African Gold Group, Inc (CVE:AGG) CEO Danny Callow has maintained that 2021 will be a transformational year for the company as it positions itself to become Africa’s next mid-tier gold producer thanks to rising reserve estimates at its Kobada gold project in Mali.
A definitive feasibility study (DFS) published last year shows the mine has about 755,000 ounces of reserves. An updated study, due out in the next month, is likely to reveal even more. That could put the company on the radar of institutional investors and financiers to help take the project forward.
Callow has over 25 years of experience in building and operating mines in Africa and has overseen more than $2.5 billion in greenfield and brownfield mining projects from conception through to full production. He’s the former head of African Copper Operations for Glencore PLC and the former chief executive officer of Katanga Mining.
Proactive sat down with Callow to dig deeper into Kobada’s potential as a low-cost producer in a high-price environment.
At current gold prices, it must be a good time to be in the sector?
Absolutely. People always look at marginal down dips in gold and think it’s negative, but I think everybody should realise that at around $1,800 per ounce pretty much every single gold operation in the world right now is highly profitable.
That being said, obviously, we always look at the possible downside to see whether this is a good project at lower gold prices and that’s important. I’ve always been a firm believer in making sure that whatever studies we do, we also make sure that we use very conservative assumptions so that we’re not operating right up at that sort of aggressive end of the future gold prices.
You’ve seen over the past few months a lot of uncertainty in the recovery of the global economy. You’ve seen a lot of central bank buying and that leads to a fairly positive story for the gold price so I’m still very bullish on it.
If you have a look at long-term prices, they’re still very much up in the $1,650 to $1,800 range and that bodes very well for most of these West African projects.
How is African Gold positioned to take advantage of this?
At African Gold Group, we’ve gone through a fairly lengthy process of consolidating all of our technical information into a very robust, independent study in July of last year. So, we’re fully permitted, we have a very independent, definitive feasibility study, which shows a very robust investment case for the project.
We are well situated geographically in the southwestern part of Mali, well away from any of the bad news that you hear coming out of the central and the northern side, and we have all our licences and permits in place. Coupled with that we have myself on board with a background in building and constructing and operating mines in Africa. We’ve got the skeleton of a very good team that we will pull in once we move into construction, and we really are only one of a handful of companies that are in the position to be able to push the button quite quickly on moving into a construction phase.
Yes, there are a lot of explorers and developers out there that are in various stages of finding and developing their resource and completing their technical reports. We’ve done all of that, so we are ready to push the button, based upon how successful we are in finding the financing to develop it.
Why was it necessary to update the previous DFS, which was released a year ago?
If you’re drilling, you should continually update your resources. That’s normally a fairly good standard to stick to because a study is only as good as the most recent information.
When we made a decision last year to release the definitive study in July, we had to have a cut-off in terms of the drilling to be able to get all of the resources and the reserves and everything calculated. And that cut-off was around December of 2019, and we’ve left out a lot of drilling as we were waiting for results to come through.
We always said that we would like to continue to do some more drilling, which we did in September of 2020 through to January of 2021. So, all of that additional drilling was not incorporated in last year’s definitive study.
On top of that, last year’s study never had a look at the sulphide side of the resource because, again, that needed a lot of test work. We focused very much on the oxide and the transitional zone.
What we’re hoping to find is a bigger resource, a bigger reserve, and the opportunity to be able to treat the sulphides which are very amenable to thorough treatment through the process that we’ve already designed. And hopefully, something that is longer mine life, and potentially even bigger output. So for me it was always important to do that.
You previously said Kobada could become a three million to five million ounce gold deposit. Could it be even larger?
We’d love to think it will be larger. I’ll certainly stand by my comments, and I think that we have only really scratched the surface of this deposit.
To put it into perspective, we’ve identified around 55 kilometres (km) of shear zones on the property we’ve drilled 4 km so we have about 51 km yet to drill. When I say identified shear zones, obviously it’s not to say that all of those are going to be mineralized, but they’re certainly showing the same sort of geological structures that we’re seeing in the 4 km mineralized zone. This gives us a lot of confidence that we’ll find more within the other 51 km. If 4 km are giving us 2.3 million ounces, which is our current resource measured, indicated and inferred, then I would probably say that there’s a very good chance that the three to five million ounces number is very attainable. Again, it depends on how much time and effort we focus on drilling over the next couple of years, and whether the intention is to grow something into a substantially larger resource through continued drilling or whether we believe we’ve got enough to get into production and start to generate some cash flows.
What are the merits of starting construction of the mine as soon as possible rather than postponing construction while you continue to drill and raise the reserve?
The obvious argument for starting construction is that we would be in a position to generate substantial free cash flow 19 months after we start construction. In our case, in last year’s study, we have an all-in sustaining cost number of $782 an ounce. At $1,800, that’s a $1,000 free cash flow margin before tax and that’s the substantial cash flow that this project would develop. That is the obvious advantage there. The downside of that is that you don’t want to start construction with a financing package that is value-destroying in terms of cost of capital to the current shareholders and investors, so we’ve been very careful about raising the finance to make sure that we’re not raising it at a cost of capital that’s prohibitive.
On the other side, we’ve seen very successful companies that have put their head down and continued to drill and grow reserves and resources substantially over a couple of years. We believe that in the next few years we can substantially grow resources and reserves as well
If the decision from the shareholders saw the value in putting the drills back into the ground for another couple of years to grow the reserve, perhaps to one-and-a-half plus million ounces, that would be something that we should also consider.
But I think the bottom line here is that everything that we’re doing now has got to be value-creating, so we’re not looking to rush into something at an excessive cost-of-capital financing package that is debilitating to our current and loyal shareholders, but at the same time, we do have a project that is ready to build, we do have a project that shows great economics, and it’s something that needs to be built. So, if we can secure the right sort of financing package, my preference would be to get moving and start to develop the project.
Do you think investors will re-rate African Gold Group based on the findings of the updated DFS?
I’d like to think that the results coming back will be substantially better. I don’t think we would have gone into this if we were not hoping for a substantial improvement, and the improvements that we’re looking at here are obviously increased ounces in terms of resources and reserves, which translate into increased mine life and hopefully improved economics in terms of the overall free cash flows that the project will develop. So, yes, I would hope that on the release of the report, the investors will see that this is an improved project from last year which was already a very robust project.
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