Galiano Gold (GAU) - Creating Cash rather than Chasing Ounces

Interview with Greg McCunn, CEO of Galiano Gold (TSX/NYSE: GAU).

With the gold bull run continuing, we thought it was a good time to catch up with McCunn and this turnaround story. On a personal note, it must have been a tough time for him recently after the unexpected passing of Galiano's COO, Josephat Zvaipa, as a result of complications associated with a COVID-19 infection at the end of July. Despite this, McCunn managed to strike a positive attitude that shareholders will undoubtedly admire.

I think that Galiano Gold is an excellent case study for investors. It exemplifies just how many things need to work efficiently before a mining story can become profitable. Attention to detail is key in this game.

Matthew Gordon interviews Greg McCunn, 12th June 2020

Let's start with the background. Galiano Gold is a Vancouver-based gold player. It used to be known as Asanko Gold until earlier this year. It is an established, mid-tier gold producer having commenced commercial production in April 2016 at its Ghanaian gold mine: Asanko. The mine is operated as part of a 50:50 JV with Gold Fields (JSE, NYSE: GFI). This is immediately a de-risked investment proposition because the mine is being operated in collaboration with a seasoned major rather than just by an up-and-coming junior. Asanko takes the form of a multi-deposit complex with two main deposits, Nkran and Esaase, and multiple satellite deposits. It is situated on the Asankrangwa Gold Belt. A definite value add is the company's ownership of a 5Mtpa carbon-in-leach processing plant.

Asanko is producing plenty of gold at the moment: around 240,000-250,000oz pa. The AISC has gone up a lot recently, from just $805/oz to $1,067/oz, likely due to COVID-19 constraints and measures, but the market cap has doubled since we last spoke, so the company is doing something right. The remainder of the Q2/20 operational results perhaps tell the tale of what has gone right for this gold player, other than the obviously positive bull environment.

• Impressively, Galiano Gold, despite the impact of COVID-19, has managed to achieved record quarterly gold production: 69,026oz. If this level was to be maintained, which does appear unlikely right now, the company would be on track for just under 280,000oz pa gold production. With a 50% stake in this operation, this makes Galiano Gold an undeniably attractive Gold company.
• Gold sales of 61,357oz at an average realised price of $1,651/oz, have generated gold sales proceeds of $101.3M. That is some serious capital.
• The cash flow generation looks strong too. Operating cash flow was $48.8M and free cash flow was $22.6M.
• As at June 30, 2020, the Galiano-Gold Fields JV had $47.8M in the bank. This is with the $30M RMB revolving credit facility fully drawn. Moreover, the JV had c. $10M in Gold reserves. The JV has the cash needed to deliver value, but how?

It is clear that the stability and optionality provided by the multiple operational pits have contributed towards this success, creating a sixth consecutive quarter of production of over 60,000oz.

The financial highlights are also very encouraging:

• After-Tax Net Income: $14.7M
•  Adjusted EBITDA2: $18.5M
• As of June 30th, 2020, Galian had cash and receivable totalling $68M. This cash gives the company a lot of options.
• In an effort to boost the share price, the company has repurchased and cancelled 326,654 common shares for the sum of $0.3M through the normal course issuer bid scheme. This might be a drop in the ocean, but it sends all of the right messages to the market.
• Galiano Gold has also entered into an at-the-money offering agreement, whereby it can sell common shares for proceeds of up to $50M. This is yet another string to the company's cash-strengthened bow.

This is where the case study comes into focus. Since 2017, Galiano Gold had been struggling with its share price. It had tracked steadily downwards, falling from a high of $4.57 in 2016 to a low of $0.60 in 2019 and $0.70 in 2020. Even the involvement of Gold Fields wasn't enough to get the market more excited. When the major made the $185M acquisition in March 2018, most expected it to be a real catalyst moment. However, it didn't deliver the accretive growth investors were expecting. Investors were concerned about the single-asset strategy.

While this is partly down to unavoidable gold market conditions, it is clear the Galiano's focus on chasing ounces in the ground and the largest resource possible wasn't working. With just one tactical shift, the company has managed to totally change the value proposition. The details matter in mining, and things can shift very quickly. Galiano Gold is now 100% focussed on cash generation. This policy has been a primary driver behind the company's share price renaissance.

When McCunn joined in March 2019, he brought a fresh team, a fresh strategy and eventually a fresh name. His tenure thus far has been admirable, but now it is time to build on things. in the short-term, the company's foremost focus remains on delivering its 3-5-year development model for Asanko. This is all about reaching a level of consistency. The company has already demonstrated its credentials with the continually strong financial results, and it will look to build on this in the near future.

However, investors will want to hear what the real growth story is. The share price bump is encouraging, and the $65M in dividends paid out to shareholders is satisfactory, but investors will want to see a lot more, especially long-suffering legacy shareholders. Exploration, as it so often is, appears to be the remedy for this issue. The idea of expanded resources and new deposits could add some spice to what is forming into a neat, tidy and reliable gold mining story.

McCunn is clearly cognisant of this, doubling the already-announced $10M exploration budget to $20M. The company has recently completed drilling programmes at both Akwasiso and Abore, and the early results have indicated an extension of mineralization in both pits. Target one is to replace the ounces depleted from the ground in mining activity in 2020 and 2021; again, this is a smart, pragmatic move. Long-term, the aim will be to delineate gold resources with superior economics within the next 2 years. This is where we sense a degree of ambition, which makes this story much more exciting. Galiano Gold hopes to advance exploration targets with the potential to contain over 1Moz of gold. Esaase has the shortest lifespan, and getting new deposits into production by 2027 to replace these ounces will be crucial.

We will be expecting some catalyst moments in the remainder of this year. This next 3 months will be the most important for the new mine strategy yet, as Galiano Gold enters a crucial development phase. The company has finished mining its second phase of ore from one of its main pits, Nkran, and will be fully transitioning over to mining at Akwasiso. McCunn expects this to support the main area of the resource, where 1.5Moz of the company's 2.4Moz resources reside. Galiano will be confronted with lower-grade ore; the reserve grades at Akwasiso are lower. Shareholders can expect to see production at 1.25-1.5g/t alongside the reserve grade. Production levels will come down slightly, settling at 240,000oz pa. There are also some significant sustaining capital expenditures to navigate.

There are plenty of potential value-add moments and investors need to keep their eyes peeled. What did you make of Greg McCunn and Galiano Gold?

Company Website: https://asanko.com/