Steppe Gold (STGO) - Gold Producer Playing Catch Up
Steppe Gold is a precious metals extraction company that is projected to produce 60,000 ounces of gold annually from its ATO Gold Mine in Mongolia. Upon the completion of its Feasibility Study, the expansion of this mine will bring the production to approximately 150,000 ounces of Gold per annum through the development of the underlying fresh rock ores.
We met with Aneel Waraich, the Executive Vice President and Director of Steppe Gold. He shared interesting developments on the Gold and Silver extraction projects in Mongolia.
Steppe Gold is listed on the main board of the TSX, the Mongolian Stock Exchange. It is a precious metals company primarily focused in Mongolia. Steppe Gold went public in May 2018 and managed to raise CAD$25M at a $2 unit offering with warrants through their IPO in 2018. They are currently producing Gold and Silver from its heap leach phase 1 operation, and will be rapidly expanding into phase 2, which consists of a CIL plant and floatation circuit. The company brought its production online in April 2020.
The Challenges of Running a Mining Operation Amidst a Global Pandemic
During the first 9 months, Steppe Gold was hoping to target 50,000-60,000 ounces from the phase 1 mine. And in 9 months, they were able to produce 35,000 ounces of Gold. This helped them produce a steady cash flow with a 100% Mongolian team, as no ex-pats were allowed in the country due to the pandemic. There were bottleneck issues such as crushing. A Secondary crusher was bought to helped remedy the situation.
Matthew Wood has built 8 heap leaches around the world, and the person with the most experience in operating in Mongolia, couldn't get into country. But they managed to put the plan in action. Wood has been in Mongolia for over a decade, built and sold successful companies, and has strong relationships with the government, the locals, and a skilled labor force.
The 2021 projections for Gold Mining
Phase 1 was a simple process and a stepping stone to a much larger mine that lies underneath the surface. It gives the company the security of cash flow to fund further growth rather than being worried about raising money through the market or other resources, giving Steppe Gold direct control over its growth and expansion.
Phase 2 is a lot more complex since a CIL plant needs to be established. A Bankable Feasibility Study (BFS) is already in motion. Numerous samples have been taken from the resources which have been doubled from 1.2Moz to 2.45Moz which significantly ramps up phase 2.
The results of the Feasibility Study (FS) are 1.6Moz - 1.7Moz of indicated Gold and another 20Moz of Silver, including Lead and Zinc.
In the phase 2 extension, Steppe Gold is planning with debt of 60-70% which is estimated roughly around $105M. The government has already provided a $10.5M tranche as a lead order.
They are trying to source an additional $50-60M from Mongolia or from the Asian banking community.
Structuring of the IPO-led Funding
After raising CAD$25M (USD$18M-19M), there was still a shortfall on the construction front, which cost around USD$20M - USD$25M.
During phase 1, Steppe Gold was able to raise convertible debentures, which were converted into equity in the last 8 months without having a major impact on the overall stocks.
The second round of financing amounted to $8M. An additional $2M in equity was raised just before the production had begun. The government of Mongolia came in with an investment of USD $3M last year as the last tranche of pre-production capital.
The company is currently looking at a 3-year plan where they plan to create a sustainable business that can maintain a healthy cash flow, along with bringing phase 2 online. The chances of a trade-sale happening in the next 3-5 years are significant as the company plans to de-risk while also growing its production profile and resource base.
Royalty and Streaming deals: Triple Flag and Elliot Management, NY
Steppe Gold bought a streaming deal in the beginning. Triple Flag Mining Finance has been their partner since 2017. They acquired both tier asses for $20M before they were public. They further built it for another $20M and generated additional revenue of $25M in the first quarter. Triple flag came in for both equity and a stream.
Triple Flag and Elliot Management New York, who is also their backer, put in equity of $7M at $2. This was more than just a streaming transaction, but also worked as aligning interest as their partners, but also as equity investors.
Projected Profit Margins
After factoring in the costs, the profits are $750. At the current market price, it comes out to around $1,000 ounce, a high margin for the smaller phase 1 production profile. The profits are expected to grow significantly in the next 3-4 years as the production ramps up. It's a high margin starter mine that continues to be optimized, and it is hoped that the all-in costs will come down to around $700.
The company plans to bring in more financial institutions on board. Eric Sprott, who is an institution joined last summer. Fidelity Investments own under 5% of the company as of today. A block trade was arranged in early March 2021.
In the last 2 years, people have been focused on phase 1. The company has been able to show that the resource report is 2.45Moz while still being at a shallow depth of 400m.
Steppe Gold has the resources and a definitive path for phase 2 and that the company can sustain this growth. The management and the board accounting for close to 20% of the company.
The Altan Tsagaan Ovoo (ATO) Gold and Silver Project
2021 is the first year for the company in ATO Mungu. Mungu refers to Silver in Mongolian. ATO Mungu is part of the 2.54Moz resource the company has updated, up to 400m of depth.
In the coming months, Steppe Gold is planning to explore the surrounding 1-5km area of the core deposit. They have the financial stability to explore the underground component for unexplored higher-grade chutes.
All the capital invested in drilling so far has been focused on extensional or infill drilling. Equipped with an estimated budget of $3M - $4M, Steppe Gold plans to drill between 10,000m-20,000m at ATO Mungo, which is expected to lead to new discovery and/or extensions. There are high chances to encounter significantly more Gold, Silver, and other precious metals on this deposit.
The second project being run in Southwest Mongolia is located 1,500km from the main site with a 14,400-hectare area. This area's license was acquired 3 years ago and the company has carried out the groundwork, IP, magnetic, soil sampling, and trenching from the surface last fall. The company yielded positive and encouraging results with 1.5g/t Gold, 450g/t Silver, 4% Copper, and 4% Zinc.
The company is mobilizing a drill rig which is expected to venture below the surface in the coming weeks. This is expected to be a 10,000m program and additional drills will be added to the project as required.
Steppe Gold has added around 425,000oz Mungu to about 350m which is a shallow, high-grade fresh ore deposit. Mungu has about 25,000oz of oxide from the surface down to 8m. The phase 2 expansion along with the CIL plant will benefit the oxide reserve extraction through higher yield counts.
Currently, the company is achieving a 70% recovery on Gold and 40% on Silver. In phase 2, the company projects that the recovery will increase to 85% and 90% respectively.
Current Cash Flow Reserves
The company has $30M -$35M on its balance sheet with expected steady growth. Based on the projections of the 50,000oz yield an additional $20M - $25M to the free cash flow in 2021.
The net exploration spend is expected to be around $5M -$6M between the 2 existing properties. Along with the sustenance of Capex, paying taxes, the company is still expected to manage additional cash on the balance sheet, which will then be utilized to fund the phase 2 expansion.