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Transcript: Orezone Gold (ORE) - Debt Funding Package Exceeds Expectations

February 15 2021, 15:46 GMT

Orezone Gold Corporation

  • TSX-V: ORE
  • Shares Outstanding: 252.6M
  • Share price C$0.98 (10.08.2020)
  • Market Cap: C$247.6M

Interview with Patrick Downey, President & CEO of Orezone Gold Corp. (TSX-V: ORE). Orezone Gold Corporation is a Canadian development company which owns a 90% interest in Bomboré, one of the largest undeveloped gold deposits in Burkina Faso.

Bomboré hosts a large oxide resource underlain by a larger, open sulphide resource, and will be developed in two stages.

We Discuss: 

  • 1:21 - Progress Made Since June 2020
  • 3:14 - Company Overview
  • 5:22 - Press Release: Financing Structure, Terms & Negotiations
  • 10:40 - Company Valuation at Market
  • 12:02 - All About Timing: Running at Full Capacity in a Month?
  • 15:47 - Blue Sky Opportunity; Allocation of Money
  • 19:30 - Reward for Shareholders: Potential for Dividends
  • 20:54 - Growth & Development: M&A Considerations
  • 24:28 - Selling at Market After News of Financing
  • 25:23 - Considering Exchanges

Matthew Gordon: Can you remind people about your project with a 1-minute overview and I'll pick it up from there.

Patrick Downey: Bomboré is a very simple project. To start with we focus on the oxides. We have a large oxide deposit that is quite unique in some ways. We have 13-years of oxides with exploration potential beyond that. Oxides are very simple: free dig, no drill and blast, simple mining, simple processing, quick. It is, therefore, low cost, low power cost and low mining cost. We get into the sulphides in Y3, we build it out of cash flow. We did all of our economics at CAD$1,300 Gold. We did all of our reserves at CAD$1,200 Gold. It is a robust project with a very low All in Sustaining Costs. It has a 13-year mine life. CAD$140,000/year on average for the first 10-years. I believe we can go beyond that and then 3-years of processing stockpiles, again, based on the reserves that we have to date, but we see way beyond that.

The All in Sustaining Costs are quite low but very similar to most West African projects. I tell people, if you want to look at an example that's been very successful like ours. It's in Mali. It's Robex Resources which has been going for 3-4-years. They have 1/3-1/2 of our tonnage so their fixed costs will be a bit higher. They have the same strip ratio, same grade. Their All in Sustaining Costs every quarter are CAD$700/oz, and they're using diesel gensets for power generation, which would be about CAD$0.25c/kwh. We will not be doing that, our will be much lower than that hence, we should have very low All in Sustaining Costs and high margins.

Matthew Gordon: I'm intrigued about the terms of the financing; you've given us some clues - the money is staying in-country, which I'm sure they're pleased about, but what did you get out of it?

Patrick Downey: There were a number of issues that were critical to us. When you're looking at debt financing, you're running various parallel paths to try and get the best deal for the company. As a junior with no other producing assets, a single-asset company, it's always difficult to negotiate no matter where you are in the world. We're in Burkina, which compounded issues in regard to that, but we've been in this business many years. We know not to panic and be patient. We're also very large shareholders in the company: myself, the chairman, a lot of my management team, my board, thus, we wanted to make sure that we got the right package for the shareholders, because we're big shareholders we didn’t want to give away the upside of the pie to the debt package. Unfortunately, Covid came along and compounded things, because the senior bank couldn't visit the site, which they needed to do for the credit committee. That's causing a delay.

We then began negotiations and met with a local bank. They had been a shareholder. I met with them in September. Our country manager is exceptionally well-regarded there and he continued negotiations. It became obvious that this was a real option for us. The deal is single digit in terms of cost of money. There are no hidden costs such as Gold prepays, Gold look backs. It's got no Gold streaming or Gold royalties. Critically, it doesn't have political risk insurance, so for Burkina that's a big number. If you get an 8.5%-9% financing package, you better add 2% to that for cost of money for PRI that other banks want. It has no cost overrun.

These people are sophisticated. They've invested in mining projects in West Africa. They visited our project and did their own independent due diligence meaning that they did not ask for a cost overrun facility that a senior mine would want, which is another CAD$20M of equity to be raised before you get your debt. We did not have that, so that's a cheaper cost of money as well. What sealed it for us was, with the senior bank, we were having a club of 3 banks who were each taking 1 piece. These guys wanted the full piece themselves which precluded another bank as a partner, that added political risk that they didn't want. The other guys felt that their terms weren’t good enough. That's where RCF intervened, he brought them both together. They negotiated a deal and entered a sound creditor agreement. RCF came in on the other side for another CAD$35M with BD Capital, which is a large company in British Columbia that does targeted mining investments. They knew us and our track record well and were willing to put money into that convert for a West African story, which also gave us a lot of kudos in the market. By putting those 2 together, that really worked, and now the capital from the local bank stays in-country. Thus, that CAD$100M plus interest stays locally for local investment. We were applauded for that by the government. They think this is a model that other people should be looking at going forward.

Matthew Gordon: I would question why more mining companies don't do that? I've worked in 25 different African countries, there are infrastructure deals left, right and centre. They want you to commit to them, and that's a very unusual structure.

Patrick Downey: Yes, it is. For a project like this, you are normally looking for CAD$100M-$250M/day. It depends; a single bank can very rarely lend that amount thus you need a club of banks. The international banks rarely get together with a local bank. It's very difficult to put them together. There are withholding taxes and all sorts of things. Our project just fit the right size. Luckily for us, the amount of debt we wanted, the structure of the debt and the fact that we could bring in RCF as partner worked perfectly for us. But for junior companies going forward, if you've got that size of a project in West Africa, that is definitely an option and people will be looking at it for sure.

Matthew Gordon: Your share price is up by 40% since we last spoke. You're just over CAD$1 now. It's not a dramatic movement. Do you think you're fairly priced in the market at the moment?

Patrick Downey: I think we're trading at CAD$0.35 NAV. If you look at single-asset companies, we looked at Roxgold in Burkina. We compared it to 2 others in Canada, from construction to start of commissioning, you generally get a 125% share price appreciation, and these were not during the days of Gold price runs. They're just generally what you see because you're de-risking the project. We believe that the same should happen to us once people get their head around things and we start showing the construction going well. We brought on Lycopodium to be our PCM contractor. They have a large extensive track record of bringing projects in under budget and ahead of schedule. That should stand in our favour, so we expect to see a big accretion in NAV going forward.

Matthew Gordon: You’ve got your money. You have an EPC partner lined up. Can you give us an idea on timing?

Patrick Downey: We will be starting right away. The mining contractors are mobilizing to site. We are just finalizing the terms with him. Lycopodium have started already on the detailed engineering. We will be ordering the Ball Mill at the end of February, that’s the lead critical item. Lycopodium and the contractors were mobilized to site April/May and the schedule is for first Gold by Q3 2022. Another key thing is that Lycopodium have process guarantees and based on their track record - and this is something you don’t see in North America, but we do see in West Africa - unique to the area - on average, from first ore through the mill to commercial production and steady state is 31 days. That is a huge bonus to your NAV. If you look at North America, I can't name 1 that hasn't taken months to get up to the nameplate. In that case, you're spending money. You're not getting your full cashflow, etc, whereas we are getting a process guaranteed to be up and full-bore running in 30 days.  

Matthew Gordon: I know it's oxide, thus, will be slightly easier, but in less than 1 month, you're going to be up at full capacity?

Patrick Downey: Absolutely. That's what they're writing into the contract. We can’t see any factors that would derail that projection. Furthermore, we will be mining 1 of the areas which is part of the capital but is not part of the capex per se because it releases ore but we have to spend the pre-production, we mine one of the pits and we make what's called a north channel reservoir to store water. We are 1 of the lucky projects in Burkina where our property is next to a river so we can gravity divert a flow. We don't have to pump it into a pit. We will have the ore ready to go into the project and we'll have those stockpiles at the plant ready to go.

Matthew Gordon: What about efficiencies; how long does it take to actually tweak and optimize things?

Patrick Downey: It's a very simple circuit. Normally when you're commissioning a plant, you've got a jaw crusher, cone crusher, a Ball Mill, etc, and conveyors in between plus your process plant. We don't have that. We will install a feeder or a sizer, there are no rocks, then it goes straight into the mill. The mill itself is oversized. We've done that on purpose, and 80% of the stuff that we're feeding to it does not require grinding. It literally gets broken up, the metal gets made into a slurry and goes straight into the tanks. and that's it. I can't explain how simple it is. It truly is a very simple plan. Normally when you're commissioning, you start the jaw crusher, you've got to reset, or something gets jammed or the setting isn't quite correct. Your rocks are hitting the conveyor and you have to start and stop and plug and unplug, etc. We don't have that which is unique to our project and renders it much simpler to commission.  

Matthew Gordon: You are painting a picture of a simple flow sheet. 140,000oz in 12-months. It's 3-4 years before you start going after the sulphide. What are you doing with this cash? What are you doing to talk to the market and say, there's more to come?

Patrick Downey: Before I go there, 1 of the structures that we had with the debt, and Coris were extremely flexible, so we split their debt in 2, hence, we have strong cash flow in Y1. We will pay off a big chunk of that debt straight away, which allows us to get into the sulphide expansion very quickly. We'd only be carrying CAD$60M debt on the project at the end of Y1. Then we have a further 3-4 years to pay it off on a standard schedule and there's no preferential cash sweep. If Gold stays where it is, they can't take any extra money off us. We want to get into the sulphides fast because they're good grade. There's great margin on them. They add to the mine life and it'll also give us cashflow to drill. We've only drilled the sulphides to 90m. Part of my trip last weekend to Burkina was to sit down with the exploration team and look at the targets and what we've got. I can tell you - they are quite juicy. We want to extend those to show that we've got a 20-year mine life not a 14-year mine life. Hopefully, we can then pay off that first tranche of debt, then we don't have to do a 2.2Mt per annum sulphide expansion, we can do a 4Mt per annum sulphide expansion.

As per the previous negotiations we were having with the more senior debt lenders internationally, they weren't giving us that flexibility: 2.2 or nothing. That's all you're getting, and we take the cash sweeps. In comparison, these guys are being really flexible with us. If we've got the cash in the cash box and the cashflow and we show that we can expand this beyond the 2.2M, which we’re pretty confident we can, now we're looking at a 7.2Mt per annum project and a 200,000/year producer.

Matthew Gordon: Do you think you are a beneficiary of changes in the market? Have you just got the timing, right?

 

Patrick Downey: I believe so. It is also due to our approach to the project. We are staging it in the sense that we do the oxides first, we de-risk it, we build the back end of the project. We will have it up and running, then we add the sulphides, which are completely independent at the front end to the oxide. Coris recognised this and they loved it, as did the international banks, thus, we can continue to run the oxides full-bore if needed, even when we're doing maintenance on the sulphides. Hence, we've got inherent flexibility that is unique to this type of project. I'm not saying we will build the 4Mt, and maybe the bank will um and ah about looking at it, but we definitely have the flexibility to do it. If we perform well, I'm confident we can do that. In my view, the best projects are built in stages and work in stages. We feel quite strongly about that.  

Matthew Gordon: Are your investors going to get anything out of it other than share appreciation? Are you talking about dividends anytime soon?

Patrick Downey: We would be, or we would look at doing a normal course issuer or a buyback of our stock if we didn't see the value in the in the stock. Remember, we're big shareholders here. I've been in this business a long time, a single-asset company is not a good business model in the mining business but finding the right partner and building a good mining company is a great way to succeed. Once we get up and running, once we see the upside and prove that we’re good operators with a lot of exploration upside, then we will be looking at growth now. If that growth is initiated by us or we sit down with someone else, I’m not sure. Personally, I don't wake up every morning wanting to be the CEO of a company. I love doing it. But I'm motivated by share price appreciation and value and the next thing I want to look at is, where does the company go in 3-5 years’ time?

Matthew Gordon: You referred to Roxgold as something that you're looking at; they went from a single asset; they've bought a second asset and they're probably developing a third asset organically. You recognize the need to be more than just a single asset, but where's that coming from?

Patrick Downey: Again, we need to be patient. We don't want to jump on the first thing that comes past the doorway. That's a recipe for failure unless you're very lucky. The first thing to do is to ensure you understand your own asset, how it's going to perform and how it can perform in the future. It is imperative to know your own value before you step outside and go looking for potential. You'll always get bankers pitching ideas, but it is better to be ahead of them and thinking about it anyway, because it's rare that they come in with something that you don't know about. It is important to talk to CEOs and look at other options.

With Goldmining companies, bigger ones get impatient with some of their smaller developments. Look at that's what happened to Roxgold? They bought an asset in Cote d'Ivoire, but it took them a long time. People were starting to get a little impatient with them, but now they are back to being a darling because they were patient. I look at RandGold: they were patient about how they built. They have great assets. I'm not saying we're going to get that but understanding how you want to grow is really important, as is picking the right partner and asset as you go to build.

Matthew Gordon: Have you got the ability to actually develop an additional asset organically?

Patrick Downey: Yes. From the sulphides and there's potential underground. To be frank, there's 20-years of open pit mining here. It's a long game. We can grow that to 200,000/year if we do it properly. Then we've got great currency at that point to go out. Remember, we won't have to issue another share, it all goes to the share price accretion, thus, we will use that to go out and look for other assets, be it a development asset or another producing asset that we go along with. It's really a matter of 2 + 2 has to make 5 or 6, not 4.

Matthew Gordon: You'll take your time to work out whether you buy, how much you develop your own land bank, and potentially dividends down the line if it makes sense.

Patrick Downey: Yes, and remember, we've been developing this for a while. I became CEO in 2017. It's taken a while to turn it around, realign it, get the right development strategy, get the team on board, then we went through the Burkina and the Covid issues. We've been patient in getting where we wanted to be. We won’t be losing our patience overnight. We developed this company and this asset the right way. 

Matthew Gordon: After you made the announcement on the financing, it looked like there was some selling. Was that just the market or was someone talking to you? 

Patrick Downey: That's generally the case. There was some selling and perhaps some people thought a takeover was happening. We've seen it with many other single-asset companies when they announce their financing. However, a lot of guys who have seen that weakness are now buying because they see this as an easy double. I don't lose sleep on that. I don't look at my share price every day and worry about it. I know where we're going. I know what the value is. I know what's going to happen, and bit by bit we'll keep building up. As you said, we've come up a lot since we last spoke. I expect by the next time we speak; we will be up further because we will have been developing and adding value to the project. 

Matthew Gordon: Which exchange will you be on?

Patrick Downey: Good question. We’d like to be on the TSX. We are based out of Africa. London has some attractiveness. I'm not sure we can do it all during Covid, but certainly we could do the TSX at this time.

Matthew Gordon: Lovely speaking to you as always. Well done. It has been a good year for you. I’m looking forward to seeing how this build out goes.

Patrick Downey: Absolutely. Thanks very much.

To Find out more, go to Orezone Gold's Website.


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