Great Basin Gold: Jump to Mid-Tier Gold Producer

|
 |  Includes: GBG, GBN
by: Goombarh

Introduction

Great Basin Gold is an emerging gold production company headquartered in Vancouver, Canada with operations in Nevada and South Africa. The company’s shares are listed on the TSX [GBG] in Canada, on the Amex (GBN) in the United States and on the JSE [GBG] in South Africa. The company is a focused developer with two new gold projects that are proceeding into mining. The Hollister mine is in the gold prolific area of the Carlin Trend in Nevada and the Burnstone mine is in Kimberly Reef area of the Witwatersrand Basin in South Africa. Great Basin Gold’s shares have been included in both the S&P/TSX Composite and S&P/TSX Small Cap Indexes.

GBG Projects

Hollister Mine – Nevada, USA

Hollister is a bonanza grade gold mine in Nevada that is just ramping up into production. The mine is based upon several high-grade epithermal gold-silver vein systems below the Tertiary cover. Bulk samples have been excavated and milled for validating and tuning up the production processes this year. Pre-production drilling has increased the mineral resource by 27% to 3 million Au equivalents as reported in June 30, 2009 M. D. & A[1]. The average grade of ore for the mine is over 1 ounce of gold equivalents per ton mined.

Great Basin acquired the property in Elko County, Nevada from Newmont in 1997. Great Basin explored the property outlining excellent high grade veins until 2001. In 2002 Hecla entered into an earn-in and joint operating agreement with Great Basin to explore and bring the property into commercial production. In 2007 Great Basin purchased back the earn-in option from Hecla for $60 million US, thereby giving GBG 100% ownership of the project. At the time, a 6800 feet decline and 1000 feet of drifts through the veins had already been completed at the Hollister project.

Since 2007 Great Basin has completed a further 30,000 feet of underground development. A total of 26 discrete veins have been discovered including 2 new ones in 2009. Bulk samples have been excavated and treated at the nearby mills of Yukon Nevada’s Jerritt Canyon and Newmont’s Midas Mine. Subsequently in November 2008, Great Basin has purchased the Esmeralda Mine and accompanying mill. This mill is 280 miles distant from Hollister and the operating plan is to truck the Hollister ore there. The mill’s capacity is 350 tons per day, and management intends to modify the mill and upgrade the capacity.

Other than the Hollister mine and block (5% of the property), the property of about 27 square miles, also has many other gold prospects that have been and are currently being explored. The February 27, 2009 Technical Report states that

The greater Hollister claim block has significant exploration potential to host one or more additional high grade “bonanza” vein systems under the Tertiary volcanic cover.

Full production from Hollister is expected to produce 120 k ounces of gold equivalents per year.

Burnstone Mine – Witwatersrand, South Africa

The newly developed Burnstone mine in the Witwatersrand basin in South Africa is the first new mine in the region for the last thirty years. The mine accesses the gold bearing Kimberly Reef at a relatively shallow depth of 300 to 500 meters. The target date for commissioning operations is June 30, 2010. The vertical shaft has reached the Kimberly Reef target at 360 meters and the access decline has also reached their targets for reef development. Presently, test mining is proceeding with the ore being stockpiled until the above ground infrastructure is ready.

In November 2002, Great Basin acquired the right to purchase 100% interest in the South African company Southgold Exploration (Pty) Ltd, which had the rights to the Burnstone Gold Property. The two-stage acquisition was completed in January 2004, giving Great Basin 100% ownership of the property. Tranter Investments a Black Economic Empowerment (BEE) company has invested in Burnstone, owning 26% which was then transferred to GBG, owning an estimated 15% of the company.

The Burnstone project is located in the Witwatersrand about 80 km southeast of the city of Johannesburg in South Africa. The project is situated close to paved highways, infrastructure, railroad and power lines. All of the required permits to complete the development of the mine and commence full scale underground mining have been obtained.

The Burnstone goldfield is defined by an 18 kilometer long, northwesterly trending mineralized corridor hosting the Kimberley Reef, one of four main gold-bearing units in the Witwatersrand Basin. At Burnstone, the central portion of the gold corridor has been uplifted by two northwesterly trending sub-parallel faults and as a result, a significant portion of the deposit areas along the trend occur at relatively shallow depths of 200-750 meters. Full production is expected to produce 250 k ounces of gold per year

Quantitative Analysis

Gold Mineral Resources

Hollister Mine in Carlin Trend, Nevada USA – Reserves & Resources

Proven & Probable Au Equivalent Reserves

1,200,000 oz

Measured & Indicated Au Equivalent Resources

1,500,000 oz

Inferred Au Equivalent Resources

1,400,000 oz

Mine Life

10 years

Click to enlarge

Table 1: Hollister Mine - Reserves & Resources

Hollister Mineral Resource Estimate: March 2009

Resource Category

Cut-off
oz/ton

Tons

Au
oz/ton

Contained
Au oz²

Ag
oz/ton

Contained
Au Eq. oz

Measured

0.25

199,300

1.895

377,700

29.02

468,100

Indicated

0.25

911,900

1.008

918,700

4.13

977,500

Total Measured & Indicated

0.25

1,111,200

1.167

1,296,400

8.59

1,445,600

Inferred

0.25

1,035,300

1.340

1,387,500

2.72

1,431,500

Click to enlarge

Table 2: Hollister Mineral Resource Estimate

Burnstone Mine in Witwatersrand, South Africa– Reserves & Resources

Proven & Probable Au Equivalent Reserves

4,100,000 oz.

Measured & Indicated Au Equivalent Resources

10,900,000 oz.

Inferred Au Equivalent Resources

4,500,000 oz.

Mine Life

19 years

Click to enlarge

Table 3: Burnstone Mine - Reserves & Resources

Burnstone Mineral Resources Overall Property: October 2009

RESOURCE
CATEGORY

Cut-off
cmg/t

Tonnes
millions

Au Grade
g/t

Contained Au
Ounces

Measured

400

43.9

6.08

8,569,500

Indicated

400

10.3

9.21

3,038,600

TOTAL MEASURED & INDICATED

400

54.1

6.67

11,608,100

Inferred

400

11.8

12.14

4,588,700

Click to enlarge

Table 4: Burnstone Mineral Resource Estimate

Estimated Gold Mining Production

Hollister Estimated Gold Production

2008 production

80 k Au Eq. oz.

Est. 2009 production

115 k Au Eq. oz.

Average annual production

120 k Au Eq. oz.

Average grade of ore extracted

49g/ton Au Eq. oz

Cash cost per oz. (USD)

$426

Total* costs per oz. (USD)

$559

Click to enlarge

Table 5: Hollister Estimated Production

Source: February 18, 2009 Hollister Technical Report by J. Oelofse, P. Bentley, and D. van der Heever[2]

*1 Total cost includes mineral taxes, federal income tax payable of US$78/oz, and depreciation and amortization US$55/oz on capital expenditure of $110 million USD

Burnstone Estimated Gold Production

Average annual production

254 k Au Eq. oz.

Average grade of ore expected

4.3g /ton

Cash cost per oz. (USD)

$319

Total* costs per oz. (USD)

$495

Click to enlarge

Table 6: Burnstone Estimated Gold Production

Source: February 16, 2009 Burnstone Technical Report by D. van der Heever, J. Oelofse and P. Bentley[3]

* 1 Total cost includes mineral taxes, federal income tax payable of US$118/oz and depreciation and amortization of US$58/oz on capital expenditures of $224 million USD

Stock Structure and Ownership

GBG Stock Structure and Price

Shares: Basic

334,000,000

Warrants

86,178,552

Options

17,559,599

Fully Diluted

438,000,000

Share Price (Oct 22, 2009)

Cdn $1.74

Market Cap – Basic (Oct 22, 2009)

Cdn $579,000,000

Fully Diluted

Cdn $762,000,000

Click to enlarge

Table 7: GBG Stock Structure and Price

GBG Ownership Information

Shares Outstanding

334,000,000

Institutional Ownership

44%

Top 10 Institutions

33%

Mutual Fund Ownership

13%

5%/Insider Ownership

1%

Float

99%

Click to enlarge

Table 9: GBG Ownership Information[4]

On October 29th, 2009, Great Basin announced a $110 million bought deal public offering of convertible debentures[5]. This offering is set to close on November 17th, 2009. The purpose of the offering was to replace the Burnstone construction loans from the syndicate of banks. The newer financing is lower cost and more flexible without having to hedge any gold production from Burnstone.

Great Basin Gold Ownership of Properties

GBG Rusaf

Great Basin owns 100% of GBG Rusaf, formerly Rusaf Gold. The Company acquired Rusaf Gold Ltd. in April 2008. Rusaf holds interests in early stage mineral prospects, the Tsetsera Property in Mozambique, properties in Tanzania and Iturup (Kurils) Islands (Russian Federation).

In 2008 Russaf conducted exploration in three regional areas of Lake Victoria (North-West) early stage, Lupa (South-West) drilling at Nkolwisi, and Kikugwe (Central-South) soil sampling. Initial 43-101 reports are nearing completion. In 2008 Rusaf drilled 33 holes in the Kurils Islands. Analysis and initial technical documents are currently being completed for the Kurils project.

Kryso Resources

Great Basin holds a a 16.7% equity interest in Kryso Resources. Kryso is an AIM-listed mineral exploration and development company focused on projects in Tajikistan. Kryso’s primary goal is to bring the Pakrut gold project in Tajikistan, of which it has 100% ownership, into production. An internal prefeasibility study has been completed for the Pakrut project, with highly positive results, and a bankable feasibility study on a mining operation is currently underway.

Qualitative Analysis

Management

Chairman - Ronald W. Thiessen

Mr Thiessen is associated with Hunter Dickinson Services Inc., a company providing management and administrative services to several publicly-traded companies and focuses on directing corporate development and financing activities. He is also a director of Hunter Dickinson Services Inc.

Among R. Thiessen’s other executive positions held are as Chairman of Taseko Mines [TSX: TKO] and as President & CEO of Northern Dynasty Minerals [TSX: NDM], which is developing the massive Pebble Beach copper gold project in Alaska.

President & CEO - Ferdinand Dippenaar

Mr. Dippenaar is a recognized member of the South African mining industry where he has worked for 25 years. In 1996 he was managing director of Grootvlei and of East Rand Proprietary Mines. Harmony Gold purchased Grootvlei and he became marketing director of Harmony. Most recently he was the Executive Director of Marketing for Harmony, when he was appointed Director, President and CEO of Great Basin Gold Ltd. in December 2005.

Market Analysis

The gold market has witnessed a strong recovery from the economic volatility of 2008. Beginning in September 2009, gold started a strong uptrend and pierced the $1000 USD mark. Presently the gold price is hovering between $1020 and $1060 USD.

Great Basin Gold undertook a massive $145 million financing in March of 2009. The financing was 115 million shares priced at $1.30 Canadian, each with one-half warrant priced at $1.60 and valid until October 15, 2010. This financing diluted the company stock by 46% and has left a significant overhang on the share price. The GBG stock has witnessed severe price volatility, rising and plunging from $1.20 to $1.70 all summer of 2009.

On October 29, 2009, Great Basin announced a $110 million convertible debenture bought financing. This loan will pay back their existing construction loan facilities and they will not need the financing from the previously arranged syndication of banks.

As Great Basin takes positive steps in moving both mines into production the market should re-value the share price. Hollister with the Esmeralda mill is on the verge of full production. Burnstone is following the plan of commencing official production on June 30, 2010. With both mines producing, the planned annual output of GBG is around 350 k oz. of gold equivalents. This is from the Hollister cash cost of $426 per oz. and the Burnstone cash cost of $319 per oz. The cash flow will be robust and the profit margin will be very healthy if the price of gold maintains above $1000 USD. Note that Great Basin has managed construction of the mines without hedging any of their future production. The future is very golden for Great Basin Gold as they maintain full leverage to the potential up trend in the gold price.

Exploration Potential

Hollister Exploration Potential

The Hollister area has excellent potential to host further high grade vein systems. The mine location is in the Carlin trend where they are surrounded by operating gold mines.

Above ground, there is the potential associated with the geologic cover (as reported in the June 30, 2009 M. D. & A[6]):

Intersection of significant “Blanket-style” disseminated Au mineralization in the overlying Tertiary volcanics (HSD-64 31ft @ 0.78 opt / 9.3m @ 26.6 g/t Au).

Drilling at the West Lateral location has already encountered intersections of 3 oz per ton over 2 feet. Reported on October 27, 2009[7]:

Drilling in the Blanket Zone has indicated grade continuity in mineralization and a body of disseminated gold hosted in Tertiary volcanic rocks above the epithermal, banded veins. Intersections range in thickness from 19.4 to 135 ft (5.9 to 41.1 m) and grades between 0.130 to 0.500 opt (4.4 to 17.2 g/t) Au.

The claim area around Hollister is large and prospective (as reported in the June 30, 2009 M. D. & A):

The integration of previous geophysical surveys (airborne magnetics, radiometrics, and ground Induced Polarisation and CSMAT resistivity surveys) with available geological and drilling data has continued. Follow-up targets of preserved mineral systems similar to Hollister that exist on the claims block are being prioritized.

At the previous operating Esmeralda mine, there is potential to restart mining quickly where there are existing stope developments giving access to the high grade ore.

Also the GBG geologic review of Esmeralda has determined that the fault structural control is the most important indicator of deposit mineralization (as reported in the June 30, 2009 M. D. & A):

A property wide geological assessment has indicated significant untested down faulted epithermal vein targets immediately east of previous opencast and underground operations.

Burnstone Increase in Reserves

Development of this exciting project continues in line with plan and is on track for commissioning by end of June 2010. Another exciting aspect is the commencement of trial mining to determine optimal mining methods which gets underway during October 2009. The current mining plan has assumed the mining of only 4.1 million ounces of the 12.5 million ounces of the resource. The positive results from the ongoing surface and now underground exploration programs continue to add resource ounces which could positively impact on the future development and production profile in the Burnstone region.[8]

Upside Potential

Great Basin as an Acquisition Target Scenario

Great Basin boasts 14 million ounces of gold in reserves and measured and indicated categories. In this environment of $1000 gold price and depleting reserves for the top tier gold miners, Great Basin makes for an attractive acquisition target with their new mines and ample resource ounces. The prevailing price paid per gold ounce for acquisitions is about $125. Multiplying $125 per ounce by 14 million ounces gives a possible price of $1750 million for Great Basin. $1750 million divided by 460 million shares fully diluted gives us a share price of $3.80 for a possible buyout. The share price for yesterday, November 6, 2009, is $1.60 which gives us a possible 137% gain for buyout.

Great Basin’s Share Price Versus Gold Sales

Great Basin in 2010 at full production should be producing about to 380 k ounces of gold equivalents per annum. With gold at $1000 per ounce, that production will come to $380 million USD in sales. Top tier gold miners are valued at about 10 times gold sales. If we use 5 times valuation for being mid-tier, that valuation of Great Basin works out to be $1900 million. $1900 million divided by 570 million shares (including the convertible debentures), gives a share price of $3.33. That is a 108% gain from the price of $1.60 today.

With a disciplined management, Great Basin looks capable of achieving the upside targets for shareholders.

Current Status*

Hollister Property

  • Increase to 1.5 million Au equivalent ounces in measured and indicated categories and 1.4 million Au equivalent ounces in the inferred category1.
  • 18,026 Au equivalent ounces extracted by trial mining during the quarter and 60,554 Au equivalent ounces extracted for the year to date.
  • 14% decrease quarter-on-quarter in cash production cost per Au equivalent ounce to US$324.
  • Further positive results received from underground infill drilling program confirming planned stope grades.
  • Permit obtained from the BLM to construct west Alimak raise.

Burnstone Property

  • Increase to 11.6 million Au ounces in measured and indicated categories and to 4.6 million Au ounces in inferred category 2.
  • 1,439 ft (436 m) of on-reef development to date.
  • Foundation for metallurgical plant completed and civil works commenced.
  • Depth of 1,188 ft (408 m) below surface reached on vertical shaft with 435 ft (85 m) remaining to shaft bottom and 716 ft (217 m) of station development completed on 40 Level at October 28, 2009.

Esmeralda Property

  • Successful refurbishment and commissioning of mill on September 9, 2009.
  • Completion of desk top due diligence study on underground mining potential.
  • Source: Management's Discussion And Analysis Quarter Ended September 30, 2009 posted November 6, 2009 on sedar.com[9]

Summary & Recommendation

The economics of Great Basin’s Hollister and Burnstone mines are robust yet conservative. The company is a relatively low cost producer with cash production costs per ounce of $426 for Hollister and $319 for Burnstone. The all in costs (including taxes, depreciation and amortization) per ounce are estimated at $559 for Hollister and $495 for Burnstone.

The new Hollister mine in Nevada is already producing ore in trial mining. Estimated production for 2009 is 115,000 gold equivalent ounces. Development drilling is reporting and confirming the high grades to be mined. The commissioning of the Esmeralda mill for the Hollister ore was successful.

The Hollister pre-production work has also increased the resources by 27%. Drilling prospective areas around the mine have discovered two new veins as well as finding long lengths of mineralization in the overlying Tertiary volcanic ground cover above the veins. The Hollister claim area is considered extremely prospective for further economic mineralization.

The economics of the new Burnstone mine in the Witwatersrand compares favorably with the South African industry averages. The planned average grade to be mined is 4.3 g/ton compared with the South African industry average of 3.4g/ton. The cash cost margin of Burnstone is 60% compared to 30% average for the South African industry. The decline and shaft are in place with trial mining and stockpiling for the ore. The target date for production is June 30, 2010.

Great Basin announced on October 13th, 2009 an increase to Burnstone’s substantial resource. The current Burnstone mining plan is based on only 4.1 mm oz. of the 11.5 mm oz. Measured & Indicated resource base. There is a further 4.6 mm oz. of the inferred category in the mine area. Surface and underground exploration in the area is continuing and will likely add to the reserves and resources.

Great Basin has a critical trait for success, a management track record of delivering on their projections. Great Basin reported aggressive cost management of the Hollister project and improvements in the mining dilution and methods have reduced their costs from plan[10].

Obviously, the previous management relationship with the renowned mine managerial firm of Hunter Dickenson shows in the disciplined and competent nature of their operations.

The outlook for Great Basin’s share price to rise as they enter full production is positive. As examined in two upside scenarios of acquisition or price to sales the possible upside for GBG shares is at least 100%. The time frame for these scenarios to unfold is short, possibly within a year.

Great Basin offers a unique blend of a new low cost sustainable long life mine in South Africa combined with a cash cow of a bonanza epithermal mine in Nevada. The writer after examining the available information, has come to this favorable conclusion. Great Basin will soon transform from a mine developer in 2009 and will jump immediately into a mid-tier gold producer status in 2010. This is in the midst of a solid up trend in precious metal pricing. For the astute investor, this transformation will result in a significant re-rating of Great Basin Gold’s share price.

Disclosure: The author holds a long position in Great Basin Gold.

References



[1] Great Basin Gold, “Management's Discussion And Analysis Quarter Ended June 30, 2009”, August 18, 2009, [Cited November 6, 2009], available here.

[2] Great Basin Gold, “ GBG Hollister Technical Report”, February 27, 2009, [Cited November 6, 2009], available here.

[3] Great Basin Gold, “ GBG Burnstone Technical Report”, February 27, 2009, [Cited November 6, 2009], available here.

[4] GBG – Great Basin Gold, “Institutional Ownership Information”, [Cited November 6, 2009], available here.

[5] Great Basin Gold, “Great Basin Gold Announces C$110 Million Bought Deal Public Offering of Convertible Debentures”, October 29, 2009, [Cited November 6, 2009], available here.

[6] Great Basin Gold, “Management's Discussion And Analysis Quarter Ended June 30, 2009”, August 18, 2009, [Cited November 6, 2009], available here.

[7] Great Basin Gold, “Great Basin Gold Provides Hollister Exploration Results And Operational Update”, Stockhouse.com, October 27, 2009, [Cited November 6, 2009], available here.

[8] Great Basin Gold, “Great Basin Gold Provides Hollister Exploration Results And Operational Update”, Stockhouse.com, October 27, 2009, [Cited November 6, 2009], available here.

[9] Great Basin Gold, “Management's Discussion And Analysis Quarter Ended September 30, 2009” , November 6, 2009, [Cited November 8, 2009], available here.