Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
As part of his plan to prevent a run on the dollar, stabilize the US economy, and decrease US unemployment and inflation rates, on August 15, 1971, U.S. President Richard Nixon directed Treasury Secretary Connally to, among other things, suspend with certain exceptions the convertibility of the dollar into gold or other reserve assets and ordered the gold window to be closed so that foreign governments could no longer exchange their dollars for gold.
For the very first time in our history, all money, all currencies, were fiat – the US dollar use to be gold backed and it was the rock all the worlds currencies were anchored to – when the US dollar became fiat, all the worlds currencies became fiat.
Hindsight – Inflation v. Gold
When a currency loses value it’s called inflation – prices seem inflated as each dollar is able to buy less and less.
If in 1971 I purchased an item for US$1.00 then in 2014 purchased that very same item it would cost $5.87 a cumulative rate of inflation of 487.3%.
Gold has gone from $35.00 an ounce (when Nixon closed the window) to, at the time I’m writing this, $1240.50. And was as high as $1900.00 oz for a short period.
My hindsight is 20/20 so I can clearly see that holding gold was a better move, over the ’71-2014 time period then owning dollars.
Foresight – U.S. $’s Future
Fact – The global economy, and that includes the U.S.’s, is dependent on life support in the form of exceptionally low interest rates.
Fact – We now have is a global wide QE happening, every central bank is now creating, or will soon be creating money as fast as they can and buying assets denominated in dollars. Every country is beggaring their neighbor by printing its own currency in a bid to keep their exports cheaper than their competitors. It’s a race to not just worth less but to worthless.
Q – What do you think is going to happen when the U.S. rejoins the race to worthless, the Fed restarts the printing presses and doesn’t raise interest rates?
Hint – Since the Federal Reserve was created in 1913 the U.S. dollar has lost more than 95 percent of its purchasing power.
Worrisome Things
In our immediate future there are a lot of serious issues including; currency devaluation, continual war, deteriorating geo-politics, religious genocide, China and its faltering relations with other China Sea stakeholders, Ebola, resource nationalism, climate change, possible bond market implosion, social unrest, very weak global macroeconomic data, resource wars, scarcity of fresh water for drinking, sanitary purposes and irrigation.
Investors need to own some precious metal bullion and the shares of gold/silver exploration/development companies.
Country Risk
One of the most serious and unpredictable risks facing mining operations and investor interests is “country risk” – where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.
Many countries might come to mind as places where shareholders could, without warning, receive news that their operations have been taken over by the government and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.
There’s not a lot of country risk in Nevada, U.S.A. And that’s good because Nevada produces more gold then South Africa and Chile combined – the state of Nevada accounts for six percent of global gold production.
Barrick Gold Corp.
Barrick Gold Corp., the world’s largest gold miner, knows all about Nevada.
And perhaps that’s why Barrick is ‘coming home’ to the state that helped make the company – Nevada is home to some of Barrick’s largest operations, including its massive Goldstrike and Cortez mines.
According to many of Barrick’s senior officers Nevada is the most prospective place on earth to explore for gold. Strange that much of the company’s attention, to its great detriment, has been globally focused in recent years.
But now Barrick is shuffling management, cutting costs (for 2013, Barrick produced 7.2 million ounces of gold at all-in sustaining costs of US $915/ounce and 539 million pounds of copper at C1 cash costs of $1.92/pound) and refocusing its operations. This renewed focus comes following billions in impairment charges in 2013 (and half a billion more in early 2014) related to the value of many of its ‘not in Nevada’ projects.
In an effort to cut costs, the company has sold its portfolio of mines down to 19 compared to the 27 it had in 2012.
Spring Valley
Yet in Nevada Barrick is advancing its South Arturo project, extending the ore body at Cortez Hills and expanding its Turquoise Ridge mine. It’s also fact tracking its Spring Valley joint venture (JV) with Midway Gold.
Barrick is coming home to Nevada. Top company executives have repeatedly said Nevada is the primary focus of the company’s gold mining ventures.
Barrick completed its 70 percent earn in on the Spring Valley project by spending US$38 million a year ahead of schedule.
After Midway opted to be carried to production (will pay back its share of development capital from production) Barrick raised its interest in Spring Valley to 75 percent.
Barricks going to spend US$17.4 million on Spring Valley in 2014 – twice the amount that was spent in 2013.
Barrick has publicly stated that Spring Valley “could potentially be a new stand-alone gold mine.”
Barrick even highlighted the project in the company’s most recent investor presentation.
After reading all of the above you’d have to think Barrick, the world’s largest gold miner, is pretty serious about fast tracking development of the Spring Valley project.
Terraco Gold TSX.V – TEN
Terraco owns a gold net smelter return (NSR) royalty suite of assets on almost all of the Spring Valley deposit.
Terraco’s NSR includes three separate components:
Ian Gordon, President of Longwave Analytics, kindly breaks down (do it yourself here) the numbers for us as to what the Spring Valley deposit NSR royalty might possibly be worth to Terraco’s shareholders:
“1. Contained gold – 327,857 ounces for 14 years and 220,002 ounces in year 15.
2. Expected gold recovery – 80%=298,286 produced or payable ounces per annum for 14 years and 176,002 ounces in year 15.
3. Mine life – 15 years.
4. Anticipated gold price for the life of the mine – $1,500.00 (U.S.) per ounce.
5. Approximately 75% of the ore body lies within Terraco’s 3% royalty and 22% within the 1% royalty. On the basis of the anticipated annual gold production this equates to net proceeds to Terraco of $129,607,778 (U.S.) over the 15 year life of the mine.
By applying a reasonable 5% discount rate to each year of the royalty proceeds, the net present value of the 16 year total royalty payments of $129,607,778 (U.S.) paid to Terraco equals $70,528,067 (U.S.). From this amount $16,083,000 (U.S.) is deducted, which is the amount that Terraco must pay to exercise on the remaining royalty option. This leaves a net present value of Terraco’s royalty on the Spring Valley project of $55,940,312 (U.S.). Terraco Gold has 134,797,151 shares outstanding, which when divided into the net present value of the royalty is equal to a value $0.415 per share.”
Today, Oct. 16th 2014, Terraco closed at .175.
Midway Gold owns 25 percent of the Spring Valley Project and is carried, free, to production. Midway gets to keep ten percent of its share of production profits, the rest, 90 percent, goes to Barrick to pay them back for Midway’s share of production costs. Once Barrick is paid back for the carry Midway will receive it’s full 25 percent.
There’s a total NSR royalty on the deposit of seven percent. We know three percent belongs to TEN’s shareholders, another three percent belongs to an entity I will keep nameless and one percent is locked into a family trust and will never be sold.
Barrick’s Spring Valley gold deposit, the one it seems so keen to fast track, has a 25 percent carried partner and a seven percent NSR royalty.
Story Time
In 1985, Franco-Nevada paid US$2,000,000.00 for a royalty interest in a small Nevada mine called Goldstrike. At the time Goldstrike had just 30,000 oz. of gold.
One year later Barrick purchases the property and starts exploring.
The Goldstrike Property produced 892,000 ounces of gold in 2013 at all-in sustaining costs of $901 per ounce. Goldstrike’s proven and probable mineral reserves as at December 31, 2013, were 10.7 million ounces of gold.
Franco-Nevada has gotten an NSR royalty payment on every ounce of gold that has ever come out of Barrick’s Goldstrike mine and will continue to do so for the life of the mine.
Here’s what David Harquail, President and CEO of Franco-Nevada – the company that in the mid 1980’s pioneered the use of royalties – has to say about the royalty business…
“It’s the best business because you don’t have to do the risky exploration, but you still can get the upside of a great discovery.”
No kidding. Either way, keeping the royalty or selling it would be huge for Terraco shareholders.
Moonlight
There’s more to the Terraco/Nevada story than ‘just’ an NSR royalty on a 75 percent Barrick owned fast tracked gold project.
Terraco also controls the over 35 sq km Moonlight Project, a contiguous land package connected to the north side of the Spring Valley project. The Moonlight Project is one of the largest early stage properties remaining on the Humboldt Trend and the company has been quietly consolidating and increasing its land position over the last several years.
Barrick’s drilling confirms the Spring Valley deposits gold mineralization is open to the north (towards Moonlight) and at depth.
So there is evidence to suggest that Moonlight could be the next mineralized event in a string of deposits on the Humboldt Trend ranging from Relief Canyon at the south end, north through Nevada Packard, Rochester, Spring Valley and Moonlight.
As if Terraco’s Nevada story wasn’t already interesting enough another of the world’s major miners walked into Terraco’s Nevada story, the following is from TEN’s website…
“Southern Humboldt Range New Entrant – Sumitomo
Regional Southern Humboldt Range activity, in addition to the above noted Spring Valley developments, includes a new entrant along trend adjoining Terraco’s Moonlight Project to the North. Renaissance Gold Inc. (“Renaissance”) has signed an exploration agreement with Sumitomo Corporation’s U.S. subsidiary, Summit Mining Exploration II, Inc., to earn up to a 70% interest in the Fourth of July project that is along strike (to the north) from the Rochester Mine, Barrick’s Spring Valley and Terraco’s Moonlight Project. Terraco’s Moonlight Project now sits between two major mining companies in Barrick and Sumitomo.”
Almaden
In addition to the Spring Valley Royalty and it’s Moonlight Project, Terraco has an advanced-stage gold project in Idaho (the Nutmeg Mountain / Almaden Project) which hosts a National Instrument 43-101 compliant gold resource of almost one million ounces. This advanced-stage project has excellent access and infrastructure and has over 66,140 meters of drilling in 903 drill holes.
The project is host to a low-sulphidation, epithermal gold deposit that sits on the side of Nutmeg Mountain, you would push material down to end up on a leach pad, there’s no stripping ratio to speak of and there’s already landslide material at the bottom – the inferred resource of 84,000 ozs of gold.
Conclusion
There are a whole lot of reasons (and all of them spring from having an excellent management team) for investors to have Terraco Gold Corp. TSX.V – TEN on their radar screen.
Richard lives with his family on a 160 acre ranch in northern British Columbia. He invests in the resource and biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com. His articles have been published on over 400 websites.
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.
Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard does not own shares in any company mentioned in this report.
Terraco Gold Corp. TSX.V – TEN is a sponsor of Richard’s site www.aheadoftheherd.com
