Teranga Gold (T.TGZ) recently reported record first quarter production of 70,727 ounces of gold at its Sabodala Gold Mine in Senegal, West Africa, a production total that was just shy of its best quarter ever. However, beyond the production milestone, what is key for Richard Young, President and Chief Executive Officer of Teranga, is the free cash flow generation that paralleled record production. The company reported free cash flow per ounce of $144.
“Our first quarter results were robust driven by last year’s production deferral, record high mill throughput, and lower costs,” stated Mr. Young. “Based on this strong start to the year, we are on track to achieve our 2016 production guidance of between 200,000 and 215,000 ounces of gold.”
We spoke with Mr. Young to reflect on the strong start to 2016 and where the focus lies following the release of its updated NI 43-101 plan filed in March.
According to Mr. Young, “Our new mine plan reflects improved operating flexibility, lower costs and increased cash flow. In the new 43-101, we plan to mine less material each year and extend the mine life to about fourteen years which produces the highest cash flows. It’s all about producing profitable ounces in support of sustainable free cash flows over the life of mine, rather than reaching record production levels but not generating free cash flow. Long-term sustainable free cash flow generation will strengthen an already strong balance sheet and fund our growth initiatives. Right now for Teranga, this means organic growth through exploration of our large land package as well as growth initiatives that leverage our existing infrastructure.”
On the exploration side, Teranga has a property which includes a mine license of 291 square kilometers and a regional land package of approximately 1,000 square kilometers on the same greenstone belt that hosts multi-million ounce deposits in both Senegal and across the border in Mali. “We have identified approximately fifty prospective targets, large targets that have the ability to host significant mineralization, which we expect to drill over the next several years. We have three drills rigs turning today to test some of these prospective targets,” said Mr. Young. In support of a renewed commitment to exploration, Teranga has appointed its first Vice President, Exploration, David Mallo, who has a long track record for the discovery of major deposits, and the Company has increased its exploration budget for the year from $8 million to $12 million.
At the same time, Teranga’s free cash flow allows the company to undertake growth initiatives that leverage its existing infrastructure to expand production. “At the moment, our process facilities are crusher constrained. Typically, a crusher will operate 70% of the time while mills will run more than 95% of the time. We are building a second parallel crusher that will give our crushing circuit a combined 90% operating time, which will allow us to increase throughput by about 15%.”
The benefits of leveraging our mill can be seen in the record throughput in the first quarter, 22 percent higher than the prior year period, due in part to better blend of ore and design improvements to the mill in late 2015. Increasing throughput at the mill will be a key factor in Teranga’s future success. “This will also allow us to bring forward and start processing the lower grade stockpiles that were originally stockpiled for processing at the end of the mine life. The 15% increase in throughput is expected to result in an internal rate of return of around 55% at a $1,200 gold price,” said Mr. Young.
Having a great deal of flexibility in mining, such as sourcing ore from various pits to optimize blend and having a large, low operating cost mill, are big advantages for Teranga but that is only one side of the equation: the other side is the impact of the market price for gold. “The world’s mine supply is declining,” said Mr. Young. “Globally the industry saw peak production last year and it is anticipated that there will be a general decline in global production going forward.”
“I think we are in the golden age for gold mining companies. In 2013, gold turned over and mining companies adjusted. Everyone focused on cost cutting,” said Mr. Young. “As gold prices move up we’ll see stronger earnings and cash flow from the industry, which means gold mining companies in general should do very well. We are already seeing this with the share prices of many gold miners doubling since the beginning of the year as gold prices have improved.”
For Teranga, with cash in the bank, no long-term debt, an ongoing exploration program and free cash flow on every ounce of gold mined, the future is very attractive indeed. A fact which the stock market is starting to acknowledge. Teranga traded as low as $0.38 in early February 2016, at time of writing it is trading up as high as $1.16 per share. Teranga has 392 million shares outstanding and a market cap of more than $400 million.