Mining gold in Ghana: Timing is everything

Ask Douglas MacQuarrie about timing and he’ll point to his stock price. While all of the Juniors have suffered with the sub-prime mortgage meltdown and the subsequent liquidity crisis, PMI Gold was hit particularly hard.

Focused on the mining-friendly and resource rich sub-Sahara country of Ghana, PMI Gold Corp was busy acquiring properties and developing their assets throughout 2007.

When the economy started to turn in early 2008 and cash was withdrawn from the market, it became clear that they would need to find alternative sources of cash. David Buckle (the Chairman at the time) felt that, given an undervalued share price of just under thirty cents, a bond issue was the best way forward. The company obtained a rating of BB- and the groundwork was laid for a Bond issue in June 2008 that would see them through to production.  However, as the global liquidity crisis worsened, the bond was put on hold until the market recovered and the company’s stock devalued to just pennies.

With the Bond strategy delayed indefinitely, PMI Gold needed a new vision and direction. Enter Douglas MacQuarrie. A no nonsense, hands-on leader, he is confident that the company can overcome the current short-term cash crunch and release the stock’s significant potential.

Normally, a Junior will buy the rights to an asset, invest millions to define and refine its potential, then look to sell to a Major at a premium. Instead, MacQuarrie is looking to move into limited production to generate internal cashflows and self-finance until the market recovers. At that point PMI Gold can re-visit the idea of issuing a Bond to raise the required $20M. There are several factors that are working in his favour.

The price of Gold has risen steadily over the past five years from an average of around US$400 per ounce and peaking above US$1,000 per ounce in early March of 2008. With the credit crisis, they have stabilized to more than US$800 per ounce today, with a likely mid-term range of between US$800 and US$840 per ounce. This dramatic and sustained increase in the value of gold has made projects that were once considered unviable an economic reality. It is here that MacQuarrie feels he can carve a niche.  “Our model is to take these small but high grade deposits that the big boys don’t want and put them into production… because our data suggests that just a few hundred thousand ounces in the right location and grade can give us payback.”

PMI Gold holds a significant 747 square km land position in Ghana, which includes seven projects in two major mining belts, the Asankrangwa and Ashanti.  Their most developed project is the Kubi Gold Project in the Ashanti Gold Belt, twenty kilometers South of AngloGold Ashanti’s Obuasi mine. The rights to this property are owned exclusively by PMI Gold, and it is this project that they would exploit to allow them to get through this short term cash-crunch.

Kubi was previously mined in the late 1990’s with the removal of 59,696 ounces of gold in 500,230 tonnes of oxide ore grading 3.65 g/t gold. However, a common feature of mines in Ghana is that they run deep (can be many kilometers) and that the grade increases with depth. As such, PMI had Golder Associates complete an NI 43-101 for the property. The results showed an indicated resource of 604,085 oz and inferred of 315,079 oz, and this is without further exploration! A preliminary economic assessment concluded that based on a price per ounce of US$750, underground production of up to 1,000 tpd, and a discount rate of 10%, that the project would have a positive NPV of US$38M and a payback of just 2.9 years.

Ghana is an English-speaking constitutional democracy that has enjoyed peace and stability since its Constitution was passed in 1992. They are dedicated to a multi-party democracy and are considered one of the most stable governments on the continent. This has contributed to GDP growth (5.5% real growth in 2007), improved Foreign Direct Investment (according to the IMF, FDI grew from US$155M in 2000 to US$450M in 2006), and improved poverty rates (fallen from 52% in 1992 to 28% in 2006). Given their history of gold production (Ghana’s nickname is “the Gold Coast”) the government is accustomed to dealing with resource companies and has created a mining-friendly environment.

The country boasts a readily-available work force with experienced miners and a tropical climate that provides favourable year-round mining conditions. As a testament to the favourable work environment, Ghana is host to many of the majors, including Newmont and Goldfields and Mid-tiers such as Redback.

When working internationally, strong representation from people that have local connections and expertise is critical. PMI Gold has considerable bench strength in this regard. They are fortunate to have people like Thomas Ennison serving as their Local Legal Council. He has served as a Barrister and Solicitor of the Supreme Court of Ghana, was the Ghanaian Ambassador to Italy, and acted as an advisor to the United Nations on mining.

The Honourable J.H. Mensah, an Independent Director of PMI, is Chairman of the National Development Planning Commission of Ghana and reports directly to the President and Parliament of Ghana. The Country Manager for PMI Gold is Neil MacFarlane, who has thirty years of experience in exploration, geology, and underground gold mining and reserve definition. Over his career he has lived and worked throughout Africa and is a critical link to the Canadian parent company.

Douglas MacQuarrie firmly believes that his plan to generate short term internal cashflows and his strong management team will see them through the current cash crunch and allow him to unlock the value that is inherent in his company’s stock.

Credit: Paul Ljucovic

Source: Proactive Investors

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