As the gold price has been moving lower and lower, investors have changed their preference from large-scale megalomanous projects to smaller and more financeable projects and companies. Red Eagle Mining (RD.V) is one of this companies that is a perfect fit for investors looking for low-capex and high-margin projects.
The Santa Rosa Gold Project
Red Eagle’s flagship project is the Santa Rosa gold project, located in the Antioquia province in Colombia. This project is located right in between Continental Gold’s (TSX: CNL) Buritica project and the Gramalote project owned by a joint venture of AngloGold and B2Gold (BTO.TO, NYSEMKT:BTG). As Santa Rosa is very close to the large city of Medellin, the existing infrastructure at and around the project is fabulous, and this has helped to keep the capital and operating costs down to an amazingly low level (see later).
Red Eagle acquired Santa Rosa in April 2011 for $9.6M in cash, of which $8.9M has already been paid. The remaining amount of $700,000 will be payable in November of this year, where after Red Eagle will own 100% of the project. As the management team still holds a 12% stake in the company, its interests were very much aligned with the shareholders’ interests, and this has led to a series of non-dilutive financing decisions to move the company forward without issuing too many new shares. Back in October 2012, Red Eagle sold a 2% NSR to Liberty Metals and Mining for $8.3M, and approximately one year later, LMM bought another 1% NSR for $4.2M. Liberty continues to be a strong backer, as besides coughing up $12.5M to acquire a 3% NSR, the fund is also Red Eagle’s largest shareholder with a stake of 19.9%.
The total amount of outstanding shares is just 74 million, which is very low considering the company had to advance the project during the turmoil of the past few years. The most recent financing was a $4M raise by issuing 12 million shares at $0.33/share, which wasn’t a bad deal, considering Red Eagle’s share price was trading in the lower twenties in the months before the placement. It’s also interesting to mention that Liberty Metals and Mining also participated by contributing an additional $1M to maintain their 19.9%.
Money has never really been an issue for Red Eagle, and that’s the main reason why the company was able to keep its proposed timelines at Santa Rosa, as just three years after acquiring the project, a definitive feasibility study has been completed.
The Definitive Feasibility Study
Over 45,000 meters has been drilled at Santa Rosa in 233 drill holes, and last year a Preliminary Economic Assessment has confirmed the viability of the project. The simplicity of Santa Rosa has allowed Red Eagle Mining to skip the usual pre-feasibility step, and the company immediately moved ahead with a feasibility study. The results of this definitive feasibility study were released in September, and the expectations were reconfirmed: Santa Rosa will be a low capex and high-margin operation. This is mainly due to its excellent location. The roads and powerlines are in place, and as the project isn’t too far away from Medellin, there’s a readily available pool of labor and no mining camp will have to be constructed.
The initial capital expenditure is just $75M which includes an 11% contingency and a recoverable VAT charge of over $4M. Unlike other companies which defer a part of their capital spending and book it as sustaining capex, Red Eagle’s Santa Rosa project doesn’t have any meaningful sustaining capex. The sustaining capex is $33M, which works out to be approximately $75 per produced ounce.
This means that there isn’t a huge difference between Red Eagle’s production costs and its all-in sustaining cost per produced ounce. As the AISC is a more meaningful number, we were surprised to see an all-in cost per ounce of gold of just $763/oz. Even at the current low gold price, the operating margin would be roughly $450/oz, a situation most mining companies can only dream of.
This is just the first step
Some people might have been disappointed with the mine plan in the feasibility which only takes 388,000 produced ounces of gold into consideration, which is less than in the PEA. The explanation for this discrepancy is quite simple. A feasibility study has (quite obviously) higher standards than a PEA, and inferred resources aren’t allowed to be used in a mine plan for a feasibility study.
So, those inferred ounces didn’t simply disappear, they are still there but cannot be used in a formal study. But that shouldn’t really matter. As Red Eagle is an underground deposit, it just wouldn’t make any sense to spend millions and millions of dollars to drill the project out and increase the resources to 1Moz. The feasibility study at Santa Rosa should be seen as a first step for Red Eagle Mining as it will be able to go into production in a relatively short time frame (we are aiming for a first gold pour less than two years from now). The cash flow from the gold production could (and will) then be used to continue the exploration efforts at Santa Rosa and as a first step the inferred resource could very easily be upgraded to the measured and indicated category from underground drilling, which would immediately increase the mine life by 2 years for just $1-2M.
But that’s not it. The company has identified almost 2,000 historic adits on the property, and most of those adits offer the potential to find more high-grade veins which could be used as additional mill feed. Additionally, the current resources at the San Ramon zone are limited to a depth of 200 meters, whilst it’s general knowledge the mineralization continues to a depth of at least 500 meters. On top of that, the mineralization seems to be continuing towards the east on to ground Red Eagle acquired from AngloGold Ashanti just in April, and new ounces of gold could be added really quick.
As the throughput of the Santa Rosa mill could easily be doubled (at an additional capex of less than $15M) to 2000tpd, the company seems to be counting on finding more ounces, and we can’t disagree with this view. The Santa Rosa land package is in excess of 300 square kilometers and the probability of finding more high-grade ore is very realistic.
The value of Santa Rosa and the permitting process
The permitting process to bring the San Ramon zone into production is very advanced. As Red Eagle recently got its mine plan approved, the company is waiting for just one more permit, the environmental license. As the process to get this license can be quite bureaucratic and there’s no official guidance on when this license is expected to be issued, but we are aiming for Q1 2015. Once this environmental license will have been received, the next steps will be to secure the necessary funding for Santa Rosa and the construction activities could start shortly thereafter.
The After-Tax NPV5% of Santa Rosa at $1300 gold is $104M with an IRR of 53%, and even at a lower gold price of $1100/oz, the after-tax NPV remains positive at $52M, and the IRR would still be a very respectable 32%. Again, keep in mind these numbers are based on just 388,000 recovered ounces of gold. If the mine life could be extended by just three more years with all other parameters unchanged, we estimate the after-tax NPV at $1300 gold would easily be $135M and even at $1100 gold the number would increase to $75M. These are our own estimates and the real situation might be different.
Conclusion
Red Eagle’s definitive feasibility study was impressive as it reconfirmed the Santa Rosa project to be a low-capex and low-cost asset. Despite having an NPV of $104M, the company is trading at less than 0.2 times this NPV (and this doesn’t take the conversion of inferred ounces into consideration, nor any other exploration upside).
Granted, the company is still waiting for the final permit and will need to find $75M to get Santa Rosa up and running, but with these economics, we don’t expect any difficulties to get this project financed. As the management team owns more than 10% of the Red Eagle shares, we are confident Ian Slater and his team will choose the least dilutive way. Even if the share count would double, the NPV/share would still be approximately C$0.80. The only thing which is holding the share price back for now is that environmental license. Once this license will have been approved, Red Eagle will be ready to impress.
Disclosure: Red Eagle Mining is a sponsoring company. Please see our disclaimer for current positions.
