Red Back Mining is perhaps the only miner I would even consider owning whose operations lie solely in Africa. The reason is twofold: The geopolitical risk in Ghana and Mauritania is infinitely better than many of the surrounding countries, and their two flagship mines have turned out to be “world class” as they have increased their respective reserve and resource base multiple times just in the past few months. Their failed bid for Moto mines was a blessing in disguise as the DRC is a very spotty country and could have very easily broken a company such as Red Back if things went south, as they have shown to do in the past. Before getting into a detailed analysis concerning the vents that have transpired over the course of the year, it is worth noting that Red Back may have the strongest balance sheet among its peers.
Red Back (RBIFF.PK) continues to generate substantial free cash flow, with a current net-cash balance of nearly 200 million (consisting of cash and marketable securities and no short or long term debt). Their strong cash position is further augmented by their more or less lack of capital requirements as they are fully funded several times over to keep their organic growth on track. I say this in the face of the coming capital outlays for 2010 (180m) because this can be funded entirely via operating cash flow.
Due to very successful exploration and expansion efforts, Red Back has three mines, all having yet to reach peak production, let alone reach a consensus on where that level might be. Just a year ago, Red Back’s peak production estimates remained just above 500k/oz per annum. World class mines have become harder and harder to come by as the largest gold deposits have already been discovered, making this story of organic growth somewhat of a standout.
Though increased production guidance hasn’t been announced yet, it is most certainly on the horizon. I think Red Back will seek becoming a 1m oz producer through one or two small to moderately sized acquisitions. Below is a brief rundown of the evolution of the operating assets over the last year.
- March 2009 – Increased proven reserves 39% following a 119% increase over the previous 18 months.
- March 2009 – Steady ramp up at Akwaaba Deep
- April 7 2009 – Initial reserve/resource update at Paboase South, with potential for a second underground operation at Chirano
- April 21 2009 – Announced a new zone discovery at Tasiast
- June 27 – Discovery of a high grade extension to the Paboase deposit at Chirano
- October 26 – 33% increase in reserves at Tasiast (generally considered world class deposit at this point) and 22% increase in M&I resources.
- November 16 – 20% Increase in M&I resources at Tasiast
Although the consensus currently has Red Back producing 495k in 2010, 540k in 2011, 560 in 2012 and 580k in 2013, these estimates don’t account for the smooth ramp up at Akwaaba, the high production levels already seen in Q3 from Chirano, nor the almost guaranteed increase in production guidance at Tasiast. I’m expecting to see between 510-520k in 2010, 580k in 2011, 620k in 2012 and 650-700k in 2013/2014. Even these estimates may prove to be prudent at Chirano continues to surpass consensus estimates, Tasiast has been repeatedly increasing reserves which all should make for a very interesting 2011 and beyond.
Disclosure: Long RBIFF.PK