by: Marco G. February 28, 2010
Introduction – Development Transitioning Into Production
Great Basin Gold (GBG) is a development stage gold junior bringing two Gold mines in disparate parts of the world into significant production this year. The first mine, Hollister, is a high grade epithermal vein type deposit in the Carlin Trend in Nevada. The second mine, Burnstone, is a new development mining a shallow uplifted segment of the Gold-laden conglomerates of the Kimberly Reef structure in Balfour, South Africa. Great Basin has overcome economic and technical challenges to bring these mining developments close to production. As the company turns the corner to profitability, the investment world may pay attention and support the share price higher.
Situation Analysis – Two Mines Coming Into Production
Pre-production Investing
Great Basin Gold has endured and survived the difficult path of bringing a mining prospect into production. In the mining world, out of hundreds of prospective properties, only a select few overcome the myriad obstacles to become a producing mine. This difficult task of successful mine development is multiplied by two, as GBG is bringing two different complex mining projects into fruition. For a detailed look by the author at GBG’s two mining properties see “Great Basin Gold – Jump to Mid-Tier Producer”.
Low Risk/Highest Reward Investing Prior to Production
As detailed in the classic mine development article, “The Second Best Time to Buy a Mining Stock”, investing in a mining stock as “it is being readied to go into production provides some of the lowest risk/highest reward mining industry investment opportunities.” See the Classic Model of Production Startup chart following. GBG is between Step #6 of Development/Construction and Step #7 of Production Startup.
Figure 1 - Classic Model of Production Startup - Note the ramping up to production brings share price appreciation. Source
For investing in Great Basin Gold, this strategy of pre-production investing is leveraged, as there are two actual mines coming into official production. Each mine is in separate regions of the world and may complement each other to enhance results and back each other up to reduce the total risk for the investor.
Risks and Challenges of Mine Development
Great Basin Gold warns that “GBG is currently developing two mines, with all the risks, challenges and caveats associated with the delivery of new capital projects” (.pdf), in their February 25, 2010 Interim Report. This declaration is standard for mining development, as there are huge risks with unknowns and roadblocks along the project path. However, an examination of GBG’s February 25, 2010 Interim Report detailing their capital expenditures along with their progress reports indicates that the majority of the risks and unknowns may now be behind them.
The Burnstone project in South Africa has estimated capital requirements of $235 million USD with $147 million spent as of December 31, 2009 and $88 million to be spent by June 2010. The remaining expenditures are for mainly for the construction of the surface process plant and further mine development. Burnstone is now developing access to the ore blocks, with over 1000 meters of the reef bearing ore exposed. See the photograph following of the exposed “Kimberly Reef” in Block B.
Figure 2: Kimberly Reef Ore Exposed for Mining Development. Note the distinct appearance of the ore bearing reef layer that will be mined.
Assays of the ore exposed in the on- reef development match GBG’s expectations.
The Hollister project in Nevada has estimated capital requirements of $110 million USD with $95 million spent as of December 31, 2009. Hollister is essentially completely developed, only waiting for the permit to switch from test mining to production mining. Hollister is concentrating on maximizing the high grade ore and minimizing dilution with waste rock.
The key words for this author in examining GBG’s Indaba Presentation of February 3, 2010 (.pdf) are that GBG is “Trial Mining” at Hollister and that GBG has “ 60,000 ore tons on stockpile” at Burnstone. This indicates that the long and strenuous development cycle is nearing fruition and demonstrates that the mine development is now transitioning into production tuning, in order to manage the costs and profitability of each production process.
Further Challenges Impacting GBG’s Stock Price
South African Nationalism
The militant African National Congress (ANC) youth wing have persistently called for nationalization of major South African businesses, starting with mines. On February 1st, 2010, the ANC youth again made headlines with their demand for nationalization of South African mines. On February 2nd, 2010 the Mineral Resources Minister Susan Shabangu rejected calls from the ANC's youth wing saying “Nationalization will not happen in her lifetime.” Later, South African President Jacob Zuma stated that Nationalization is not government policy, in an effort to calm the business world.
The threat of nationalization does cast a pall over GBG’s share price, whether real or perceived. The investor needs to make their own decision as to the investment risks here.
Possible Upsides Impacting GBG’s Stock Price
Esmeralda Mining Development
Great Basin Gold acquired the Esmeralda Mine property in 2008 mainly for the production milling equipment on site. The property also contains an existing mine that may be restarted.
Great Basin Gold gave a hint of possible re-development of the existing Esmeralda Mine in their February 3, 2010 Indaba Presentation:
• there is an opportunity to access areas where development is complete, rehabilitation is minimal, and the ore is high grade, providing a low cost mining start up.
• revenue generated from bulk sampling will be utilized to offset the cost of the initial underground drilling, mapping and sampling programs
A low cost entry into another production property for GBG would be a bonus.
Monetizing of 40 k oz. Gold in Hollister Stockpile
Great Basin Gold has an existing stockpile of high grade ore from Hollister, as described in their February 25th, 2010 Investor Presentation. See the chart following detailing the ore stockpile at Hollister.
Figure 3: Hollister Ore Inventory Stockpile. Note the 44 k oz. of Gold contained as of January 31, 2010.
As this stockpile is processed and monetized, this will provide additional cash flow for Great Basin Gold.
Status - February 25, 2010 Conference Call
Great Basin Gold gave an interim report for investors on February 25, 2010 in a conference call. The bulk of the call gave details of progress in the Burnstone mine development.
The new item of GBG production guidance is detailed in the chart in Figure 4, following.
Figure 4 - GBG 2010 Guidance. Note the estimated 195K Au oz. recovered at a cash cost of $480 USD per oz.
Barring an unforeseen catastrophe and given the existing production profile and the depth of management expertise at Great Basin Gold, the forecasted production appears achievable.
Summary
Great Basin Gold is uniquely positioned to bring their two mining projects of Hollister, Nevada and Burnstone, South Africa into production in 2010. Hollister is projected to deliver 135 k oz. of Gold this year. Burnstone is expected to deliver 60 k oz. of Gold this year. GBG’s guidance calls for 195 k oz. of Gold production in 2010. As Burnstone ramps up, GBG is expected to double this production to approximately 380 k oz. annually.
The bulk of the risks and uncertainties with mining development have now been largely mitigated and overcome by GBG to bring their two mines on-line. At Hollister, GBG has essentially been mining for over one year in all but name as trial mining. The mining processes are focused on costs management by minimizing rock waste and preserving the high grade gold ore content. GBG reports an average grade of 1.23 Oz/ton (42 g/ton) Gold extracted in Quarter 4, 2009. GBG is now reporting the pouring of Dore bars for sale at Hollister.
At Burnstone, the pre-mining development is focusing on developing access to the ore stopes of the Kimberly reef. They have developed a 60 k ton stockpile of lower grade ore (est. 5 g/ton). The strategy that they are pursuing is to provide multiple accesses to the different ore blocks for future mining when the mill is operational. At Burnstone, GBG is also focusing on minimizing the waste rock handling to reduce their operating costs.
The major capital expenditures are now nearing the end for GBG. GBG is fully financed for completion of their two mine developments. Revenue has started at Hollister and will start in the second half of 2010 for Burnstone. GBG is planning to produce about 200 k oz. of Gold for 2010 and is focused on delivering this by managing and tuning their production processes.
Recommendation
Great Basin Gold’s share price has dipped recently in response to a pull back in Gold prices and also due to the perceived political risks of a mine in South Africa. This creates an opportunity for investors that may be interested in a mine developer that is transitioning to mine producer. The startup of revenue for GBG with the ensuing profitability may create new interest in the investment world. The author believes existing news and perceptions are already priced in to GBG’s stock price and the forthcoming good news with production increases will move the share price upwards. A method of leveraged investment by warrants in Great Basin Gold is detailed in a previous article “Great Basin Gold – Follow the Flood for Fortune”.
Disclosure: Long position in Great Basin Gold
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