A well-timed PE gold play
Daniel Gleeson 28 Apr 2015
12:14
Published in Mining Journal dated May 1, 2015
TMAC Resources is one of those rare gold companies with private equity money at its core. Add to this a robust project and
the buy-in of the second biggest producer of the yellow metal globally and it is no surprise it has lofty ambitions.
The development of Hope Bay looks like a foregone conclusion with RCF and Newmont's backing
For such a company publication of a positive prefeasibility study for its flagship project – a milestone in most listed
companies’ evolution where they hope for a share-price re-rating – was treated as a foregone conclusion. It will build the
mine. Full stop.
Despite this, the economics of its Hope Bay project, 65km east of Bathurst Inlet, in the Kitikmeot region of Nunavut, were
worth more than a cursory glance.
The base case (at a US$1,250/oz gold price) for the project showed a post-tax net present value (5% discount rate), of
C$626 million (US$517 million) and an internal rate of return of 40%. The pre-production capital of C$206 million would
be paid back in 1.7 years, according to the study.
There are not many opportunities like this in Nunavut, a territory in the north of the country not blessed with the best
infrastructure.
Fortunately for TMAC it is not the first company to set foot on Hope Bay.
The Doris, Boston and Madrid deposits –all part of the company’s mine plan – were drilled by BHP Billiton between 1988
and 1999. The miner spent about C$100 million drilling and building underground development at Boston, according to
TMAC, before Miramar Mining took it on.
Miramar secured the permitting for production at the Doris deposit, where TMAC plans to start gold production next year,
and identified large openpit mining potential, according to the company. The C$150 million it spent was handsomely
rewarded when Newmont Mining bought Miramar out for C$1.6 billion in 2007.
The gold major then shelled out some C$800 million carrying out extensive exploration and engineering, building
infrastructure at Doris, including some 3km of underground development, and constructing and permitting a tailings
disposal. All of this came before it put the mine on care and maintenance in 2011.
In 2013, TMAC entered the fray, taking advantage of the more than C$1 billion its predecessors had spent.
It found itself with a port, jetty, haul road, power plant, maintenance shop and other ancillary items. In fact, after defining
4.5 million ounces of measured and indicated resources and proven and probable reserves of 3.5 million ounces –
supporting a 20-year mine life – it only needs to buy and build a mill and processing plant, hence the moderate capital
expenditure and all-in-sustaining costs of US$785/oz.
In TMAC’s latest announcement there is a sense of inevitability this mine is going to be built. There was no mention of
funding, just its ability to get into production.
“After two years of de-risking and advancing the project we are in position to execute on a plan that realises production of
gold in late-2016,” Terry MacGibbon, the company’s chairman and former head of FNX Mining, said.
While not every C$260 million capitalised company can afford such confidence, TMAC is not your average junior.
Through Newmont’s sale of Hope Bay back in 2011, it holds a hefty 37.8% stake in the company, in addition to a 1% net
smelter royalty on all the gold coming out of the project.
Resource Capital Funds, or RCF as many know it, has 39.5% of TMAC. Management owns 9.1% of the company with the
remainder owned by other investors.
These sorts of shareholders, considering the company is not publicly-listed, are there to stay. This is why management can
be so blasé about the small matter of putting C$205 million into the mine-build pot.
While 160,000ozpa of gold production didn’t really factor into Newmont’s plans in 2011, it does now. The company
recently announced it would build its Long Canyon phase one project in the next few years, producing 100,000150,000ozpa. The returns it would get out of Hope Bay may well exceed what it is spending US$250-300 million on in
Nevada.
And, for RCF, this is another example of it getting close to ‘crystallising’ the value of one of its investments. It wants to get
its just deserts and Hope Bay being built and ramping up is one way to achieve this.
One slide on the company’s latest presentation shows these shareholders have more in mind than 160,000ozpa over 20 years
(see right).
They will be hoping 80km of strike length at Hope Bay puts it in a position to repeat the success of other projects on
Canada’s Archean gold belts.
If they’re right, this private equity story could have some mileage.