The Federal Reserves balance sheet continues on its parabolic path as it reached $6.6 trillion, which was published April 30th, 2020.
With unprecedented money printing coming from Central Banks globally, the Bank of America recently issued a bullish call on gold hitting $3,000 within the next 18 months, which represents a 50% increase from previous all-time USD highs. The bank increased its target from US$2,000 previously, as policymakers across the globe unleash vast amounts of fiscal and monetary stimulus to help shore up economies hurt by the coronavirus. It’s also interesting that given the economic crisis many countries are currently facing, Central Banks remained net buyers of gold throughout January – March while dumping U.S treasuries.
With gold having strong fundamentals in this uncertain environment, a company to pay close attention to in the coming months is the world’s newest gold producer. Steppe Gold (TSX: STGO), a Mongolian based gold producer, announced on March 25th that the company had commenced gold production at its 100%-owned ATO gold mine in Mongolia. The company remains on track to produce approximately 60,000 ounces of gold in 2020 at cash costs of circa $500 per ounce from its heap leap operations.
Positive cash flows from the ATO Mine will go towards studies to expand the open pit and processing facilities for the company to increase gold production to a targeted 150,000 ounces of gold per annum, which is a part of its Phase 2 plans.
The company has proven in-country management as the company’s executive chairman Matthew Wood was the founder and executive chairman of a Mongolian coal company, Hunnu Coal Limited, which was sold for $500 million in 2011. Alongside a proven management team, the company has also recieved major support from Mongolian government as its newly established investment fund, the Mongolian National Fund provided a landmark investment in January, which serves as a great endorsement as Steppe was the first mining company to ever receive capital from the Mongolian Investment Fund.
Mongolia is one of the emerging players within the global mining industry, implementing sustainable growth into the country’s long term development policy and the ever-evolving mining industry. The foundations of continuous economic growth of the country have been driven predominantly by the mining sector, and the policymakers, as well as the public, are convinced that Mongolia’s natural resource industry offers the prospect of long term and sustainable economic development.
Mongolian economic growth has been strong these past few years, as it has been around five percent since 2017. In 2019, the GDP growth rate was 5.1%. The steady economic growth has been driven predominantly by the mining sector, which counts for 24% of the total GDP.
Steppe Gold is focused on becoming Mongolia’s premier precious metals company as these first few years are part of a grander plan of solidifying the company as a mid-tier gold producer capable of producing 150,000 ounces per annum. It is expected the company will begin construction for phase 2 in 2021/2022. By commencing production, phase 2 should be a relatively seamless transition as it will require limited equity dilution due to the support from its on-going cash flow at ATO.
The company already has now mined, crushed and stacked approximately 533,0000t of gold ore at a grade of 2.0g/t on Cell 1 of the leach pad where leaching has commenced. At an expected gold recovery rate of 70%, Steppe already has 24,000 ounces of leachable gold on Cell 1. This equates to approximately US$38M of recoverable gold at a gold price of $1,600 per ounce.
The assumption is that the life of mine all-in sustaining costs will be $650, which showcases the type of free cash flow the company could generate in the years to come.
Its also worth noting, most junior producers trade in a range of 3-7X expected cash flow, Steppe Gold is trading at 1X the expected 2020 cash flow which truly showcases its revaluation potential as more market participants become aware of the companies story.
This year the company will be doing extensive exploration programs and releasing resource upgrades, which are currently being calculated for ATO 1, 2, 4 deposits alongside an initial resource for the Mungu deposit, which should help replenish its reserve profile.
We recently caught up with Aneel Waraich, Steppe’s Executive Vice President and Director. We asked him a few questions about upcoming plans as the company gets closer to first gold sales:
With the commencement of production at the ATO plant, what are Steppe’s Phase 2 plans?
As the production of ATO phase 1 comes online, we will start pushing forward on the feasibility work for Phase 2. We anticipate completing this required feasibility work over the next 12 months, if not sooner. We are working from existing studies, so this will be a revision/addition to what we have already and, most importantly, incorporating our new discovery and deposit Mungu.
In addition to the feasibility work, we will need to do some additional exploration and reserve drilling on the fresh rock ores.
When will construction begin for Phase 2?
We would expect construction to start in the 2nd half of 2021 at the earliest so we have been guiding 2021/2022 for start of this construction on Phase 2 and commissioning of the CIL plant in 2023.
Will the cash flow generated from Phase 1 mining production, help self-fund phase 2 plans?
A significant amount of cash flow will be generated in Phase 1, and realistically we believe the first two years of net cash flow accumulation could be the equity contribution for the phase 2 build-out. We plan on funding phase 2 with debt and equity with a most likely split of 70% debt and 30% equity.
We believe we should be in a very strong position to fund the expansion with our own cash flow. We will take advantage of debt given we will have minimal to no debt by then and could take on new debt on favorable terms as an established producer, operator, and cash flowing entity to expand our operation.
When it comes to gold sales, is the company working with the Mongolian central bank?
Steppe Gold plans to sell all of its gold and silver to the Mongolian Central Bank. This allows the country to accumulate gold reserves and also foreign US currency if they would like. It is good for the country but also for Steppe Gold as we will not be exporting the gold and will get paid immediately (same day or next business day) upon delivery of the gold to the Central bank.
Be on the lookout for Steppe Gold these next few months, as the company has many exciting catalysts for the remainder of 2020.
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