African Gold Group, Inc. - Site Visit

We recently attended a site visit to AGG’s Kobada gold project in Mali, West Africa. African Gold group released a positive PEA on the project in July last year, outlining an interesting production profile, and is currently conducting infill drilling to prepare for the completion of a Feasibility Study later this year.

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African Gold Group Inc. – Site Visit

Introduction

African Gold Group Inc., through its subsidiaries, engages in the identification, acquisition, exploration, and development of mineral properties in West Africa. It primarily explores for gold and precious metal properties.
The company controls approximately 802 square kilometers of exploration concessions in the regions of Ghana and Mali, West Africa. Its principal projects include the Kobada project located in the Kangaba region of Mali; and the Mankranho, Nyankumasi, and Asankrangwa Holdings in Ghana, West Africa. African Gold Group Inc. (AGG) was founded in 2002 and is headquartered in Toronto, Canada.

We recently attended a site visit to AGG’s Kobada gold project in Mali, West Africa. African Gold group released a positive PEA on the project in July last year, outlining an extremely interesting production profile, and is currently conducting infill drilling to prepare for the completion of a Feasibility Study later this year.

Mali

Mali is currently the 3rd largest gold producer in Africa, and several senior producers [AngloGold Ashanti (AU), IAMGold (IMG.TO), Randgold (RRS.L)) Avion Gold (AVR.TO) Resolute Mining (RSG, ASX)] have operating gold mines in Mali. Goldfields of South Africa, although not producing, is aggressively developing its Yanfolilia project located in the same region as Africa Gold Group’s Kobada project.
At this moment there are some conflict zones in the northern part of the country close to the borders with Algeria and Niger. The southern part of the country is however very quiet, and business-minded.
Currently the Malian government owns a 10% free carried interest in domestic mining projects, and is allowed to buy an additional 10% at fair value. It’s interesting to note that miners have a 5-year tax holiday to recoup their investment, before they have to pay the 35% corporate tax rate. Mining companies are also exempt from VAT and customs duty until three years after the commencement of production.

The Kobada project

African Gold Group acquired the Kobada project in 2006, and has since then undertaken considerable exploration. At a cut-off grade of 0.1g/t, the resource base currently stands at almost 1.1Moz, with only 1.7 km of the 14km strike length

2012 exploration program

The company tends to complete a 87,000 meter drill program this year, and drilling has started in January. There currently are five drill rigs on site (three diamond and two RC rigs), and three other rigs are on their way to Tanzania, scheduled to arrive by the end of this month.
The company plans to release a first internal conceptual resource estimate by the end of Q3, which should give us a first indication about how big this system could be.

drilled. The company is focusing on the oxidized profile of the ore body which has an average depth of 100 vertical meters from surface, which should be recoverable through a gravimetric process plant only. As their claims have a surface area of 218km², there is considerable upside exploration potential as evidenced by 3 distinct new gold zones that were recently discovered off trend of the main Kobada structure, more specifically: Foroko North, Gossokorodji and The Termite Zone.

The Kobada-PEA

Back in July 2011, AGG released an excellent PEA, outlining production of 125,000 ounces per year at an average of 0.64g/t gold.
It should be noted that the PEA is based on a Bulk Mining Model (as opposed to Selective Mining) and that 60% of the material contained within the current resource estimate is currently defined as waste. This has a dilutive effect on grade. The 2012 feasibility drilling will be based on Leachwell analysis and it is projected that this will convert an enormous percentage of the waste into ore.
The capital expenditures came in relatively low with only $122.5M to be spent on construction, and the opex is also very low, with a projected average cash cost of $471/ounce. These excellent economics result in an IRR of 90.6% at a gold price of $1100/oz, climbing to a stunning IRR of over 160% at a $1450/ oz gold price. The after tax NPV at $1450 gold comes in at $415M USD, which is a lot higher than AGG’s current marketcap of $41.6M.

[highlight1 variation=”silver”]Preliminary Economic Assessment IRR vs Gold Price[/highlight1]

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Gold Price variation (US$)	Pay back period (month)	After Tax Net Present Value (M)	IRR (%)
$ 900	23	$ 103.2	48.8
$ 1,000	17	$ 160.1	70.1
$ 1,100	14	$ 216.9	90.6
$ 1,200	11	$ 273.7	110.7
$ 1,450	8	$ 415.8	160.1

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The Road to Feasibility

AGG is currently at the stage of drilling in excess of 23,000m for feasibility purposes, and is planning to release the feasibility study later this year. We expect them to announce a resource update and upgrade later this year, containing 2Moz, mainly in the Measured and Indicated categories. This upgraded resource estimate will be the base for the feasibility study, which is expected by the end of this year, or Q1 2013.

Why we think the Feasibility Study will be much better than the PEA

First of all, the total tonnage will increase the mine life from 6 years to at least 15 years (all categories included).
On top of that, leachwell tests indicated a higher average grade than the common fire assay test. This is because of the nature of the lateritic deposit, which contains coarse gold, resulting in a nugget effect. The 50g fire assays obviously only partially take this nugget effect into account, and that’s why leachwell tests are more accurate. After the current leachwell-testing program, the average grade is approximately 30% higher than the fire-assayed grade. The company plans to do further test work with a pilot plant, which is expected to be up and running by the end of March.
This will result in a higher official average grade of the deposit, pushing the expected annual production up to approximately 150,000 ounces per year. The combination of improvement in both these aspects, an increase in tonnage and grade, will result in a much higher NPV for the entire project. If we use the 2Moz Measured and Indicated resources as a starting point, the NPV5% of Kobada could be as high as $1B dollar.

What to expect in the near future?

Drilling will be completed by the end of March this year, and all assays should be back by October, leading to an updated resource estimate by the end of this year, together with the Feasibility Study. It is expected that the Minister of Mines will grant an extension to the current deadline to complete the feasibility study, which has been set at June 28, 2012.
This Feasibility Study is necessary to apply for mining permits in Mali, which could be granted as soon as 3-6 months after the application has been made. As delays are quite common in the mining sector, we are aiming for African Gold Group to have their mining licenses by the end of Q2, 2013. We hope the company will be able to secure the necessary financing shortly thereafter, so that construction activities can begin by the end of next year.

Ghana

Besides the Kobada project in Mali, African Gold Group has interesting properties in Ghana. The Asakrangwa asset lies right next to Keegan Resources (KGN.TO, KGN) Esaase project, and on strike with PMI Gold’s (PMV.V, ASX:PVM) Obotan project.
Elsewhere in Ghana, the company’s Mankranho concession surrounds Newmont Mining’s (NMC.TO, NEM) Ahafo project, which produced 566koz in 2011. Newmont can earn 70% of this license by spending up to $8M in exploration efforts.