Steppe Gold Ramps Up Mongolian Gold Production While Paying Down Debt

• Steppe Gold, a gold and silver producer, aims to double its production in the next two years while expanding its asset base in Mongolia.
• The company produced 30,000 ounces of gold, generating significant cash flow, and repaying some of the debt incurred for phase two expansion.
• Phase two is expected to increase production from approximately 45,000 ounces to 100,000 ounces at similar costs, extending the mine life to over 10.5 years.
• Mongolia is highlighted as a favorable business environment with supportive government policies, no political unrest, and increasing interest from global investors.
• Prominent investor, Eric Sprott, remains bullish on Steppe Gold, having recently increased his stake in the company.

Steppe Gold Ramps Up Mongolian Gold Production While Paying Down Debt

Steppe Gold Ltd (TSX: STGO) is emerging as an attractive investment opportunity for gold investors looking for a low-cost producer with significant near-term growth prospects. The Toronto-based company operates the ATO Gold Mine in Mongolia, which achieved commercial production in Q2 2021. Steppe is now focused on ramping up production, generating strong cash flows, and using those funds to strengthen its balance sheet and self-fund the Phase 2 expansion at ATO.

Key Highlights

• Doubled 2022 gold production to ~30,000 oz while reducing AISC to ~$800/oz
• Paid down debt and accrued payables from operating cash flows
• On track for Phase 2 expansion to double output to 100,000 oz/year
• Fully permitted mine life recently expanded to 10+ years
• Exploration upside on 1,400 km2 land package surrounding ATO
• Supportive Mongolian government provides stability and growth incentives
• Singapore billionaire investor recently acquired more shares

Ramping Up Low-Cost Gold Production

Since achieving commercial output in mid-2021, Steppe Gold has successfully doubled production at its ATO Gold Mine to a 30,000 oz/year run rate at all-in sustaining costs of approximately $800/oz. This demonstrates ATO's potential as a highly profitable operation even at today's gold prices around $1,750/oz. The Phase 1 heap leach mine is now generating strong cash flows, which Steppe is utilizing to pay down debt and strengthen its balance sheet.

As of November 2022, the company has produced around 30,000 oz of gold in 2022. Even if Steppe stopped mining and blasting today, it has stockpiled enough ore on leach pads for continuous processing for the next 18 months. This provides a substantial cash flow buffer and flexibility in case of any temporary shutdowns.

Deleveraging the Balance Sheet

Earlier this year, Steppe Gold had debt on its balance sheet along with accrued payables from the period when ATO was not yet in production. The company made a strategic decision to take on debt and payables in order to avoid equity dilution during mine construction. Now that the mine is generating strong operating cash flows, Steppe has prioritized paying down debt and accrued payables. The company has already knocked down payables significantly and paid back a portion of its debt. Steppe is on track to have a clean balance sheet with minimal or no debt by early 2023.

This sets the stage for the Phase 2 expansion, as Steppe can use its future operating cash flows to strengthen its balance sheet rather than service debt. The company can also avoid potential equity dilution by funding the remaining capital expenditures for Phase 2 from internal cash flows.

Fully Permitted Phase 2 Expansion Underway

Steppe Gold is advancing Phase 2 of the ATO Gold Mine, which has received its final permits and government approvals. This expansion project will double the mine's production capacity to approximately 100,000 oz of gold per year at similar all-in costs of $800-850/oz. Phase 2 construction is expected to be completed in 2024.

The Phase 2 feasibility study outlined an initial reserve base supporting a 10.5 year mine life producing 1 million oz of gold. However, Steppe has continued exploring and delineating new resources, as ATO's reserves only cover a small portion of the highly prospective 1,400 km2 land package. This provides excellent potential to further expand reserves and mine life.

Steppe's permitted processing capacity will leap to 4.7 Mtpa in Phase 2, utilizing a larger crushing circuit, additional leach pads, and a new ADR plant. The company plans to fund the remaining capital expenditures for this expansion using operating cash flows, avoiding further debt or equity issuance.

Supportive Mongolian Jurisdiction

Steppe Gold's ATO Mine is located in Mongolia, which has emerged as a mining-friendly jurisdiction. The Mongolian government has demonstrated support for Steppe by providing crucial project financing when other sources were unavailable. The government is also incentivizing in-country gold production by paying Steppe a 5% premium over spot gold prices.

Mongolia relies economically on mining, so the government has a vested interest in supporting companies operating successfully in the country. Major miners like Rio Tinto have continued advancing huge projects like Oyu Tolgoi amid disputes, indicating Mongolia remains open for business.

Singapore Billionaire Investor Increases Position

In a strong sign of confidence, Singaporean billionaire investor Kin Chan recently acquired more shares of Steppe Gold on the open market. He originally became the company's strategic investor in 2020. Kin Chan now owns approximately 11% of Steppe's shares outstanding, making him the second largest shareholder. Seeing a billionaire investor increase his position, rather than selling shares, speaks volumes. It indicates he sees significant upside potential as Steppe pays down debt, builds up cash flows, and advances Phase 2. His involvement also helps derisk the Mongolia factor for other investors.

The Investment Thesis for Steppe Gold

Steppe Gold offers a compelling investment case as a newly minted gold producer with declining costs, rising output, and a pristine balance sheet. The company's strong management team has delivered on its promises of building Phase 1 on time and on budget, achieving commercial production, ramping up output, and strengthening the balance sheet.

With Steppe poised to double production to 100,000 oz/year by 2024, funded mostly from internal cash flows, the company's annual earnings have the potential to increase dramatically. This could re-rate Steppe at much higher valuation multiples, especially given the deleveraged balance sheet and exploration upside.

Any gold producer generating robust free cash flow near the bottom of the cost curve deserves a healthy premium valuation. Steppe Gold gives investors direct exposure to this type of increasingly rare gold growth story. After its transformative Phase 2 expansion, Steppe will emerge as a potential takeover target for mid-tier and major gold miners looking to add low-cost ounces to their global portfolios.

Low-Cost Production

Steppe Gold is ramping up gold production at ATO to 30,000 oz/year at an all-in sustaining cost (AISC) of just $800/oz. This is well below the current gold price, allowing the company to generate substantial cash margins of over $900/oz. Very few miners can produce gold this cheaply. ATO's low costs provide a buffer against any future drop in gold prices.

Significant Growth Ahead

Steppe is fully permitted to double ATO's production capacity to 100,000 oz/year by 2024 via its Phase 2 expansion. The company can fund this growth internally through operating cash flows, avoiding dilution. Doubling low-cost production could dramatically increase annual earnings and cash flows.

Strong Balance Sheet

By paying down debt and accrued payables, Steppe is strengthening its balance sheet and eliminating financing risks. The company can fund the Phase 2 expansion mostly from operating cash flows. Steppe's clean balance sheet will allow it to pursue further accretive growth opportunities.

Exploration Upside

ATO is situated in a highly prospective 1,400 km2 land package, but current reserves only cover a fraction of this area. Significant exploration potential provides upside for additional resource delineation and mine life expansion beyond the current 10+ years.

Takeover Potential

Once Steppe doubles ATO's production rate, it will pop up on the radar of mid-tier and major gold miners looking to add low-cost ounces. The project's scale, long mine life, and exploration upside make Steppe a prime takeover candidate.

Proven Management TeamSteppe Gold's management team has a track record of keeping promises and delivering results on time and on budget. They offer strong stewardship to guide Steppe through its next phase of production growth and value creation.

Supportive Jurisdiction

Mongolia has emerged as a mining-friendly jurisdiction keen to support Steppe's operations and growth plans. The government's assistance derisks Steppe's flagship project.

Steppe Gold provides investors with a rare opportunity to gain exposure to a newly minted, low-cost gold producer on the cusp of achieving significant production growth, increasing earnings, exploration success and asset growth in a supportive mining jurisdiction. The company's improving balance sheet also unlocks additional strategic opportunities.