By Marc Davis
It promises to be one of the world’s lowest-cost gold mines. So suggests an updated pre-feasibility study (an initial blueprint for a mine) for the Mara Rosa gold deposit in Goias State in central Brazil.
The study’s findings were just announced by the deposit’s owner, Amarillo Gold Corp. (TSX.V: AGC) with its filing of the pre-feasibilty report on SEDAR.
All told, the production profile metrics suggest that Mara Rosa has what it takes to be a profitable mine that is inexpensive to build and relatively cheap to run.
Most notably, the one-million-ounce, near-surface deposit is shown to be capable of yielding around 112,000 ounces per annum for at least eight years. And it can be mined by open-pit extraction (a simple, quarry-like operation).
Accordingly, all of this can be done for as little as US $627/oz in “All-in sustaining costs” (total production costs).
By comparison, most of the world’s gold mines cost upwards of $870 oz/ton to operate in 2016, according to RBC Capital Markets. Such a scenario can make for perilously thin profit margins.
In comparison, Mara Rosa promises to be one of the world’s lowest-cost gold mining operations. And this promises to buffer the company’s profits from fluctuations in the price of bullion. It also represents a major differentiator for Amarillo Gold.
It also virtually assures Amarillo a fast payback on invested capital (only 2.2 years based on $1,200 oz/gold), as well as the prospect of a steady stream of robust earnings.
M&A activity in the sector is heating up. And the low cost metrics at Mara Rosa establishes establish Amarillo as a likely takeover candidate for several well-established, supply-hungry gold producers that are active in the same region of Brazil. (More on this in a moment.)
Why There’s Magic in the Metrics
First let’s look at some of the highlights of Amarillo’s updated pre-feasibility study for Mara Rosa in the following two tables:
Why Mara Rosa is Low-Hanging Fruit for M&A Suitors
With the likelihood of becoming Brazil’s next gold mine, Amarillo represents one of the ripest plums among the ranks of aspiring gold miners.
In fact, the Mara Rosa deposit has all the right characteristics and operational logistics to become a lucrative gold mine, which is a considerable rarity these days.
The story gets better. The deposit is located in a mining-friendly jurisdiction where there's plenty of other regional infrastructure in place to support a new mine.
This includes a hydroelectric power grid, a railway within 1.5 km of the deposit, a national highway only 11 kilometres away and a town of 12,000 people (which is also called Mara Rosa) about 5 kilometres away.
All of this promises to minimize projected “Capex” (mine construction) costs, as well as operational expenditures.
Mara Rosa's appeal to prospective suitors is further sweetened by the fact that it is located in a well-established mining district. In fact, there are several proximal mines, including Yamana Gold Inc.'s Chapada mine (35 kilometers away).
By way of explanation, the world’s dominant gold miners are doing all they can to significantly reduce their capital and operating costs just to stay in business. And the key to doing this is to acquire new gold assets that are complementary to their existing mines.
In other words, any proximal gold assets worth acquiring need to be both cheap and relatively fast to commercialize.
Mara Rosa measures up nicely in this regard.
It would therefore make economic sense for one of the region's big gold producers – namely Kinross Gold Corp., AngloGold Ashanti Ltd. or Yamana Gold – to eventually gobble up Amarillo. At least, this is the buzz among some of the industry experts who are following Amarillo’s emerging story.
In fact, the prospect of a rapid after-tax payback period of only 2.2 years should make Mara Rosa all the more appealing. This is because today’s gold miners are keener than ever to quickly recover any outlays of Capex expenditures.
It also bears mentioning that the up-front Capex costs of building a mine at Mara Rosa are relatively cheap by industry standards. At only around US $148 million, this adds to Mara Rosa’s appeal as a low-risk acquisition target.
Furthermore, the presence of shallow mineralization at Mara Rosa offers a favourably very low stripping ratio (the ratio of waste rock to ore), which makes for significant operational cost savings, too.
Other Key Value Drivers
Here’s something that’s been mostly overlooked by the investment community in the wake of this updated pre-feasibility study: Amarillo has made significant headway in recent months with its mine permitting process.
More specifically, the company has been issued a preliminary permit to build a gold mine -- something that represents another major de-risking event. This permit essentially represents both social and environmental acceptance of the mine proposal in Goias State, and also outlines a clear road map for obtaining final approval to commercialize Mara Rosa.
In other words, the company just has to complete the milestones laid out in the preliminary permit to receive this permission. Key components of this work will be the completion of the full feasibility study, detailed plans for the tailings facility, and the finalization of agreements to acquire surface rights. This is all expected to be achieved within the next 12 months
The company now has to demonstrate to the state government that it can operate a successful mining operation, without posing any threat to the local environment. This is expected to be achieved by way of the company completing a full bankable feasibility study (a final blueprint for a mine) within the next 12 months.
Assuming it gets the final go-ahead, the mine promises to generate in excess of US $1 billion in gross revenues, of which about $300 million will be paid directly in federal and state taxes, with further taxes to be paid in payroll and value added tax (VAT). There will also be a 1% production royalty to be paid to the government.
The benefits to the community in the town of Mara Rosa and the surrounding district should be numerous and would include approximately 300 permanent jobs in the local community, as well as many more spin-off employment opportunities.
On a technical note, the company has about 80.25 million shares outstanding (86.98 million fully diluted) of which about 40% is institutionally held and around 15% is owned by management and the board of directors.
The company recently completed a $3.3 million private placement by issuing 1.3 million shares at $0.32 per share without a warrant.
At under $0.50 a share, the company is trading at a discount to its peers -- companies with comparably-sized projects, and at a similar stages of development. In this regard, Amarillo is trading at around 0.16 X net asset value (NAV) versus a peer average of 0.4 X NAV.
The granting of a preliminary mining license, as well as the demonstration of very robust project logistics at Mara Rosa, are crucial value drivers that have set Amarillo on course for a very bright future.
Ultimately, Amarillo is well-positioned to capitalize on a resurgent gold market in the most meaningful way -- by inexpensively mining up to one million ounces of gold over a mine life of at least eight years.
With such low Capex and production costs, Mara Rosa promises to be one of the world’s most lucrative modestly-sized gold mines. This competitive advantage will therefore make Amarillo an attractive takeover candidate during the balance of 2017 and beyond.
In closing, the company’s enterprise value is well deserving of a positive re-rating by the investment industry. In turn, this should help power an ascendant share price that is destined to go from strength to strength.
About the Author: Marc Davis has a deep background in the capital markets spanning 25 years. He is also a longstanding financial journalist, having worked for leading digital financial news agencies in North America and in London’s financial centre. He is also a former business reporter for CBC Television. Over the years, his articles have also appeared in dozens of digital publications worldwide. They include USA Today, CBS Money Watch, Investors’ Business Daily, the Financial Post, Reuters, National Post, Google News, Barron’s, China Daily, Huffington Post and AOL.