Transcript: African Gold Group (AGG) - DFS Says Highly Profitable 100,000ozpa
African Gold Group is a Canadian-based company, which is engaged in the identification, acquisition and exploration of properties for mining of precious and base metals. The Company’s principal asset is a mining license located in Mali, West Africa, namely the Kobada Project. The Kobada Project is a gold exploration project with the potential to produce more than 50,000 ounces of gold per annum. The company’s other project is the Madougou Gold Project in Burkina Faso. The Madougou Gold Project is a mid-stage exploration project, located in the north-western region of Burkina Faso. The company’s subsidiaries are: 2516232 Ontario Inc, AGG Barbados Ltd, AGG Ghana Ltd, AGG Mali SARL and Arziki Mining Ltd.
0:00 – Company Overview
00:26 – Tiring Events, Gold Price & DFS Numbers
09:48 – Three Year Payback, Plant Study & Cash Flow
18:37 – Challenges, Investors & Project Timeline
30:29 – Outro
Danny Callow: I’m Danny Callow. I'm the Chief Executive Officer of African Gold Group. We're a TSX-V listed developer and explorer based in southern Mali. We've just released our latest definitive feasibility study showing significantly better results than the prior definitive feasibility study, and I'm very excited to be here today to talk through some of the numbers and the upside that we have in the company.
Matthew Gordon: It’s good to have you back on, we last spoke back in June. I just wanted to catch up as the DFS has come out, which was fantastic. I would say that your share price looks like most precious metal companies at the moment. But the other thing you can't get away from is the fact that this company is just not getting the love that you believe it deserves. You are a USD$22M market cap, and given what the DFS tells us it must be infuriating, or frustrating at the very least.
Danny Callow: Yes. It is. You can probably see that my hair has probably reduced a bit since the last chat, but it is frustrating. We're looking at some of the reasons behind that. Clearly, we are in Mali, and I think that a lot of people attach negative sentiment to that.
Matthew Gordon: Tell me about that. We've had a few Mali companies on here. We've had Roscan, Orzo, a few names, and they seem to be doing just great. Do you think it's fair to give you a Mali discount?
Danny Callow: I don't think it's fair. Mali is the 4th biggest producer in Africa of gold. It’s a very safe, stable mining environment. Good mining code. No negative news coming out like in other countries, where mining tenements are being taken away or taxes are being withheld. It's a really, really good country to do business in. When you start to hear the negative sentiment, that tends to be about terrorist activity. To put that into perspective, these things are happening 800-900 miles away from any of the mining companies, and not one mining company has been affected by this in the last 20-30 years. I think it's sentiment that's not justified. Unfortunately, we're tackling these questions every single time we get on a call.
I like Mali. Mali, like the rest of West Africa is a great place to do business. I've worked in some very challenging jurisdictions and Mali is not one of them.
Matthew Gordon: Where are you located? Are you near to any infrastructure that you can benefit from?
Danny Callow: Yes. We are just up the road from Hummingbird Resources, which is a producer. Hummingbird have done a great job in increasing their resources and reserves over the last few years. They've got a very nice sustainable 100,000+ hours of operation for the next few years, of producing good cash. They put a lot of money into other exploration assets as well. B2Gold is not far away. We've got Cora Gold next door to us and you've seen some good results coming out of them in terms of their drilling and resource upgrades. You've obviously seen things like the financing in some of the bigger projects as well. There are plenty of the majors operating there: IAM Gold, Anglogold, Ashanti, B2Gold, Barrick. They wouldn't be there if it was a difficult place to do business.
Matthew Gordon: Are costs becoming prohibitive? AISCs are going to be affected by inflation. The cost of transportation, materials, even people. Is that a big concern?
Danny Callow: It's not a concern in the sense that the AISCs are still significantly lower than the current gold price. I think you're going to see this year, AISCs of between USD$900-$1100/oz as a pretty standard number for most of the operating mines in this region. That being said, at USD$1,750 gold, USD$650 is not a bad free cash flow margin in terms of dollars per ounce. I think it's great. We will be producing upwards of USD$40-$50M in free cash after capital expenditure, taxes and royalties. People go on about the gold price but the gold price is generating significant cash flows in pretty much every West African gold producer right now.
Matthew Gordon: You mentioned last time a power solution, a sort of hybrid solution. Is that still part of the mix?
Danny Callow: Yes. We've had a good look at whether we can tap into the grid. It's challenging in Mali. There's not a lot of additional spare power there and therefore, most people go for a full carbon thermal generator-type plant. We need 20mw for this new DFS. We don't believe that the best way to do that is solely on heavy fuel oil and diesel for a number of reasons. Hence, we've gone for this hybrid, solar battery, diesel plant, which ultimately will save us about 43% off our fuel costs every year for generating power. We will produce power for probably USD$0.20c/kwh versus maybe $0.30c/kwh that the straight thermal systems are producing. On top of that, we've obviously got this big 40% reduction in carbon emissions and other noxious gasses. It's a win-win. It makes a lot of sense.
The other great thing about it is we're not putting the capital in to build it. We are doing it with an independent power producer. They're providing the capital. We signed a very clean power purchasing agreement, like you would normally sign with the government, and they're responsible for delivering us the power at our fingertips when we need it.
Matthew Gordon: It'll be interesting to see how you progress with that. People talk about being interested in ESG, I suspect your shareholders are more interested in how you get this thing moving? Get some big moments and get the cash flowing. Then ESG becomes an easier conversation to have.
Let's talk about some of the main numbers around the DFS because the bit that interests me, the bit that I think is a big deal and I don't know if perhaps people have missed it or not reacted to it, but you are now including the sulphides. That's a big change. Talk us through the DFS and some of the technical background to how you put the numbers together.
Danny Callow: That's a really valid point. 2 years ago when I joined this company, we inherited a project that clearly had some potential. It had some legacy issues, and certainly, the study that was out was a little fuzzy around the edges. We decided that the best thing we could do was to really focus on the technical side. I think we've delivered on that. We had a look at the geological structure, all of the drilling that have been done. We incorporated another 18,000m-19,000m of drilling, mainly infill drilling, to really firm up that geological model, and we’ve seen a significant increase over the last 2 years in resource and reserve. The reserve has seen the biggest increase: from 2020 2018 until now we've increased the reserve 148%. That's now at 1.25Moz. We ticked the box on the more than a 1Moz number. It was a criticism a year ago that we were 755,000oz reserve, we are now 1.25Moz.
What does that mean in numbers? It means we can generate 100,000oz/year for 10 years, obviously then it tails off a little bit. But then we have this massive exploration upside on the property that will ultimately fill that gap in at the back end from years 11 to 16 onwards. Resources-reserves were key.
The sulphides were absolutely key. Most geology tells you that the oxides are sitting on top with the sulphides underneath. We had a little bit of criticism last year that we hadn't touched the sulphides. It was intentional. We really were focusing on just getting the oxides into a really good study. We always intended to go back and treat the sulphides.
The test work we did on the sulphides was very comprehensive. What you look for there are: is it free milling? How do you process it? Is it through flotation or bi-ox? Fortunately for us, it was straight through a gravity plus CIO process and that means that we can use exactly the same plant for the sulphides as the oxides.
What this study is delivering now is a flexible process plant. You can throw in solely oxides, solely sulphides, a mix of both, anything you find on that property, this process plant can handle. Now we’re really gearing ourselves up for every single ounce of gold that we find in the future, over and above the 1.25Moz can go through this plant as well. That's what's really exciting about this study.
Matthew Gordon: Coming back to the initial cost, and I know you're going to optimize this over time, but what are you walking in with day 1? Remind me of the AISC and the CAPEX numbers.
Danny Callow: The CAPEX is about USD$165M, that gives you a fully-fledged 3Mt/year gravity plus CIL process plant, all of the associated infrastructure, all of the owner’s costs, contingency as well. It's still a very good number for the size of plant. It's about USD$19M higher than the previous study, and that's predominantly on additional steel price increases, but it's also on a slightly larger tailings dam as a kick-off. Ultimately, it's still very comparable to anything that you've seen in West Africa over the last few years in terms of capex. AISC is coming in at about USD$970. That is probably in that USD$900-$1,100 range I mentioned earlier on. I think you'll see most other miners coming in at that now. If you're under that, you are doing a great job. Again, it's giving us this USD$700-$800 free cashflow number that is still going to give us some really sizable, good free cash flows throughout the life of the mind.
Matthew Gordon: You've talked about that number in relation to what you are valued at today, which is just USD$22M-$24<, depending on the day of the week, which just seems ludicrous. But if I look at your background and your track record, it may be worth reminding people now why you would come in to a project this small, but when you mentioned the free cashflow with a 3-year payback, it makes sense, but you've got a lot to prove still.
Danny Callow: Yes, and we've had this discussion previously; why on earth do you need a company like Glencore, a major corporate, building billion dollar projects? Then you come into something like this that needs all the TLC that you have to do in a junior company to get it recognized and get it technically advanced. Unfortunately, I do things in big-company-way because I make sure that the technical side is defendable. We're not pump and dump. We don't get out there and use newsletter writers to try and get the stock up quickly and sell it. I've invested in every single capitalize raise that we've done. I'm an owner of this stock as well. I'm very, very, confident on it. But I do believe now that we've turned a corner in terms of being able to defend that technical side exceptionally well, and that's what's been key for me. It's been a little bit slower than I guess some of our investors would hope for. But now, I'm very confident to sit here and say, you can throw anything at this process plant. It will turn it into gold at 95% recovery, at free cash flows of USD$750/oz, for ad infinitum.
Matthew Gordon: Saying it and showing it are two different things. Show it, prove it. When we talk about the integrity of doing things right technically, having a big company mentality and not being pump and dump – what does that actually mean? Why are you so certain that this plant can deal with anything thrown at it. Why is it going to throw off 100,000oz/year?
Danny Callow: Firstly, the company that we've used to do the study, Senet, has built probably 12 or 13 of these plants. They've actually just finished a plant across the border in Guinea about 50km away. It's almost a carbon copy of this plant. Therefore, we are 100% confident that the design of this plant will do what it says on the label. There’s also the fact that I've built USD$2.5Bn of projects with Senate over the last 15 years. I trust them implicitly in terms of putting their capital numbers together and upon their ability to deliver on time and on budget. I've never delivered a plant late. I've never delivered it over budget with Senate, and that's why I'm very confident that these numbers are accurate, both in terms of capex and opex, and we have a great team with Senate on board, helping us all the way through this.
Matthew Gordon: The plant is on budget and on time. How do you know it's going to do what you want it to do because that's where the money gets created? So far you’ve just spent money. Why is it going to create and throw off so much free cashflow for you?
Danny Callow: The test work that we've done over the last 2 years has been phenomenal. The oxide test work alone for the DFS last year was more test work than I've ever done for any copper, cobalt or gold plant in the past.
Matthew Gordon: Why? Was it difficult.
Danny Callow: No, it wasn't difficult. What happened was that we inherited a lot of information where they went down the wrong path. When you question that, you have to go back and start right again from base principles, which includes drilling those metallurgical holes again, getting the samples. The biggest thing about any of these ore bodies is variability. You have to make sure that your test work encompasses anything that you're going to find along that strike, and that's what we did.
We went to 4 different ore zone domains which had slightly different geological structures. We made sure that we took enough samples from there. We tested it every which way you could and we made sure that when we say we're going to get 95%+ recovery, we physically have done that on test work with every single ore domain you can throw at it. That's why I can sit here today saying that we're not going to suddenly come up in 3 years’ time and say, oh we didn't realize that we couldn't treat the laterites, or we didn't realise that the sulphides were as hard as we finding now. We really have tested everything. That's why it's taken a little bit of time and money, but it's definitely worth it because once you've done it, you don't have to do it again. You're finding with a lot of junior miners that they rush from a PFS straight into production, get 50% recovery instead of 90%. Then they don't know why they're only getting 0.5g/t instead of 1g/t into their process plant. Then they realized that they didn't do enough technical analysis on the metallurgy before they did it.
Luckily, my background has taught be that you do that first because you're spending a lot of money that investors are giving you to make sure that you deliver on what you said you were going to deliver. I'm very confident on that.
Matthew Gordon: The timing could've been better; covid hasn’t helped. The market for precious metal coming off in the last 12 months hasn't helped, but you're doing things the right way you believe?
Danny Callow: Correct.
Matthew Gordon: 10+ years at 100,000oz. You feel very confident from the work that you've done?
Danny Callow: Yes. I feel very confident. I also feel very confident that there is actually much more upside than this as well.
Matthew Gordon: Remind me of that free cashflow number?
Danny Callow: It's about USD$600-$700/oz after capital expenditure and taxes. So you're talking in the region of USD$50M-$65M/year in free cash.
Matthew Gordon: How quickly? What’s the ramp up period?
Danny Callow: The beautiful thing about gold is that from 0-2 months you're running at full production. We start halfway through the first year and will produce 50,000oz in the first 6 months and then 100,000oz-110,000oz, all the way through for the next few years, and you hit those free cashflow numbers quickly.
Matthew Gordon: Where do you get the money from to build this? It is USD$165M capex, USD$25M market cap, if you’d have come trotting into my bank, I'd have said, no, that's too much. The delta is too big. Who do you go to? What money do you need to look at? Because you're going to need to get cute there, aren't you?
Danny Callow: I think you're 100% right, and because of covid, and because of a little bit of negative sentiment to gold and precious metals, the money that was probably there 2-3 years ago is not there now.
Matthew Gordon: It is different now, I would say.
Danny Callow: There's also a little bit of responsibility that we have as well to not go for money at any cost because ultimately, you have to give the shareholders the return that they expect. Interestingly, what we have seen over the last 18 months, because we've been talking to institutions quite regularly over that time, is that the big banks are starting to come back and get interested in projects again. We've had very fruitful discussions with 2-3 African Banks. They're not the cheapest of the big banks, but they're certainly not as expensive as mezzanine debt. We've had some really good discussions post the delivery of these results, where people who were on the fence of not really wanting to talk to us at 775,000oz of reserves are now starting to get very interested at 1.25Moz.
I think over the next 2-3 months, we're going to have some good discussions and pick up on some discussion that we were having post the DFS last year. We'll hopefully look to get one of those as a cornerstone. The discussions we've had are certainly very interesting, to the extent that we've got people in the data room having a good look at that. Clearly there's a mezzanine or hybrid debt entity to this as well. I don't think we'll get the full amount of debt from 1 provider, and that's fine. Whether that is normal debt or whether it's some sort of royalty or stream is yet to be seen.
I think that if you had to look at USD$160M, probably $110M of this will be debt and $50M-$60M will be equity. Once we get an announcement on a cornerstone debt provider, I think you'll see a bit of a snowball effect. We've seen that with Ore Zone and a number of these companies that were in this position a year ago, pounding the streets and really trying to tell their story, the all of a sudden you get a bit of a snowball effect where you get the first bit of secured debt and then a lot follows quite quickly. That's what I'm hoping will happen.
Matthew Gordon: Yes, we spoke to Ore Zone about how they managed to get that with local money. It's a really interesting challenge for you because the delta is vast, but it almost doesn't matter if you get expensive money up front because you can refinance it out relatively quickly as you hit certain milestones, one suspects, depending on what the securitisation component is.
You mentioned that people are still in the data room. Some people have asked about whether or not you have engaged advisors? How many investors are actually looking at this and of what type in terms of the money that they could be supplying? Are there any strategics having a look at this? Because I think the fear is that you end up giving this away cheap to strategic versus actually doing what your background says is: I can get this thing going.
Danny Callow: As an example, you've got someone like West African Resources who took the time to raise the money the right way and build their own mine. At the time when they were very cheap they didn't give the company away to anybody else. A strategic equity stake in a company is always good because they grow with you and there's always a bit of a backstop there as the share price grows. But you're 100% right: to sell this company, even at a 50%-100% premium to what the share price is now is crazy. The net asset value of this versus the actual market cap is crazy, and I think most people know that.
We do have a few speculators, people also love having a look around. We don't turn anybody away. We're always open to discussion, but I think everybody knows that we would be an absolute bargain.
It's difficult because we've also had a look at other options, such as, do we just keep drilling? Do we keep adding resource and reserve for this thing? The question then becomes: how much is enough? I believe we've got a great project and it needs to be built. Over the course of the next 6 months we will have a good advancement in discussions to be able to raise a large portion of the cornerstone debt for this, and you're right, it might be at quite an expensive discount rate, but so what? That will snowball and we know that we can build this thing when we get the money to build it. We know that gold is a good mainstay and a safe haven and I think it's going to stay up at these levels for a long time. Plus, there's not many of us around, there's not many projects ready to build in West Africa right now that that show these sorts of numbers.
Matthew Gordon: It's interesting for sure. With regards to where you're at today, cash is rolling down, you’ve a lot of people in your PowerPoint, but I suspect not a lot of people are actually doing the work. How are you managing the GNA?
Danny Callow: We've had a massive reduction. We were effectively a Forbes-Manhattan company, and in 2019 we did a fairly good hatchet job of removing all of that. We got rid of any relationships, we cut back on massive overhead costs, office contracts and all the other things that come with a Forbes-Manhattan relationship. We took about USD$60,000/month out of the GNA cost. Now we have myself, a part-time CFO, a part-time secretary, a vice president of corporate affairs and a small team on the ground.
Matthew Gordon: Help me here: you took out USD$60,000/month?
Danny Callow: Yes.
Matthew Gordon: By removing Forbes-Manhattan?
Danny Callow: Yes, because there were consulting agreements, offices, services agreements, etc.
Matthew Gordon: Wow. Can I just say? Unfortunately, that thing is typical of a Vancouver setup, and for investors watching this: that's the kind of thing you need to be cognisant of as these deals in some cases are terminal because it's lifestyle. You have now cleaned that out. There are no encumbrances. They do have some shares. Have they been dumping those shares and causing a bit of pressure on the market?
Danny Callow: Possibly. They haven't openly said it, but that is quite likely the case.
Matthew Gordon: You've done everything you need to do to clear that up. We did talk about it at length last time, so I’m cognisant that there’s no debts or encumbrances there other than whatever shares they choose to sell into the market. How many were we talking about at that point back in March?
Danny Callow: At the time they owned about 6-7% of the company. Post the raise that we did in March they did not come in at that last private placement raise so that probably diluted it a little bit. I would be surprised now if they own more than 3% combined between Stan and Forbes- Manhattan. They're not interested in participating in anymore raises. We're focusing very much on the main institutions now, to try and get some headway there. I think you're going to just see this fizzle out over the next few months. Frankly, I came into this company in August and immediately I just thought that we need to get away from this.
I've come from a strong corporate governance background where none of it fitted comfortably with me, and it took up until February-March of this year, but we managed to do all of it in one fell swoop. For the last few months we've been absolutely unencumbered and we've saved substantial sums of money. We're not spending investors’ money on ridiculous GNA costs and we're focusing it all on getting the numbers out through the drill bit and in the DFS.
Matthew Gordon: Part of the question I asked was how much have you got left? Where can you get to with what you've got left? What do you need to do with it?
Danny Callow: We probably can keep ourselves going through to the end of the year. That being said, it would probably be an idea that between now and the end of the year we may top up a little bit, not for any other reason, I just think that the end of the year/beginning of the year is always a bit rough with people going away for Christmas. There's plenty more we can do with the money, depending on what we want to do. We can we can put the drill back in the ground, it is prime drilling time now. We've got another 300,000oz sitting there that's easy to drill out. Also, our focus now is going to be on rerate and the money for this project.
Matthew Gordon: Is this 300,000oz of measured and indicated?
Danny Callow: Yes.
Matthew Gordon: What would that cost you?
Danny Callow: As a guess, probably CAD$3-4M to update the resource and get it into an additional resource.
Matthew Gordon: You don't need to do that now. With the DFS you've got, the conversation is going to be about furthering that and getting this thing working out.
Danny Callow: I agree.
Matthew Gordon: That's comforting for shareholders to hear, or anyone thinking of getting in here to hear.
I've got a bunch of questions that I could ask you here, but for me, what I want to be hearing about from you is that: those sorts of conversations where you are getting to. Have you actually hired anyone to help with this or are you managing this yourself?
Danny Callow: No, we have. We formed a special committee of the board about 4 months ago. We asked Cannacord to come on board. We've had a relationship with Cannacord for probably a little over a year now, out of London initially. Now we're seeing a lot of interest out of Australia and Australian institutions, so we're using more of the Australian Canaccord guys. They're quite busy at the moment in setting up meetings, like this post-DFS. We're certainly seeing interest and appetite from the Australian investor, which is interesting. They don't seem to be spooked so much with a small drop in the gold price or something that happens politically. They seem to understand this part of the world. Cannacord have been pretty good in putting us in front of some of those new investors that we haven't really dealt with before. We have good advice, and as we move more into the fund raise and trying to secure some of this debt and equity, we will probably formalize that a little bit more because they're experts in those sorts of things. But so far the relationship is fairly strong, but probably, we’d have to formalize it a bit more if we move into the next phase.
Matthew Gordon: That makes sense. I'll ask the question because it was asked of us, which is: is there any point during a market like this for a company of your size looking at M&A activity? By that, I mean you finding other projects that you want to raise money to acquire or JV into?
Danny Callow: M&A is an interesting one right now. A week ago we saw a massive Gold M&A transaction with Kirkland Lake being announced. That always has positive spin-offs down the value chain, to the minnows down the bottom. Notwithstanding the fact that they will start to digest some of their smaller projects, etc. We've seen it with Endeavor and Samafo. That being said, I don't think I would be interested in anything that was exploration or pre-development. If there was a producing asset that looked interesting and we could do something with, and not an end-of-life, 2-years left asset, maybe it would be interesting to us.
We haven't really been out there yet. We have been inwardly focused on trying to get these numbers together, and ultimately, right now that's what we're going to focus on. But we are always on the look-out for any opportunities. These things come by you quite often. I get a lot of projects on my desk. But this has solely been my focus, to try and get this into a position where we are confident that we can put someone in the data room. We can answer any of their technical questions. The financial model can stand up on its own and people can see the value in the project.
Matthew Gordon: I wanted to ask as, obviously, you don't mind a project with a bit of hair on it, one which takes a while to sort out, and the value eventually comes. Whether now's the timing or not is another matter. Talking of timing, funding is the long pole in the tent. You don't know how long that's going to take. We've agreed that it perhaps doesn't even matter what the cost is right now, but from funding, how long's it going to take to build this thing and get into production, whatever that run rate looks like initially?
Danny Callow: 19 months first gold and by 21 months for production. The nice thing about gold is that it's a fairly straightforward process. There's nothing too complex about. It is slurries and, reagents and providing you put them in the right quantities, Gold comes out the end in good recoveries. 19 months: we are very confident. Senate have just built one in about that time, as I say, just across the border, and a very similar plant. So I'm confident on those numbers, and that's a fairly nice aggressive timeline.
Matthew Gordon: Danny, good update. I appreciate you coming on and sharing that with us. Stay in touch with regards to the funding component. I think that's what everyone's watching out for, everything else is a distraction I suspect. Looking forward to speaking to you.
Danny Callow: It was great to be on again. Thanks a lot.