The shock of past downward projections belies the true value of established gold miner Guyana Goldfields’ Aurora gold mine, says Investor’s Digest of Canada junior mining stock columnist Mike Kachanovsky. He calls Guyana a bargain stock and says a rebound in this sector is long overdue.
There is a lot of commentary circulating in the precious metals sector about where the final bottom may be found in what has been a grinding bear market. Some people believe that the sector has already transitioned into a new bull market phase in the aftermath of the 2016 lows for the price of gold.
However, silver and platinum have continued under pressure throughout this year and the mining stocks are struggling to maintain even the multi-year lows of the current price regime.
My opinion is that we may not have found the ultimate lows for the sector but we can probably see it from here. The rebound will be a gradual process as the metals and stocks recover and then start marching higher from the bearish extremes of several years.
The sentiment across the board is worse than I have ever witnessed over a span of 30 years in this sector. Institutional money is throwing in the towel as a number of precious metals funds have either been wound down altogether, or significantly reduced their weighting of precious metals sector holdings.
It should come as no surprise that this was exactly the sort of market reaction that was underway at the start of this century, shortly before the commencement of a powerful bull market for resource stocks that went on for a decade.
One junior gold mining stock stands out
I could write about several dozen mining stocks right now, with impressive fundamentals and superb value in this market environment. However, circumstances have positioned one investment prospect at the top of my list as an ideal candidate for a strong rebound.
Toronto-headquartered Guyana Goldfields Inc. (TSX—GUY) is an established, profitable gold miner with a large mineral inventory to sustain operations for many years into the future, as well as exceptional discovery potential that promises to build on that resource leverage even further. As its name suggests, the company operates in Guyana, a stable English-speaking country located in South America that is a significant gold producer.
The company controls the Aurora gold mine there, which it established through several years of successful exploration and a well-executed development plan. As it stands today, the Aurora mine is slated to produce in the range of 180,000 ounces of gold during the 2018 fiscal year. This estimate had been updated after management reduced guidance roughly 10 per cent from projections issued earlier in the cycle. A round of selling after weaker-than-expected second-quarter financial results and short-term operating issues disappointed the market and drove share prices sharply downward.
The second half of the year should generate improved operating performance as planned expansion of the processing plant gains traction. Even with much more conservative guidance in place, Guyana Goldfields is well-positioned to deliver exceptional cash flow from operations despite the current sluggish gold price regime.
Transitioning to underground from open pit
Aurora is gradually transitioning from open pit mining to starting higher-grade underground mining of the main ore body. All-in sustaining costs (AISC) are estimated to remain below US$1,000 per ounce of gold this year. As Guyana Goldfields develops additional gold zones into 2019 and production increases, it expects AISC to decline further and this will contribute to much more robust operating margins.
The company is accelerating payment of the structured debt facility it took on to fund the mine construction. At the end of last quarter, $50 million of that debt remained. Management has indicated a priority to retire this debt load and recently divested ownership of another gold asset in Guyana to raise additional cash earmarked for early debt repayment.
Guyana Goldfields may take a much more aggressive posture to its growth plan once the covenants related to its debt obligation are removed. Exploration spending will become a greater priority.
Several high-profile discovery zones have been somewhat neglected while the mine development phase was underway. Given the exceptional success the company has already demonstrated at the end of the drill bit, one may expect further meaningful upgrades to the gold resources for this project in the future.
A strong balance sheet provides a measure of financial stability, bolstered by more than $60 million in cash. The gold endowment for the Aurora project also builds confidence.
There are more than six million ounces of gold in the Measured and Indicated categories, plus another 1.7 million ounces Inferred, which should keep this mine operating long into the future. For a company with a market cap in the range of half a billion dollars, this is one attractive metric.
More than 250,000 ounces a year for 16 years
The most recently updated mine plan presents a production profile averaging more than 250,000 ounces of low-cost gold per year, spanning a 16-year mine life. Annual production is set to increase, and operating margins are set to become even more attractive in the next couple of years. If there is a meaningful boost in the spot price of gold, this will turbo-charge the earnings potential for this project and potentially catapult the stock to a much higher market cap.
Due to rebalancing of institutional ownership, intense selling pressure into the end of September drove the stock down to price levels unseen for several years. Suffice to say the bad news from one weak quarter has been fully priced in at this point but this company remains exceptionally attractive for long-term growth.
Considering the entire sector has already endured one of the most severe corrections in history, one may expect that sooner or later, as the gold price reacts to positive overall fundamentals and begins trending higher it should drag along the mining stocks to another bull market. I look at this current price range as a short-term opportunity and expect significant gains through the long-term recovery.
For an established low-cost gold producer, with extensive developed infrastructure, an enormous mineral inventory to support a very long mine life, and exceptional exploration potential that can further extend operations, Guyana Goldfields is a bargain stock that should be on the radar screen for investors building exposure to precious metals. The rebound in this sector is long overdue.
Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.
This is an edited version of an article that was originally published for subscribers in the October 19, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •10/22/18 •