There aren?t many places where you can find a virgin gold resource exceeding 11m ounces excluding silver credits, so Greystar?s Colombian Angostura deposit sticks out amongst its peers. Set in the Columbian hills fairly near the Venezuelan border, Angostura lies 55km and just over two hours by road from the provincial capital Bucaramanga.
You are forgiven if you have never heard of Bucaramanga, but with a population of a million souls, it is the same size as Calgary, Alberta or the UK?s second largest city, Birmingham. In case you conceive it as a vast shanty town, it styles itself ?The Technopolis of the Andes? and boasts several universities and an educated workforce. Even the three small townships near Angostura have electricity, water, sewage and telephone lines. Road access actually comes with a choice of routes although improvements are underway. Hydroelectric power connected to the national grid criss-crosses the property and water is plentiful year-round.
Colombia.
Colombia itself is a country on the rise. Since his election in 2002, President Uribe?s strenuous efforts to stabilise the country have been bearing fruit and its previously dire economics are improving. That he was re-elected last year with 62% of the vote bears testimony to his success. The old image of leftist FARC guerrillas, right wing paramilitary death squads, cocaine farms and foreign hostages is slowly ebbing, although some with long memories will remember that Greystar had to pack up and go home between 2000 and 2003 for staff safety.
Colombia is lucky enough to have seriously prospective geology. Thanks to its hostile reputation, it remains under-explored despite housing no less than three major Andean cordilleran systems, all known to be associated with mineralisation. The country?s mining code is fair and reasonable and the investment climate is good. Colombia badly needs foreign investment and its government knows it.
Mining companies have not been slow to appreciate all this. Most of the gold mining is either operated by private companies or is artisanal, but BHP Billiton, Anglo American, Xstrata and Drummond all run large coal mines, while BHP Billiton also operates a nickel laterite mine. Evidently none of them regard Colombia as a no-go zone.
Angostura.
Back to Angostura. This huge deposit comprises a meshwork of higher grade shoots within a background matrix of lower grade material. The oxide cap is substantial with around 2m of the 11m ounces, which is a big plus. These near-surface oxides generate 90% recovery rates by simple heap-leach cyanidation and present a juicy, low-cost near-term target, but most of the value is locked away in the deeper sulphides.
Angostura?s sulphides have been stubbornly refractory, but solutions can be found to unlock most ores these days. Metallurgical work continues, but earlier this year the company announced very respectable recoveries between 82% and 92% for flotation followed by bio-oxidation, easily good enough to produce a positive scoping study.
David Rovig and team now face interesting decisions as to how to design the Angostura project. Option 1 is to market it as a humungous 400,000oz per year combined oxide / sulphide project from Day One and await a buyer. Option 2 is to work the low-capex oxides as Phase I for the first 5 years (probably at lower throughput), accrue capital and eventually proceed to mine high-capex sulphides with a much smaller burden of debt. The latter might well the preferred option if they are forced to develop it themselves, but it is worth noting that the recent scoping study ? admittedly provisional in nature ? proposed the ambitious version.
Why no takeover?
Greystar is rumoured to have entered into a whole string of confidentiality agreements with would-be suitors, so the obvious question is, why hasn?t anyone proffered an engagement ring to such a comely and ample maiden by now? Several answers coexist, but inadequate size clearly isn?t one of them.
Firstly, the IRR of 14% on the recent scoping study was perhaps disappointingly modest. Cash costs were good at $276/oz, but capex on this low-grade bulk-tonnage project will be hefty and debt considerable, so slow payback shouldn?t come as a surprise. However, let?s pause to note that the IRR was calculated using a conservative $515gold price and that leverage to gold price should therefore be good. Rovig and colleagues also reckon there is upside in optimising stripping ratios and enhancing recoveries, although this needs to be offset against the spiralling costs that currently bedevil all new mining projects.
Secondly, it is slightly surprising that with a resource of this size, not a single ounce is in the ?measured? category, let alone converted to reserve status. Lower confidence levels inherent within indicated (two thirds) and inferred (one third) resources will by itself deter a major from proposing marriage, and would-be suitors are likely to hold out for the definitive feasibility study.
Thirdly, despite my earlier fair words on country risk, some remains, both from home-grown insurgents and from cuddly next-door neighbour Hugo Chavez. However, as long as Colombia?s economy continues to grow at almost 8%, one would have thought the risk of catching Venezuela?s virus was low.
Fourthly, although it won?t trouble the majors already mining in Colombia, it should raise at least one eyebrow of any investor that Greystar is a one-project, one-country company with no diversification. If local politics went bad, Greystar would be in obvious trouble.
Valuation, sentiment and funding.
A year ago, Greystar?s share price hit a high of CAD$12.50 but has since pulled back sharply. Many private investors were expecting a take-out a couple of years ago and weariness ? perhaps even cynicism ? appears to have set in. News of another 25km drilling on top of the existing 225km clearly was not music to investors? ears, and nor was the timescale of a further year for the definitive feasibility study. The mine itself would take around two years to build after that.
Greystar?s pre-existing CAD$20m in the bank would have comfortably seen them through the next round of drilling, but wouldn?t have stretched to fund the feasibility study. Hence the company has just placed another 6 million shares at CAD$6.60 ? happily minus warrants ? to raise almost CAD$40m. The trouble was, the investing community saw it coming and the price collapsed to a two-year low despite the positive scoping study.
In those two years, Greystar added another million resource ounces, established deposit continuity and more or less solved the metallurgy conundrum. Not surprisingly, with this out the way, the price has recovered to $7.35 and is still climbing.
One man?s poison is another man?s meat, and newer investors may take a more upbeat view. Even after recent gains, Greystar?s current enterprise value is around CAD$27 per gold ounce in ground, excluding silver. 4% of the gold price seems lowly for a project of this size with a positive scoping study based on less than half the drilled resource. It will change.
Politics allowing, there is now little doubt that Angostura will one day be a mine.