Guyana Goldfields Produces First Gold; Insiders Keep Buying Shares

Aug. 9, 2015 9:01 AM ET  |  About: Guyana Goldfields Inc. (GUYFF), Source

Guyana Goldfields (OTCPK:GUYFF) achieved first gold production at its flagship Aurora gold project in Guyana, South America on August 4. The first gold pour executed on time and on budget. It expects the Aurora mine to start commercial gold production as early as next month. The Aurora mine could produce up to 50,000 ounces of gold by year-end, and 140,000 ounces in 2016. It will make good profits and cash flow at today's gold price.

Gold prices plunged to 5-year lows in mid-July and that bearish momentum has carried into August. The sell-off could worsen if the U.S. central bank raises interest rates at its September policy meeting. Guyana Goldfields is ready for a sub-$1,000/oz gold environment. It plans to remodel the mine plan to suit lower gold prices, by expanding the mill in late 2016 and deferring underground production later into the mine life.

Guyana Goldfields expects to complete an updated Feasibility Study (FS) in the first quarter of 2016 to outline the changes in the mine plan. We currently have a $4.40 per share price target and BUY and HOLD rating on the company. Investors have upside catalysts to look forward to, such as the all-important transition into commercial production. Insiders continue to buy shares, as the company transitions from developer to gold producer.

All figures are in U.S. dollars unless otherwise stated.

Shifting into gold production

Guyana Goldfields achieved first gold (pre-commercial production) on Tuesday at its flagship Aurora gold mine in Guyana. The Aurora gold mine will be the newest low-cost producer in South America, and globally, with sub-$700 costs. At such costs, the Aurora mine will be profitable and cash flow positive at today's gold prices. That is very appealing to market participants as several gold peers are struggling to generate free cash from their mining operations.

The initial gold pour resulted from processing lower grade ore. The use of lower grade ore in the initial stages of commissioning the mill is common practice to work out bugs in the hard rock milling circuit. After optimizing the mill circuit, the company will gradually feed the mill with higher-grade material. Mill commissioning should wrap up by late August, or early next month, according to the company.

Guyana Goldfields plans to produce between 30,000 to 50,000 ounces of gold by year-end, depending on how long ramp up will take. We expect the Aurora gold mine to achieve commercial production of 5,000 tpd as early as next month, where it will produce roughly 10,000 ounces of gold per month. Project development is approximately 95% complete, with only mill commissioning left. As of June 30, there was $20 million of capital expenditures remaining to complete development.

Guyana Goldfields is trying to keep its development budget from not exceeding $277 million. This amount includes $249 million of pre-production capital and $28 million of financing costs, pre-operating costs, and working capital. We expect the Aurora gold mine to complete on budget and on schedule. Guyana Goldfields has financed $277 million in project costs by $117 million in equity (dilutive) and $160 million in debt (Tranche 1 facility). It has access to a cost overrun Tranche 2 facility of $25 million in case if the project goes above budget.

Scenario planning if gold plunges to $1,000/oz

As we all know, gold is now trading at 5-year lows and placing significant stress on the balance sheets of gold miners, particularly those producing ounces of gold at costs above $1,000/oz. The significant drop in gold has forced gold companies to readjust their business and mining models in order to squeeze the most cash out of their existing mining operations. Guyana Goldfields originally had planned to expand the mill to 10,000 tpd and start underground mining in 2018, but that has now changed. The re-scoped mine plan intends to start the mill expansion in late 2016 and start underground mining in 2024, as seen in Figure 2.

Guyana Goldfields conducted an internal early stage conceptual study to increase the open pits immediately and defer underground mining for roughly 8 years from now. The two charts below show the FS mine plan (top) and the re-scoped mine plan (bottom). The re-scoped mine plan supports a front-end loaded production schedule, due primarily to the mill throughput expansion in late 2016. The revised mine life expands to 2037, or 6 years more than originally planned.

It will cost an estimated $65 million for the mill expansion (2016-2017) and $197 million for the underground development (2022-2026) for a total capital cost of $262 million. As mentioned above, the Aurora gold mine will generate sufficient cash flow at today's gold prices with sub-$700 costs.

Guyana Goldfields' chief executive Scott Caldwell said the company would keep 70% of the cash flows made at Aurora (used for expansion, exploration, reinvestment) while the remaining 30% would go toward repaying bank loans. The deferral of underground mining will give the company time to accumulate cash flow, and familiarize itself with the deposit.

We expect Guyana Goldfields to issue an updated Feasibility Study in the first quarter of 2016 to reflect the extended open-pit mining scenario, and the deferral of underground mining. The revised economic study will include new operating cost parameters, and changes to NPV and IRR based on an updated ore reserve metal price. Guyana Goldfields used a $1,300 price assumption in the FS released in 2013 to calculate its unmined gold reserves. The price is now trading at $1,100. We expect that a lower price assumption could cut Aurora's reserve base.

Guyana Goldfields' share price has done very well relative to its gold peers during the development phase, knowing the gold price has fallen nearly 10% since the beginning of this year. Mr. Caldwell has been continuously buying shares in his company since we last discussed insider activity in June.

Insider buying tells the market that the company's owners have great confidence in the performance of the business. The act of committing his own personal capital to buy shares is a positive sign. Mr. Caldwell has acquired roughly $70,000 worth of common shares in the public market since June 10.

We currently rate Guyana Goldfields a BUY and HOLD with a price target of $4.40 per share for a project return of 50% from the previous closing price of $2.90 per share. We will re-rate Guyana Goldfields when the company provides more information on the new mine plan for the Aurora gold mine.

Investors have positive catalysts to look forward to, including the transition to commercial production next month and an updated economic study in early 2016. We recommend investors to look at the stock on the TSX listing since the OTC listing provides less liquidity.