Roxgold (ROXG) - West African Gold Producer: Aiming For Growth

Roxgold is a Canadian-based gold producer with assets in West Africa. In Western Burkina Faso, Roxgold operates the high-grade Yaramoko Mine Complex located (on the Houndé greenstone belt in western Burkina Faso). In addition, the company is also advancing a development project: the Séguéla Gold Project in Côte d'Ivoire.

Dorward is a capable and likeable CEO. We were first attracted to them because of their strategy. Getting into production quickly, despite a short life of mine, at Yaramoko was the making of the company. Several of its close by peers continue to labour under a low market capitalisation and share price by employing a more sedentary approach of building low-grade ounces in the ground. Old school, but not in a good way. This has allowed Roxgold to make a second acquisition.

Matthew Gordon talks to John Dorward, 14th June 2020

Looking at the Yaramoko gold mine first, it contains 2 high-grade underground gold mines: Bagassi South and the 55 Zone. Roxgold has guided 120,000-13,000oz of gold production this year. By conducting this high-grade gold mining operation, Dorward has learnt a lot. In relation to the specific geology of Yaramoko, the company has gone from believing the grade of the deposit was homogeneous and uniform in its distribution, to now relating that the high-grade zones are much more discrete. There is an exploration upside at numerous satellite deposits around Yaramoko. Annual gold production in 2020 is expected to be between 120,000 and 130,000 ounces.

The Séguéla Gold Project is an 'advanced stage development project.' Roxgold claims a construction decision will be made in early 2021. It was acquired in April 2019, and Roxgold has rapidly increased the value of the property, growing the resource and releasing a PEA almost immediately. The numbers on the PEA look good:

1. An 8.2-year life-of-mine.
2. 10.2Mt total mineralised material.
3. 890,000oz contained gold. 8:1:1 strip ratio.
4. 3,500tpd throughput.
5. A head grade of 2.7g/t.
6. A strong recovery rate of 94.5%.
7. Annual production of 103,000oz pa.
8. Production in the first 3-years: 143,000oz pa.
9. Cash costs of just US$605/oz.
10. A very low AISC of just US$749/oz, falling to US$600/oz after 3-years.
11. CAPEX of US$142M.
12. Sustaining capital over the life-of-mine stands at US$36M.
13. NPV5% at US$268M.
14. An IRR of 66%.
15. The payback period is just 1.2-years.

With stats like these, its little surprise that gold investors and generalist alike have been registering more interest in Roxgold stock recently. Séguéla has many of the hallmarks of Yaramoko, and Roxgold will be hoping it can replicate its success. The numbers are going to take a hit for the next few years, returning to 2017 levels. This is because Roxgold is now doing twice the work, courtesy of the need to push Séguéla forward. It's an anticipated drop-off that shouldn't be particularly detrimental to the company's balance sheet, though we're curious to see what this means for Roxgold's bottom line.

2019/20 has been a period of heightened cash burn, but when does Dorward expect to tighten the gap between the company's net cash position and free cash flow position? The free cash enabled Rozgold to acquire Séguéla outright from Newcrest for US$20M. It also funded the exploration programmes at numerous sites. Roxgold expects to begin constructing Séguéla at the start of 2021 with a 12-month build. The crucial thing to know for gold investors is that while Roxgold appears to be on the verge of doubling its production and revenue, it has no plans to issue a single share beyond its current 371M shares issued. Great stuff. Instead, Roxgold will "enhance" its debt position via existing banking arrangements, delivering a more economic property than Yaramoko.

We've had contributors write articles on our platform about the West African security situation before, and you can check one out here.

It's clearly not affecting Roxgold operationally, but what is the word on the ground? Dorward acknowledges that it has been a challenging few years for West Africa, but he states that the situation in Burkina Faso has improved. This is because Burkina Faso use to tackle these issues alone, and wasn't apart of the regional, multinational initiative to combat the problem. However, he claims that in the last year, Burkina Faso has integrated into the regional grouping much more. It appears the countries are now cooperating together to combat the terroristic threat in the region. Roxgold's security expenditure has increased, but not too significantly in the grand scheme of things.

Looking to the future, Roxgold is always looking at potential M&A; this is especially important given the risk profile of West Africa. I have no doubt that a good asset in a more stable mining jurisdiction would act as a multiple for Roxgold's share price. Ideally, Dorward wants a third mine to build after Séguéla enters production, but it isn't likely to be Boussoura; that will take a lot longer. In the meantime, he continues to buy shares from the open market.

What did you make of John Dorward?

Company Website: https://www.roxgold.com/home/default.aspx