CGA Mining (CGAFF.PK) was added to the S&P/TSX Global Gold index on the 23rd of December, just two years after beginning construction on its 7.8M ounce Masbate Gold Mine in the Philippines, and three weeks after declaring a maiden high grade resource on its Segilola project in Nigeria. This index, which comprises the top 34 gold mining companies listed on the TSX, TSX Venture, NYSE Amex and NASDAQ markets, accounts for around two thirds of world gold production. The company’s inclusion in the index is testament both to the speed and success with which the company undertook the Masbate mine development and early months of operation, and to the scale of the project; Masbate is now the largest gold mine in the Philippines and will be operating at a steady state rate of 200,000 -250,000 ounces per annum. Although CGA is a relatively new company the members of the management team, individually and collectively, have an impressive track record in developing gold mines. CEO Michael Carrick, for example, formerly Managing Director of Resolute Mining and Executive Chairman of AGR, has now developed seven gold mines, which have a combined production rate of over 1 million ounces per year. Besides Masbate he was involved in developing Boroo (the first gold mine in Mongolia), Golden Pride (the first gold mine in Tanzania), Obotan (in Ghana) and three mines in Western Australia (Chalice, Bullabulling and Marymia). Along the way the team collected a clutch of environmental awards, including being three-times winner of the Tanzanian President’s award for Environmental Excellence and Leadership (2002, 2004 and 2006), the award from the Mongolian Chamber of Commerce for the best environment-friendly entrepreneur (2005), and Ghanaian awards for the best mine for the environment and community activities (1998) and the most environmentally committed company in the mining sector (1999).
CGA’s stated strategy is to enhance shareholder value by using its expertise in the development and operation of gold mines to focus on world class projects which are ready for development and which have the capacity to grow substantially. Talking to Michael Carrick however it is clear that there are also other pillars implicit in the CGA strategy.
Perhaps the first of these is its pioneering expertise. Prior to setting up CGA the team had successfully developed the first gold mine in both Mongolia and Tanzania. As Carrick points out,
pioneering comes with its challenges, but also offers a number of key advantages, including the opportunity to be involved in the development of mining law and tax regimes, and strong support and interest from government and community.
This first mover experience led to the CGA team being invited to inspect Segilola by the Nigerian government, who, keen to develop Nigeria’s non-existent hard-rock mining industry, had visited Tanzania and learned about the success of Resolute Mining, (where Michael Carrick had been MD), in developing the Golden Pride mine.
A second strategic pillar is the considerable importance placed on quality partnerships at all stages of the development and operational pipeline. In selecting its partners CGA always looks to pick the best in the industry; for example Carrick describes CGA’s construction and operating partner, Leighton, as “Rolls Royce-ish”. While such partners may cost more they bring substantial benefits of quality control, safety, predictability, discipline, procedures and training. There has already been proof of the success of this strategy as the current throughput at Masbate, which is yet to reach full production, is already exceeding the design throughput by a considerable margin. CGA also seeks to work in close partnership with local partners and key families on each project.
A third pillar is CGA’s strong community relations, health & safety policy and committed environmental stance. The company is closely involved with local communities, seeking to improve levels of education, health and sanitation, to provide better infrastructure and to establish programmes such as the farm technology transfer programme at Masbate. These all aim to enhance local livelihoods and quality of life. CGA also employs local labour wherever possible, with 80% of the workforce at Masbate coming from the island, and one in three households directly involved in the mine. CGA’s commitment to health and safety is well demonstrated by the safety record on the construction of Masbate, which took 3.5 million man hours to complete but was achieved without a single long term injury. On environmental issues the company aims to maintain or exceed world best practice and to enhance and protect the local environment surrounding the projects.
For the moment CGA has three projects in its portfolio; the Masbate and Segilola gold projects and the Mkushi copper project in Zambia.
Masbate Gold Project, Philippines
The Masbate project is located on the island of that name, 350km south of the Philippine capital, Manila, and roughly in the geographical centre of the country. It can be accessed by daily commercial flight from Manila to Masbate City followed by either a 1 hour boat ride or 70km drive on partly sealed roads.
The project, an epithermal deposit, was previously operated, both as an open pit and underground operation for 14 years from 1980 by Atlas, who produced a total of 1.1M ounces of gold and 940,000 oz of silver at a gold grade of 2.12g/t. It closed however in August 1994 due to falling commodity prices and problems faced by the parent company on other operations. Masbate then passed through several hands before Thistle Mining’s interest in the project was acquired by CGA Mining in March 2007 for $51m. CGA now has an economic interest of 100% of the project through its holdings of three companies, (Filminera, PGPRC and Zoom Mineral Holdings). Resources at the time of the transaction were 4.7M ounces including 1.98M reserves, and the asset included a considerable amount of onsite infrastructure; an airstrip, dedicated barge loading jetty, roads, accommodation, offices, clubhouse, workshops, assay laboratory, bunker fuel tanks and general reticulation.
Bank finance for the project construction was negotiated through BNP Paribas and the plant construction contract was awarded to Leighton in September 2007. Construction on the 4M tpa carbon in leach processing facility began two months later. Leighton, with its 25,000 employees and a current market cap of A$12bn is now one of the world’s major project development and construction organisations and also the world’s largest contract miner.
In 2008 CGA signed a Technical Services Contract with Leighton to provide contract mining at the project. The “alliance” type of contract is designed to allow for flexibility, total transparency of costs and provide the safest and lowest possible operating cost per tonne. That year CGA also announced a 62% increase in resources to 7.8 million ounces (measured and indicated 4.55 M oz, plus 3.22 Moz inferred), a 53% increase in probable reserves up 53% to 3.03M ounces (average grade 1.0g/t) and an upgrade to the planned throughput and scale of the project.
Construction of the plant and a 30MW power station was completed in early 2009, more or less to spec, to time and to budget, and without a single lost time injury despite 3.5 million man hours of work. The first gold pour, after total expenditure of approximately $178m, took place on 12 May 2009 just over two years after acquiring the project - a remarkably short gestation period. Production is now ramping up and is already nudging a rate 5Mtpa although the design throughput was just 4Mtpa. Carrick believes that over the next two quarters the operation could possibly run at 6.5Mtpa. The mine is permitted to operate at up to 7.5Mtpa
In parallel with the construction process CGA also ran the Social Development and Management Program to implement projects designed to improve living conditions in the local communities on a long term basis. Twelve people were employed in the Community Relations Department to interact frequently and directly with local residents. Examples of the projects completed during construction include school repairs and enhancements, the construction of 2 chapels and 2 pre-school day care centres, the donation of hospital equipment and beds, sponsorship of local sports tournaments and fiestas, and the donation of musical instruments.
Masbate’s resources identified to date, including the former production of 1.1M ounces, have totalled 9M ounces. But Carrick thinks that this is just a start. Previous owners did not have the financial resources to fully explore the deposit, and CGA now own the next 12km along the intensely mineralised strike. Moreover the deposit is still open at depth, there are further known artisanal workings and other untested anomalies on the project. Recent drilling has returned some excellent intercepts with, for example, 42 metres at 10.5g/t and 27 metres at 9.88g/t.
The Philippine government is supportive to mining, and Masbate, in line with other projects in the country, benefits from a 6 year income tax holiday with a possible extension of 2 years, and excise tax of just 2% on gross revenue. There is a small hedging program in place with no hedging in the first 12 months, puts on 46,079 ounces at $800/oz, then forward hedging on a total of 214,000 ounces spread over four years (FY 2010-2013) at an average price of $859/oz.
Segilola Gold Project, Nigeria
The Segilola project is located 600 metres from a sealed road some 120km NE of Lagos, and 18km south of the local town Ilesha, which has a population of 300,000 and which lies on the main road from Lagos to the state capital Abuja. The project is thus far away from the more troubled oil region of the Niger Delta. It was first assessed in the 1990s by an Australian geological firm, and in 2005 a prospecting licence was granted to Tropical Mines Ltd, a firm 80% owned by local interests and 20% by government.
In 2007 Segilola Gold Ltd (SGL), a wholly owned subsidiary of CGA, entered into a JV agreement with Tropical Mines whereby SGL could earn up to 51% of the project by carrying out exploration and preparing a feasibility study for the project within 3 years. To date 10,000 metres of drilling have been completed and the company now owns 38%.
In December 2009 the maiden NI 43-101 compliant resource estimate for the project was published; 620,000 ounces of gold at a grade of 4.3g/t. The strike length is currently 1900 metres, the deposit is open at strike and depth and can be mined using open pit methods. Preliminary test work has suggested that gold recoveries of over 90% are achievable using conventional CIL processing techniques. Segilola is now the most advanced gold project in Nigeria.
The feasibility study is now underway and scheduled for delivery in the fourth quarter of 2010, at which point CGA can earn the outstanding 13% on the project to take its share to 51%. There have been no formal estimates of cash costs as yet but Carrick believes that they could be under $200/oz, and that only a small plant with a relatively low capital cost will be required. He is pleased with the progress of the project, and loves the rocks which are a continuation of the highly prolific Ghanaian gold belt.
Mkushi Copper Project, Zambia
CGA owns a 51% share in the Mkushi copper project in Zambia through its subsidiary Seringa Mining Ltd, in a JV with African Eagle Resources [AIM: AFE]. The project, which lies close to the southern limb of the Zambian copper belt and 250km north of the capital Lusaka, is a brownfields copper mine previously operated from the 1920s to 1970s. Water, power and other infrastructure are close by. The project has an NI 43-101 resource of 12mt of 1.07% copper (at a 0.5% cut-off), an in-house feasibility study has been completed and testwork has shown that 96% recoveries are achievable and that the process can generate concentrates of 30% copper.
Summary
To date the CGA management team has succeeded in maintaining their previous impressive track records with other companies. CGA has worked effectively, efficiently, synergistically and safely with all the other stakeholders, including the local community, the commercial partners and the local and national administrations, to develop the Masbate mine and bring it into production. So far the rate of production has substantially exceeded both expectations and the design throughput. With cash costs of around $450/oz the project is extremely profitable at current gold prices. The company currently holds $22m in cash (as at 31st December) and long term debt of $110m. Work at Segilola has got off to a promising start.
This year the company is on track to be producing 200,000 – 250,000 ounces of gold at a grade of around 1.5g/t. It will also be looking to expand the capacity of the plant and to develop the considerable upside geological potential of Masbate, which remains open at strike and at depth. For the moment the mine life stands at 10 - 15 years. CGA will also be completing the feasibility study on Segilola this year. If all goes well it could begin developing Nigeria’s first hard rock mine in the next financial year which could begin production in 2012 and eventually be adding perhaps another 100,000 ounces pa to CGA’s total. The company will be reviewing options on the Mkushi copper project, and may also be looking for another acquisition which meets its project criteria.
Only time will tell whether the company will succeed in its plans - but the focussed excellence of the team on the type of projects it knows best, its insistence on quality partnerships, and the strong premium placed on community relations, health and safety and environmental issues must all mitigate risk and increase the possibility of success. For the moment Carrick sees the greatest risks to be continued successful exploration.
To date the story that has been appreciated by the market. There is a strong institutional shareholding, and the share price has risen 111% over the last year.
Disclosure: I hold no position in this company
