Galiano Gold (GAU) - Turnaround Story Ramps Up Exploration Excitement

McCunn is a sharp operator. When a gold producer turns its focus away from searching for ounces in favour of creating cash, it allows the company to leverage the current gold bull environment rather than looking for potential that may go unfulfilled. Ounces in the ground are all well and good, but free cash flow gives a company options. This has been reflected in Galiano Gold's share price recently: it is up 50% since when we last spoke in June.

Galiano Gold used to be known as Asanko Gold. The company has established itself as a mid-tier gold producer having started production in 2016 at its Ghanaian gold mine: Asanko. The gold mine is operated in a 50:50 JV with Gold Fields (JSE, NYSE: GFI). It is throwing off around 250,000oz gold pa, solidifying the company's status as an established mid-tier gold miner.

So, this is a strong and stable gold mining operation, but where does the sex and sizzle come from in this story? The answer appears to be an exploration. In fact, McCunn has just signed off an additional $10M on top of the original $10M exploration budget as the company continues its hunt for economic gold ounces. Here is the real growth story for investors. Pay attention.

We Discuss:

1. 2:42 - Company Overview
2. 4:05 - Cash vs Ounces: Development and Changes
3. 9:23 - Run Through of Q2 Results
4. 12:10 - What's Next? Optionality, M&A, $300M Facility
5. 14:22 - Cost Mitigation & Cash Generation: AISC Still on Target?
6. 19:34 - Exploration: Plans and Allocation of Capital
7. 23:08 - The Future: Predicted Cash Generation and Allocation
8. 26:23 - Shareholder Relations and Likelihood of Selling
9. 28:55 - Relations and Conversations with Goldfields

Matthew Gordon: Can you give us that one-minute overview?

Greg McCunn: I'm Greg McCunn, I'm the CEO. Galliano is a Gold-producing company. We operate the Asanko Gold mine. It's located in Ghana, West Africa. The mine is a 50:50 joint venture between Galiano and Gold Fields with Galiano as the operator. Last year, the mine produced about 251,000oz of Gold at an All-in Sustaining Cost of around USD$1,100 p/oz. We expect more of the same this year in 2020. I'll talk about that as we get into it. Looking at Galiano corporately, we do trade under the ticker GAU on both the New York Stock Exchange and the TSX. I think our market cap this morning when I walked into this interview, was about USD$375M. I think that's up about 50% since the last time we spoke in early June.

Corporately, also from a balance sheet perspective, we did have a great second quarter, which I'm sure we'll talk about, we continued to build cash on the balance sheet. We are sitting with about USD$68M in cash at the end of Q2, and of course, no debt.

Matthew Gordon: Can you just talk us around that time? What were the things that you had to instigate and put in place?

Greg McCunn: Just going back about a year and a half, when I came back to the company as CEO, which we went through in my last interview and how I ended here, as you said, there was a real culture that had developed at the Asanko Gold mine. This mine has been in production for 4-years, just over 4-years now of commercial production. During the first 3-years, the company essentially eroded its balance sheet. The mine didn't distribute any cashback to the parent companies, the joint venture partners, and any cash that was generated all went back into the ground in terms of capital improvements. And it was really actually a pretty decent EBITDA margin at the mine with about USD$300M in EBITDA generated over the first 3-years of production. All of that and some of the company's treasury actually got reinvested in the mine.

Last year we set about trying to make the most of those investments and looking at the development of the mine going forward in conjunction with our joint venture partners trying to optimise the assets that we already have, which is that 5.4M ton p/a Nkran mill, CIL processing facility, multiple open-pit operations. And we came up with this plan, we published it back in February and the new technical report. We've got a 10-year mine life, very little development capital being spent across that 10 years producing, anywhere between 230-250,000 oz p/an of Gold at an All-in Sustaining Cost of just over USD$1,100 p/oz on average for those 10-years. Obviously, what this has allowed us to do is to really, instead of focusing on making the mine bigger and better, it's focusing on generating cashflow.

I think that's really shown over the last 9-months. In the last 3 quarters, the mine has distributed USD$95M to the joint venture partners. USD$47.5M to Galiano's account and that's allowed us to really prepare a balance sheet which was quite strained in the middle of last year with less than USD$10M of the treasury to where we are today, which is a much stronger position.

Matthew Gordon: How are you going about building up a big and meaningful mine? How do you allocate that cash?

Greg McCunn: I think one of the most significant changes that we've made it really, again, the discipline around it and how you spend that capital and looking at the return on invested capital very carefully and realistically. Mining is inherently a capital-intensive business. I think we talked about it last time and there there's really no way around it; we will have to invest some capital, and you will certainly see here in the second half of the year, we've got tailings storage facilities, we've got new pits that we are shifting into. There is sustaining capital to get spent, but that capital is allocated carefully. And we target at a minimum, a 15% rate of return, at what we consider to be reasonable Gold prices at USD$1,300 p/oz Gold.

If you stay focused on that and really focused on generating that return, I think that brings that discipline, but also what you need to avoid having an unintended spend of capital is, and again, this is the second change that we really made is in round climbing. If you don't have a good solid plan in front of you, with a four-year going, right now we're working on a really highly-defined three-year business plan, ideally, that would be five, a 43-101 technical report life of mine plan is not a business plan. It's an indication of what the asset is capable of. It's a backup for your reserve statement that shows that your reserves in the ground can be economically extracted, but it doesn't have all the details that are required to carefully plan out and allocate capital. And that's one of the biggest changes that we've made in the last year and a half, is really working on our forecasting, our budgeting, going back and looking back against the forecast that we made and finding ways we went astray and where we could make improvements, and continually improving that forecasting and planning process and stretching it out from your annual business plan. Right now, we're working on the three-year plan.

Matthew Gordon: How have things been?

Greg McCunn: Q2 was really a solid quarter at the Asanko Gold mine, as you said, we were expecting when we spoke in June, that it was going to be a decent quarter. We had another record quarterly production from the mine - 69,000 oz of Gold production, that brings our total year to date up to just over 135,300 oz. We're well on track to achieve our guidance of between 225,000 and 245,000 oz for the year.

Similarly, for costs, we were off to a good start in Q1. In the second quarter, our All in Sustaining Costs were slightly higher as we started to lift on the tailing storage facility. And they ended up at USD$1,067 p/oz. So that brought our year to date total to about USD$930 p/oz. Again, well below our guidance of between USD$1000 and USD$1,100.

The cashflow continued in the quarter; we distributed USD$30M to the joint venture partners from the mine in Q2, we continued to build our balance sheet. I think also very importantly in Q2, which was something we've been pushing for a while, really one of the challenges that this company had maybe gone back two or three years is that it didn't have access to capital when it really needed it. And that can happen in the mining business, especially for junior mining companies. One of the things that I tried to do when we came back was to make sure that never happened again. Late last year, we took our first step, which has we put in place a USD$30M revolving line of credit at the joint venture level. That just gives us improved access to working capital. And you would've seen this quarter, certainly, investors would have seen that we filed a USD$300M base shelf prospectus in conjunction with a USD$15M at the market financing perspectives.

Clearly, we don't need any money right now. We're generating lots of cash flow, but these are really important tools to have in your financial toolkit to give us flexibility in the future going forward. What we're trying to do here, I think the message we've been trying to get across, certainly in these interviews is we're trying to build a proper business here and strong business requires access to capital at the right times. I think you can look for us to have those financial tools in place all the time, as shelves expire and ATMs expire, we will renew them. I think its good business practice right now so that was also an important milestone that we hit strong operational performance, strong financial performance, and then continuing to put the business in a position where it could be successful going forward.

Matthew Gordon: Should we read anything into this USD$300M facility? Any M&A activity?

Greg McCunn: I think what we've been trying to do for the last year and a half, we really tried to position ourselves for what's next, which as the title that you see on our webpage is ‘building a sustainable business’, and fundamentally, mining has risks and challenges associated with it. It has got periods of capital investment that are required where you're going to be pushing back a pit or doing some sort of significant investment. Having a single asset, it inherently exposes you to the timing on Gold prices and whatnot. So absolutely we wanted to put ourselves in a position where we can now look to grow the business, to add a second operating asset. 

If you go back a year and a half, we were in no position to do that. We didn't have a credible life of mine plan. We didn't have any money. We didn't necessarily have the right people in the right places. And certainly, we didn't have the financial tools to be able to finance or do anything like that. What we've been trying to do over the last year and a half has been to put ourselves in a position where we've been able to do that. Now we've been adding personnel and board members to build that management team and that credibility and experience of building businesses. We've improved our financial position considerably, and you saw some of the final pieces being put in place there in Q2. In conjunction with it, we've got the mine running with a credible life of mine plan in front of us. For the first time, and certainly, in the last year and a half, we're in a position where we can now start to have those conversations and do that work. Certainly, we're active and we're looking at opportunities. I think we said, last time we spoke, we want to make sure that when the opportunity presents itself, that we're ready. We don't have to do anything, but it's not a switch that you can just flick on to go to the ready stage. We've done a lot of the good work here in the first half of this year and I think we're in a good position for Q2.

Matthew Gordon: Are you on target to consistently deliver Gold ounces at less than USD$1000?

Greg McCunn: Let's talk about the outlook for the second half and maybe where we're going for next year because absolutely, this is critical and was one of our main objectives when we spoke last time was trying to drive the cost structure down. First and foremost, I think everyone should take note that we did reiterate our production and cost guidance for 2020. We are tracking according to our plan, but without giving quarterly guidance specifically here, I think everyone can do the math, the first half of the year was very heavy production-loaded and very low cost because we weren't spending much of anything in terms of sustaining capital.

Right now, in the third quarter, we're in a very important transition period for the mine. This is actually the most important three months of the mine over the next two and a half years. What's happening is we're transitioning out of one of our main pits called Nkran, which we've been mining. We've been mining out for the last four years. We finished mining the second phase of ore there at the end of Q2. And we moved out of that page now and shifted to a smaller satellite called Akwasiso. Obviously, supporting Akwasiso, supporting where the main driver of production is going to come from now, what do we have? About 1.5M oz of our 2.4 Moz of resources, the main pit, where we've been mining out for a year and a half. As we've shifted out of Nkran and into Akwasiso, what that means is we're going to be faced with lower grades, the reserved grades of Akwasiso are lower as they are at Esaase. We'll be producing between 1.25 and 1.35g p/t, along with our reserve grade from those two pits, which means our production levels are going to come down slightly.

If you look at our mill throughputs and our recoveries, we're going to be sitting in that 60,000oz per quarter, that's 240,000 oz p/a. And when things go a little bit better, they will be a little bit stronger. When they are going little slower, they will be a little off that, back and forth. You can expect basically, for the next two and a half years are production levels around that.

And certainly, the other important transition here in Q3 is that this is an important quarter for a couple of key sustaining capital expenditures. We are doing a push back of the Esaase main pit. That's going to really benefit us throughout the second half of the year and into 2021. You can expect stripping costs to be higher there. And importantly, we're finishing up the fifth raise of our tailings storage facility, which started at Q2, but really the bulk of that work is happening in Q3. You're going to see that Q3 will be certainly our highest All-in Sustaining Cost quarter for the year.

We are comfortable that we're still going to hit our guidance. This was going according to the plan, but the nature of the All in Sustaining Cost metric, unfortunately, when we do things like stripping, we capitalise it and amortize it from an accounting perspective over the ounces that are open. But for All-in Sustaining Costs, we adhere to world council standards and run all those costs through the quarter that are incurred. There's some bumpiness in the AISC.

But importantly, when we talked about the life of mine, I think your question, Matt, was where are we heading in our cost reduction strategies? And certainly, we were very keen at the start of this year. We published life of mine plan and showed All-in Sustaining Costs over the 10-year period, averaging just over USD$1,100 p/oz. In our mind, that is too high. Where would we set ourselves an objective to be able, where we feel like we can drive the cost structure down to about that USD$1000 p/oz level or reduce the cost by USD$100 p/oz -it's a big target. The bulk of that was targeted by our mining operations, which are contract mining. We felt we could possibly take USD$0.50c p/t out of our mining costs, which to put that in perspective, we move about 30M tons p/a so that's USD$15M in savings right there.

Unfortunately, due to COVID, retendering these strategic mining contracts hasn't been as easy as we would have liked. It's really difficult to mobilise contractors into Ghana, the borders have been closed there. Whilst we've been able to keep the mine running and keep the existing contractor going it's been somewhat challenging running a proper tender process because we're limited to those people who can supply equipment within countries. What we're doing is we're working now on a modified version of that. We're really trying to optimise 2021 to capture as much of the cost as we can and trying to drive mining costs down. If we can get between 50% and 70% of those savings for 2021, I think that would be a really good outcome in the backdrop of where we're at.

Matthew Gordon: Have you had to reassess how you allocate capital against exploration specifically?

Greg McCunn: Yes, fortunately, switching gears to exploration is one of the things that we've been able to keep going very strongly. Our second quarter was a really good start to our exploration program, and we were quite excited about it. When we spoke back in June, we didn't really have any of the results coming out yet. We've now published two news releases. From our exploration perspective, in Q2 we were focused on trying to expand our reserve-based around these two satellite pits that we're going to be using for the next two years. Instead of Nkran, we're going to be mining out of these two satellite pits to support the Esaase deposit. One is called Akwasiso, which we mentioned, and we're mining. The other is called Abore, which is located about 10km north of the processing plant.

At both, we ran pretty extensive drill programs at both of those pits. We were successfully able to expand the reserve base and those numbers will be quantified in our year-end reserve update, but we're now busy doing the mine planning. We published all the drill results. We've added a third phase of mining at Akwasiso where we're mining now. We were meant to be finished up there in January we are busy working on the new plan for 2021. And I think we'll be mining there well into the year. That's a tremendous improvement to the business. It means we don't have to go and open up a new pit, establish new haul roads, put in fuel bays, all the things that contractor mobilisation, et cetera, that go along with moving the operations. Those are things that we've been successful at in exploration and we might have found only 300,000oz or 400,000 oz of additional reserves there so it's not an overly dramatic change, but it dramatically improves the business over the next two years, which is what the whole purpose of that Q2 program was. We're very happy with the way that's turned out.

For Q3, we've shifted gears now to something to more sizzle perhaps in terms of finding a new discovery. We've shifted the drills twofold, first to our target, which is about 10 km south of the processing plant. It's called Miradani, and we haven't had any reserves declared on here. We have had some historical drilling that we did last year in 2019. It was very successful. It's some nice wide intercepts of higher-grade mineralisation. This has a strong potential to be the next pit that we bring into production.

And we're focusing our drilling right now on a starter pit, which we think has the ability to maybe have a couple of hundred thousand oz of short-term reserves that we can even get into the mine plan next year or in 2022. Trying to make that business better. But really, Miradani is a 3km-long mineralised trend. It's going to require us to continue to work on it for probably the next year and a half of running drilling programs.

We're quite excited about this. This could be the next multi-million-ounce deposit that we find on the Sikagrava Gold belt. I think that's where some real sizzle is going to come for investors who are following this when we start to get some results from this. And hopefully, we'll see some similar results to what we saw in 2019, which were quite nice.

All of that is beginning to develop again into this three to five-year business plan to try to improve upon what we have now, drive the cost structure down, find higher-margin ounces in the ones that we had in our existing mine plan.

Matthew Gordon: You're sitting on 21,000 hectares? What do you think you'll end the year with on the current plan?

Greg McCunn: Let's just assume we continue at today's Gold prices; you're looking at margins where we're going to continue to produce significant amounts of cash flow. In theory, we could finish the year USD$80M in cash on the balance sheet, continuing to spend on exploration at the mine site and maybe even accelerating that exploration program. We had a budget of USD$10M this year. Our board approved us to increase that to USD$20M for the year, which would allow us to really get at some of the higher, the longer-term targets that we are currently not working on. The joint venture still needs to approve that budget. We're working with getting that through Gold Fields, but they have the same view that we do; that this is a tremendous land package. We've gotten most of one of the up and coming Gold belts on Ghana tied up here in our 21,000-hectare land package. Unlocking that potential is something that could create a lot of value for shareholders.

Matthew Gordon: How do you apportion that? What are you going to do with that extra USD$10M?

Greg McCunn: We're going to continue to develop Miradani, which we think is very important. The original plan had us just really focusing on this starter pit. Our intention would be to continue to drill there beyond the end of Q3, keep going into Q4, go for the whole year, continue to run our drill program. We can increase the number of drills that we have turned there, that's something that right now we're sitting with three drills turning. We've been slowly increasing our capabilities on-site, our geological capabilities and building our exploration team, which are very strong, local, Canadian geologists who we've been able to bring on board. Our SVP exploration, Paul Klipfel, who joined the company in April, he is leading this program, we did manage to get Paul into Ghana. He's on the mine site, and he's expecting to be there for a big chunk of time this year, overseeing this program.

Focusing on Miradani, but also continuing to advance some of the targets immediately to the west of the processing facility. We did acquire a new concession, which we slotted in. It's an exploration level concession. It's got three advanced targets on it. We are busy doing the groundwork on. That's something that we acquired earlier this year. We've been getting ready to start to drill those. And I think we could be in a position, subject to JV approvals and budget, which we're busy developing. The drill goes in the fourth quarter, which would just continue to build the story, to improve the business through exploration.

Matthew Gordon: Four or five names hold 60% of the company, they are meaningful, they are with you. Are they all still with you?

Greg McCunn: Not that I'm aware of. During the last filings and certainly all the meetings we've had in the back of Q2, I think genuinely our biggest and most supportive shareholders are all still there. We've got their backing to continue with our strategy here. We've put a tremendous amount of work into our investor relations activities in Q2, and really trying to get this story out on the street and what we're trying to do here in building a sustainable business. I think it's working; if you tracked our volumes and our liquidity, our trading volumes quarter over quarter, certainly Q2 has been the best quarter we've had since 2015. The volumes have almost tripled since where they were in the fourth quarter of last year. And partly that's the macro environment, obviously. Retail investors are becoming interested in the Gold space, generalists are starting to return. I think we're just seeing the tip of the iceberg of that now. And our volumes now are sufficient that we would qualify for readmission to the GDX-J, which we're not a part of right now. The trend towards passive investment it's very important to be a part of the indices. You certainly meet the market cap criteria; we did meet three of these periods in a row where we met the liquidity criteria. The first one under our belt here on the September rebalancing, we'll admit for the first time in a long time to liquidity constraints.

Matthew Gordon: Are you seeing some selling from some parties? People have different strategies, but any unexpected selling?

Greg McCunn: Surprisingly, we haven't. I'm actually fully expecting it. And I certainly wouldn't blame any of the bigger investors who were astute enough to invest in a company when we were trading it USD$0.85c a share and we're now trading well over USD$2. That's a very short turnaround in a year and a half. But we haven't seen that. I think the bigger names have maintained their positions. We haven't seen anything other than a few hundred thousand shares trading around the margins, which is typical in any environment. It does mean that we've got to work hard on that 30% to 40% that does really free trade. We need to work hard to improve that liquidity there. And I think we've met our objectives, certainly for the last quarter.

Matthew Gordon: Are Gold Fields going to help you find an additional asset to put into the portfolio?

Greg McCunn: Potentially they could. We haven't asked them for any help in that respect. They're facing some of their own changes, as you probably saw it: senior management changes at the Gold Fields level. So right now, we continue with our relationship with Gold Fields as it is. We operate the mine, we've produced the plans, and we certainly work with them with joint venture structures to get those approved. We don't have anything longer-term strategic that's brewing with Gold Fields who are quite focused on their own knitting right now. And rightly so, they've got a really nice project in Chile that's looking like it's starting to get into development. And certainly, Nickel has transitioned to his predecessor next year, will consume some of their focus over the next 12-months.

Matthew Gordon: Great update. I like what you're doing, I like that you are sticking to the plan. I also like that you've increased the exploration budget. It does bring that sex and sizzle to the party. Stay in touch, let us know how those drill results pan out for you.

Greg McCunn: Absolutely. You can look for some news releases coming out here in the short term on exploration. I think that will be the key catalyst as we go forward along with continuing to deliver, obviously from the mine and keeping the focus on cashflow

Company Website: https://asanko.com/