- 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.
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.
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.
This article was written by
Gold Panda has been working as an M&A analyst for over 11 years. He's been investing since 2007. Preferring value to growth, he tends to take a relatively conservative approach in his investing. His focus is on small and micro-cap stocks, which he believes is the area which offers the greatest opportunity to exploit market mis-pricings.Gold Panda is part of the team that runs the investing group Microcap Review. He provides a real-time portfolio to the group. Microcap Review focuses on three areas of opportunity in the micro-cap space: arbitrage and special situations, net-nets and undervalued stocks. Learn more.
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