On April 10, during a presentation at the European Gold Forum, Teranga Gold (OTCQX:TGCDF) CEO Richard Young was asked whether the company considered itself a consolidator in West Africa. His answer was that in the short term there was an asset within the Randgold portfolio that does not appear to meet Barrick's hurdle rate and that it would create a lot of synergies with the Sabodala mine. The project in question is Massawa and I first talked about it in my first SA article on Teranga back in February 2017.
The Massawa project
Massawa is 83.25%-owned by Barrick and is located in eastern Senegal. It’s adjacent to Teranga Gold’s 2.7-million ounce Sabodala mine:
There are four main deposits, namely Massawa Central and North Zone, Sofia and Delya. The deposits consist of free milling ore from the oxide contribution of the pits together with the fresh material of Sofia and the bulk of the Central Zone pit. Refractory fresh material is sourced from the northern part of the Central Zone pit as well as North Zone and Delya pits and it has proven to be highly recoverable through a bio-oxidation process.
The hurdle rate Young was referring to is three million ounces of mineable gold with a minimal internal rate of return of 20% at a long-term gold price of $1,000 per ounce. These standards were used by Barrick CEO Mark Bristow at Randgold for years and are one of the main reasons the latter managed to outperform every major gold miner in the world. Randgold wanted to develop large gold projects, which would generate significant profits even if the price of gold crashed. This hurdle rate means that any gold project holding reserves below three million ounces of gold and demonstrating an internal rate of return below 20% at a gold price of $1,000 per ounce cannot be qualified as a prospective project and I expect the new Barrick to stick to it.
In Q4 2018, Randgold completed a feasibility study for Massawa and it showed that this is one of the best undeveloped gold projects in Africa. However, it still falls short of the company’s targets. At $1,000 per ounce of gold, the project has reserves of 2.4 million ounces and an IRR of just 12%:
Details on the feasibility study is scarce, but pre-production and construction capital stands at $430 million, which is a little lower compared to the number in the pre-feasibility study for the project:
Teranga should be able to realize a lot of synergies by leveraging its own infrastructure and a combined operation should be able to get better conditions from suppliers. For example, the mining fleet needed for Massawa was estimated at $50 million, which would be split by Randgold and a mining contractor. Teranga can save tens of millions and drive down operating costs by using its own fleet.
Even as a standalone mine, Massawa is an amazing project. Most gold miners use a long-term gold price of between $1,200 and $1,300 per ounce and the project shines at those prices. At $1,200 per ounce, Massawa has an IRR of 25% and a net present value of $344 million at a 5% discount rate.
Besides Sabodala, there are three other gold projects in close proximity to Massawa which could potentially reap significant synergies. They include Toro Gold’s Mako gold mine, IAMGOLD’s (IAG) Boto gold project and Bassari Resources’ (OTC:BSSRF) Makabingui property:
I think that Toro Gold and Bassari Resources just don’t have the scale to compete for Massawa, so the obvious rival for Teranga would be IAMGOLD. The latter recently completed a feasibility study for Boto, which showed very robust economics:
Sabodala is a little closer to Massawa than Boto, but I think that the latter should also be able to realize significant synergies from a combination with Randgold's project.
Massawa is a great gold project but it doesn’t fit Barrick’s criteria on size and return so I expect it to be put on sale in the coming months. Teranga has already said it’s interested in the project as its Sabodala mine is located just next door and I think that IAMGOLD could also be looking at a potential acquisition. I think that Massawa would allow both companies to add a lot of value to their respective projects in Senegal thanks to infrastructure and operating synergies.
While IAMGOLD is a much larger company than Teranga, I think that the latter has better chances to walk home with Massawa. The reason for this is that Teranga has a billionaire cornerstone investor by the name of David Mimran. He has deep pockets and the Mimran Group is the largest employer in Senegal. Mimran also has great connections in West Africa, which have already benefited Teranga in the past. In 2017, the company managed to beat gold majors Randgold and Resolute Mining (OTCPK:RMGGF) for the Afema project in the Ivory Coast.
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Disclosure: I am/we are long TGCDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a financial adviser. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading.