Gold: Have your cake and eat it too

Investors love leverage.

This is especially the case for speculators in “junior” gold stocks, which tend to outperform bullion’s upwards-trending spot price by orders of magnitude. And it’s been a winning strategy so far this year thanks to a rising tide market for gold.

However, there’s a drawback to this stock picking strategy. Most of these publicly traded companies have no revenues. And they’re entirely reliant on the capital markets for cash handouts that can seriously dilute their stocks. So their future financial survival is never guaranteed.

Worst of all, they’re unable to cash in on gold’s resurgence because they’re not actually mining gold.

But what if investors can have their cake and eat it too? This involves owning inexpensive gold stocks that are underpinned by actual gold production.

Such a scenario provides all the upside that gold juniors enjoy in a hot market. Yet the advent of steady cash flow, as well as earnings, also significantly limits the downside risk for any gold stock. In essence, it’s an ideal insurance policy for investors.

Golden Dawn Minerals is poised to become one of these much-envied investment situations.  The company is gearing-up to breathe new life into a past-producing gold/copper mine in southern British Columbia – one that is scheduled to be up-and-running by Q1 of next year.

It is also forecast to be a low-cost producer, which is a considerable rarity these days.

In fact, engineering studies demonstrate that gold can be mined, processed and  shipped to market for as little as US $820/oz in “all-in sustaining costs” (which includes all other corporate operating expenditures, as well as royalties). This translates into a very enviable operating margin of US $430/oz.

By comparison, most of the world’s gold mines cost around US $1,100-1,200 an ounce to operate, which explains why so many of them have been unprofitable as of lately.

Two more small proximal gold/copper mines are also expected to be re-activated by Golden Dawn after Lexington-Grenoble is brought on-stream. All three projects are situated in what has traditionally been a fertile gold and copper mining district for over a century. Known as the Greenwood mining camp, it’s mostly seen small-scale, non-mechanized artisanal mining that has barely scratched the surface.

This helps explain why there’s still nearly 100,000 ounces of relatively high-grade gold waiting to be extracted from Golden Dawn’s past-producing Lexington-Grenoble deposit.

This well-outlined gold asset has been extensively drill-defined by no less than 232 drill holes. (More drilling is planned to outline more gold resources, with a view to doubling the mine’s life to at least 10 years.)

Most importantly, the mine is already permitted, meaning that no regulatory roadblocks stand in the way of it becoming a turnkey solution money-maker.

Furthermore, virtually all the necessary mining infrastructure is already on-site, including a modern mill and a tailings storage facility, which are valued at over CDN $40 million.

(The mine was originally commissioned in 2008 but production ground to a halt after only a few months when its former operator, a small mining company, ran into financial trouble. At the time, gold was trading at around US $750/oz -- a significant discount to today’s buoyant prices).

The mine also benefits from ready access to a power grid, a water supply and a nearby highway. It’s also close to the town of Grand Forks, where a skilled labour force and mining supplies can be easily sourced.

Golden Dawn forecasts that it can reactivate the mine for as little as CDN $9.6 million, which includes paying-out its current owner. (Golden Dawn currently has an option agreement in-place to buy the mine outright for a fraction of its assessed value. The necessary cash infusion is expected to take the form of a prospectively non-dilutive debenture financing).

The company also computes an average output of 20,700 ounces of gold equivalent (the combined value of gold and copper) per year over an initial mine life of five years, totalling 104,000 gold equivalent ounces.

All told, the mine is forecast to generate an average of CDN $8.6 million a year in post-tax cash flow, based on cumulative revenue of CDN $157.8 million over five years (assuming a price of US $1,250 oz/gold).

For readers who love to study metrics, this mine offers a pre-tax net present value (NPV) of CDN $32.5 million at a 6% discount rate and an internal rate of return (IRR) of 72.6%. Projected payback on the capital expenditures (start-up costs) is a little less than two years.

These metrics have all been calculated by an independent engineering firm by way of a preliminary economic assessment that was announced last month.

The proposed reactivation of the Golden Crown gold/copper deposit (where 62,500 ounces of gold equivalent have been clearly outlined to date) and Golden Dawn’s wholly-owned, past-producing May Mac gold/silver mine also promise to boost the company’s annual yield. At the same time, they also offer the prospect of cost-cutting synergies to further strengthen the company’s bottom line.

So what does the investment community think of Golden Dawn’s game plan?

“It’s a good leverage play,” according to Rodney Stevens, a Vancouver-based senior mining analyst with the investment bank RCI Capital Group. “And it’s a perfect opportunity for a small company like this one because it’s a manageable, bite-sized project.”

“So they’re in a sweet spot in terms of the company’s risk/reward profile,” he adds. “And shareholders should enjoy a lot of upside as they go into production.”

The principals of do not own shares in any of the companies mentioned in this article. 

About the Author

Marc Davis is managing editor of