Hummingbird Resources Is Giving Away 49% Of The Dugbe Gold Project For Peanuts

Summary

• ARX to earn 49% in Dugbe by investing $10 million in exploration and delivering a DFS.
• The previous deal with a ARX foresaw the investment of $30 million in exploration.
• Dugbe has a net present value of $337 million at $1,500 per ounce of gold.

Introduction

Mali-focused gold miner Hummingbird Resources (OTCPK:OTCPK:HUMRF) has been searching for a partner with which to develop its stalled Dugbe gold project in Liberia for several years as the project is too large for the company to develop alone. The project has 4.2Moz of resources and the initial capex stood at $212 million.

There had been little development over the past six years but a partner was mentioned in the company’s 2019 results – a non-binding deal with an obscure firm named ARX Resources. The latter was set to acquire Dugbe by investing just $30 million in exploration and delivering a feasibility study.

In June 2020, Hummingbird announced the signing an earn-in agreement with ARX and the conditions are even more disappointing – a 49% stake in exchange for $10 million invested in exploration over two years and the completion of a definitive feasibility study (NYSE:DFS).

The Dugbe gold project

(Source: Hummingbird Resources)

Dugbe is located in southeastern Liberia and it includes the Dugbe, Joe Village, Nemo Creek and Tiehnpo permits. Hummingbird commenced exploration activities in 2006 and the project hada gold resource of 812,000 ounces when the company was listed on the LSE in 2010. Hummingbird managed to grow resources at Dugbe at a significant pace and they reached 4.2 million ounces by 2013. The same year, a Preliminary Economic Assessment (PEA) was completed and the key financial figures looked compelling. The net present value was $337 million using $1,500 per ounce of gold and a 10% discount rate. At that price of gold, the internal rate of return of the project was 43% with average all-in-sustaining costs of just $904 per ounce. These are very good figures for a gold project:

(Source: Hummingbird Resources)

Also, the initial capex could be decreased to $143 million if contract mining was used.

Hummingbird chief executive Dan Betts said he believed the 12-month target to construction of the mine was aggressive but achievable. And then the price of gold crashed and Dugbe stalled. This is a very common story for junior gold mining companies – as soon as the price of gold slides significantly, many explorers and developers find it hard to raise money, then they lose momentum and are forgotten by the market.

(Source: goldprice.org)

Overall, more than $70 million has been spent on Dugbe to date.

The deal with ARX Resources

Back in January, when the partnership with ARX was revealed, all the information on this company was that it’s based in the British Virgin Islands.

Now, we known that ARX was founded by Stephen Dattels and Michael Beck. Dattels is a former Executive Vice President and Director of Barrick Gold (GOLD). Beck, in turn, is a former partner of N. M. Rothschild & Sons. The CEO of ARX is Ian Stalker, who and is currently the CEO of Papua New Guinea-focused gold miner K92 (OTCQX:KNTNF). Overall, I think ARX has an impressive team of mining veterans.

Under the earn-in agreement between Hummingbird and ARX, the latter can get a 49% interest in Dugbe after completing a DFS as well as a mutually agreed $10 milliontwo-year exploration programwith the objective of materially increasing the known resource base of Dugbe.ARX has the right to extend the earn-in period by up to 12 months for payment of $1-million a month.

Once ARX earns a 49% interest in Dugbe, the two companies plan to enter an agreement under which Hummingbird’s stake in the project can be converted into a 51% stake in ARX.

Investor takeaway

ARX’ CEO Ian Stalker has been involved in bringing into production several gold mines in Africa, including Siguri, Bibiani, and Geita so I’m optimistic about the prospects of Dugbe going into production.

However, I think that Hummingbird is set to receive very little for almost half of this project. Several years ago, Dugbe was considered to be among the best undeveloped gold projects in Africa. Now, the company is giving up 49% of it for just $10 million in exploration expenditures and the completion of a DFS. And this is after sinking $70 million in Dugbe to date.

Overall, I think Hummingbird’s management has done a poor job of unlocking thevalue of Dugbe. Over the past few years the company has also had significant issues at its flagship Yanfolila mine in Mali and this is why I think Hummingbird is a badly-managed gold producer which should be avoided.

I don't think going short Hummingbird is a good idea though as the company is generating significant cashflow from Yanfolila and is currently valued at just 0.6 times net asset value.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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.

Comments

[FIFOkid]

The market certainly was correct in assigning no value for the Dugbe project in its stock price. Still after all of the negative issues this is still up around 60% YTD and yes my worst performing gold stock I continue to hold.

[11146471]

It's no accident that as cheap as HUM seems it can never catch a higher price...

[Norman Bates at Disneyland]

A series of bad decisions and bad luck over the past few years. The LSE price was 60% higher a few years ago. I have a very small position, but almost everytime I am considering increasing it management does something unimpressive (like now).

[hulubalang]

Agree this looks like a bad deal but think Hummingbird management made this move in order to acquire a third producing gold mine, Kouroussa, which was announced on June 8 (not mentioned in this article).

polaris.brighterir.com/...

Dan Betts, CEO of Hummingbird, commented:

"The intended acquisition of Cassidy Guinea and the Kouroussa Gold project marks a transformational step in the development of Hummingbird and the execution of our strategy to become a multi asset gold producer in the near term.

"Kouroussa is a high grade, high margin project with a number of similarities and synergies with Yanfolila which we are confident we can harness to our advantage. Over the last few years we have looked at a vast number of projects and Kouroussa ticks every box in terms of a next mine for Hummingbird. It is of the scale, geology, process circuit design and grade that are all perfect for our team's experience to be put to immediate use, and it is in line with our strategy to focus on high margin projects.

"I am delighted to welcome the shareholders of Cassidy Gold to the Hummingbird share register and I am pleased that our West African Banking partner, Coris, have indicated their keen support for the financing of the project as may be required. Our plan is to spend the next 6 months refining the detailed engineering and design of the project whilst initiating construction and ordering long lead items, with an aggressive timetable to try to accelerate the build and pour gold within two years of the acquisition.

"We look forward to updating the market as the development of Kouroussa progresses."

[Diottica]

"badly-managed gold producer which should be avoided"

Agreed.

[User 14979912]

Bold

[taipingshan]

They've been bumbling through their first project, maybe they know they're in over their heads and need to team up with people who know what they're doing. If so, maybe it's not such a bad idea