most exciting things about Blyvoor is Katoro's belief that the project will reach first production within just 18-24 months. For shareholders, this is a very short timeline to revenue – especially when Katoro’s market cap currently sits at just £5.2 million.
So, where will news come from next? More importantly, will it be able to extend the strong run Katoro’s share price has enjoyed since March?
Coetzee believes so, pointing to the numerous potential funding partners now circling Blyvoor:
“From the time we first announced this transaction we started engaging with potential funders. There's quite a number of them. There's quite a few that have shown quite a keen interest, and this has only increased since we made the scoping study results available,” he says.
All in all, Katoro looks to have a brilliant opportunity ahead of it at Blyvoor. New investors should watch closely – the firm’s current 2.3p share price could soon look very cheap.
Author: Daniel Flynn
The Author does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.
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