Insiders Are Buying Teranga Gold - Should You?

Aug.27.14 | About: Teranga Gold (TGCDF)


Insiders at Teranga Gold have purchased more than 600,000 shares of the stock over the past few months, including a recent purchase by the Chairman.

The company is aiming to grow its annual gold production to as high as 350,000 ounces annually, at industry leading all-in costs.

Teranga Gold is a compelling buy at current prices and is highly leveraged to a rising gold price. I am bullish.

When insiders of a company are selling stock, there could be multiple reasons for it. However, when insiders are buying stock, there's usually only one reason: they think the share price will rise.

Lately, there has been a number of insider purchases at Teranga Gold (OTC:TGCDF), a Canadian-based gold company which owns and operates the Sabodala gold mine in Senegal, West Africa. The company's new mine plan forecasts 250,000 ounces of gold production annually, at low all-in sustaining costs. This mine is expected to generate significant amounts of free cash flow over the next few years, even with gold at current prices. For 2014, production is estimated at 220,000 to 240,000 ounces, at all-in costs of just $800 - $875 per ounce.

In my opinion, the insider purchases only strengthens the investment case in Teranga Gold, and I feel the stock is a compelling buy at current prices.

Symbol: TGCDF

Recent Stock Price: $.77

Shares Outstanding: 353 million

Market Cap: $271 million

52-Week Range: $.40 - $1.11

(Credit: Yahoo! Finance)

Why Teranga Gold?

Teranga Gold operates the only gold mine and mill in Senegal, a stable, mining-friendly country located in West Africa. The company's plan to produce 250,000 ounces of gold annually, and production costs are expected to be among the best in the industry because of the mine's high grades and low sustaining capital requirements.

With all-in costs currently below $1,000 per ounce, Teranga is profitable and should remain so even if gold dropped another 5-10% in price. As capital expenditures drop in the coming years, free cash flow is expected to improve.

In total, Teranga has 2.8 million ounces of gold in proven and probable categories, but it also holds 6.2 million ounces measured and indicated and an additional 2.6 million ounces inferred. Beyond the current resource, there is significant exploration opportunities for Teranga on its highly prospective land package.

The company's short and medium term goals are to maximize free cash flow at Sabodala while exploring and developing the Masato deposit, which contains 1.57 million ounces of gold indicated and is scheduled for first production in September. The plan is to complete infill drilling of the high grade zone and extend the mineralzation along strike at Masato in the near-term. Over the long-term, the company plans to continue exploring high-potential targets on its 1,055 km land package.

Franco-Nevada Stream a Major Third Party Validation

Franco Nevada (NYSE:FNV) provided Teranga Gold with an upfront cash payment of $135 million in 2013. The deal allowed Teranga to acquire the remaining balance it owns in a joint venture with Oromin, consolidating the Sabodala district and allowing Teranga to repay half of its loan with Macquarie bank. In exchange, Teranga will deliver 22,500 ounces annually over six years to Franco, followed by 6% production thereafter, at 20% of the spot price of gold.

I thought this deal was a win-win for both parties as Teranga acquired an additional 1.45 million ounces of open pit mineral reserves to its existing reserves, doubling its open pit reserve base, while Franco gets a portion of the gold production at a fixed price per ounce. Franco only invests in companies that have proven track records and carry less production risk, so I saw this as a major third-party validation of the quality of the asset. Overall, this deal reduced a lot of risk for Teranga Gold shareholders in my view as it reduced its debt burden, consolidated the land package and increased its resources.

Insider Purchases

As mentioned, insiders continue to buy shares of Teranga Gold, which is just another reason to be bullish. The insider purchases tell me that management and directors feel shares are either undervalued, or possess the potential to appreciate in the near-term.

- On May 8, Navin Dyal, Vice President and Chief Financial Officer, purchased 10,000 shares at $.67 in the public market.

- On May 29, Richard Scott Young, President and Chief Executive Officer, purchased 150,000 shares at $.64 and 170,000 shares at $.61.

- On August 19, Alan Richard Hill, Chairman of the Board, purchased 19,000 shares at $.72. On August 22, he purchased an additional 517,000 shares at $.72 and $.73.

Bottom Line: Teranga Looks Attractive at Current Prices

Teranga Gold is an attractive gold producer that is growing gold production in Senegal, West Africa. The company could eventually produce as much as 350,000 ounces of gold annually, at low all-in sustaining costs. If Teranga can successfully execute its growth plans, I believe shareholders are in for a nice ride.

Disclosure: The author is long TGCDF.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.