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Dan Hrushewsky: Low-Cost, High-Margin Mining in West Africa

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AfricaThere are two things investors pay too much attention to, according to Jennings Capital Analyst Dan Hrushewsky: metals prices and grade. Why? Extremes of low and high prices never last, and high grades don't always make for economic deposits. In this interview with The Gold Report, Hrushewsky explains the metrics behind his all-in cash cost estimates and profiles West African projects that are connecting the dots.

The Gold Report: So far in 2013 we've seen steep one-day drops in metals prices and seemingly endless redemptions in gold exchange-traded funds (ETFs). Is the gold bear here to stay?

Dan Hrushewsky: Interesting question. Bear markets never last forever, and being roughly two years into this one, I would say that we are closer to the end than the beginning. It is difficult to say how far away we are from the end. We may be seeing the first signs of life. You'll recall that during the last bear market in the late 1990s and early 2000s, signs of life began showing up in the diamond sector first. It's almost as if investors still had a bad taste in their mouth from the traditional gold and base metal sectors, but started feeling comfortable with risk again and started with a different "flavor." We could even be starting to see this in the uranium sector with some of the juniors active in the Athabasca Basin, such as Fission Uranium Corp. (FCU:TSX.V) and Alpha Minerals Inc. (AMW:TSX.V).

TGR: Some mines aren't profitable at $1,250 per ounce ($1,250/oz) gold. How are companies adjusting to the new price environment for gold?

DH: Recently, a lot of companies have been talking about: 1) cutting head office costs, 2) renegotiating contracts with third parties, 3) deferring capital expenditures (capex), cutting down on sustaining capex and deferring pre-stripping, 4) re-sequencing mine plans to access higher grades first, 5) re-calculating resource estimates at higher cut-off grades, reserve estimates at lower gold prices and 6) suspending, closing or divesting of higher-cost assets.

TGR: Are mines operating in West African countries typically higher margin?

DH: Not necessarily. It depends on the specific characteristics of the deposit, such as grade and metallurgy, and access to infrastructure, such as cheaper hydroelectric power and water. High-margin projects are strong performers in high or low gold price environments and, as an example, two such higher-margin projects are those of Roxgold Inc. (ROG:TSX.V) and True Gold Mining Inc. (TGM:TSX.V). Roxgold's 55 Zone deposit is one of the highest-grade deposits in the world with 0.6 million ounces (0.6 Moz) Measured and Indicated at 19.3 grams per ton (19.3 g/t) at a 5 g/t cut-off grade, and has very high gravity recovery. This translates into a low cost, high-margin project with lower financing risk. True Gold's Karma project is one of the highest-grade heap-leach projects in the world with above-average recoveries and leach kinetics. This also translates into a low capex with therefore lower financing risk.

TGR: What are your near-term and medium-term prices for gold?

DH: I use a near-term gold price similar to current levels, and a long-term gold price of $1,500/oz. I don't use lower gold prices in the long term, because if you use steady state lower prices you have to assume a lower-cost structure, and you have to assume different mine plans and different resource/reserve estimates (i.e., smaller reserves/resources at higher grades). Making these detailed adjustments in my model just doesn't make sense.

TGR: As an analyst, are you shifting your focus to low-cost producers? Perhaps some equities operating high-grade underground mines or open-pit, heap-leach operations?

DH: Most of the companies I cover are attractive depending on your gold price outlook. For example, if you think gold prices are going up, you would want to own companies with high leverage to gold price increases, such as Volta Resources Inc. (VTR:TSX), Orezone Gold Corporation (ORE:TSX) or Perseus Mining Ltd. (PRU:TSX; PRU:ASX). If you think low gold prices will be around for a long time, then the companies with high-margin projects, such as Roxgold and True Gold, are optimal investments. Of course these latter companies do well in rising gold price environments as well.

TGR: Many of the companies you cover are either exploring or mining in West Africa. In a risk-averse market, why would an investor in junior equities want to be vested in West Africa versus somewhere like Mexico?

DH: Because I find that the West African companies are a better value than companies elsewhere due to perceived higher risk. I say "perceived" because I believe that many places in, for example, Mexico, are higher risk than many West African countries. I also believe that the potential for exploration success in West Africa is better due to relatively less previous mining activity there.

TGR: How does an investor mitigate risk while getting exposure to African plays?

DH: By choosing companies with good management and higher-quality, advanced projects in good jurisdictions. This includes True Gold, Roxgold, Orezone, Perseus, Asanko Gold Inc. (AKG:TSX; AKG:NYSE.MKT) and PMI Gold Corp. (PMV:TSX.V; PVM:ASX; PN3N:FSE).

TGR: In June you visited Teranga Gold Corp.'s (TGZ:TSX; TGZ:ASX) Sabodala gold mine in Senegal and the adjoining Oromin Explorations Ltd. (OLE:TSX; OLEPF:OTCBB). Teranga has made a takeover bid for Oromin. How would investors be served by a successful bid?

DH: Because mining is often an isolated and standalone activity, combinations rarely add much synergy. However, the Teranga/Oromin combination would be very synergistic and should significantly benefit the shareholders of both companies. Teranga has a mill, but only two years of effective mine life, whereas Oromin has 43.5% of an open-pittable reserve of 1.4 Moz grading 2.05 g/t, which Teranga could definitely use—a match made in heaven. Teranga would also need to work out an arrangement with the other 56.5% joint venture owners to either buy them out or process their share of the deposit, in order to gain access to the whole deposit.

TGR: How is Teranga controlling costs at Sabodala?

DH: Teranga is stockpiling lower-grade ore (we estimate the stockpile grade is approximately 0.67 g/t on average) and is only processing the remaining higher-grade material for now.

Also, Teranga is implementing margin enhancement initiatives such as optimizing mine plans, re-sequencing pits, renegotiating contractor and supplier contracts, reviewing employment levels and reducing discretionary expenditures such as delaying new mine development, reducing sustaining capital, reducing exploration expenditure and reducing corporate costs. Teranga also has an excellent preventive maintenance program at the Sabodala mine, which has resulted in significant cost savings.

TGR: Let's circle back to Roxgold. SEMAFO Inc. (SMF:TSX; SMF:OMX) owns the Mana project in Burkina Faso, which is next to Roxgold's Yaramoko concession. SEMAFO just sold its stake in the Samira Hill gold mine in Niger. Is SEMAFO likely to use that cash as part of a bid for Roxgold?

DH: It is rumored that SEMAFO made an informal offer for Roxgold a year or so ago, before both companies underwent management changes. The offer was purportedly too low, and both companies agreed to discontinue discussions. Since then, SEMAFO has discovered the Siou deposit, 15 kilometers east of its Mana mill. The Siou deposit has an in-pit Inferred resource of 1 Moz grading 4.62 g/t. I suspect that the urgency of finding additional higher-grade feed for its Mana mill has abated with the discovery of this very interesting deposit.

TGR: Some of the companies you cover in West Africa have published some noteworthy drill results in 2013. Could you tell us about some of the more newsworthy ones?

DH: True Gold has had some interesting results from in-pit metallurgical drilling for its definitive feasibility study. Grades of these holes have been significantly higher than the resource grade. The diameter of these holes was some 40% greater, and may indicate that when True Gold goes to mine the deposit, grades will be higher than the estimated resource grade. Also, I am excited by some of the extensional drilling outside of the current pit outlines, which speaks to the excellent potential to expand the resources of the project.

Sarama Resources Ltd. (SWA:TSX.V), a company that I do not cover but follow closely, has had excellent results—36 meters (36m) of 6.48 g/t—at its MM prospect, which is shaping up to be a potential 2+ g/t resource. Perseus has had interesting results from its regional program in Cote D'Ivoire, including 28m of 8.1 g/t at its Mbengue prospect. PMI, in its quest to find a viable oxide starter pit for its Obotan gold project in Ghana, has discovered a potential candidate—its aptly named Dynamite Hill prospect, where one hole returned 10m of 13.65 g/t. Roxgold has had excellent high-grade results throughout its resource delineation drilling at Zone 55, and recent results such as 14.2 m of 12.7 g/t were no exception.

TGR: Are there any other gold stories in West Africa that you would like to share with our readers?

DH: Some other interesting stories to watch are Orbis Gold Ltd. (OBS:ASX), Papillon Resources Inc. (PIR:ASX), Aureus Mining Inc. (AUE:TSX; AUE:LSE), African Gold Group Inc. (AGG:TSX.V) and Ampella Mining Ltd. (AMX:ASX).

TGR: To conclude, when it comes to junior gold equities, what is one thing investors put too much emphasis on and one thing investors pay too little attention to?

DH: Investors put too much emphasis on the gold price (extremes of low and high gold prices never last), and grade (high grade on its own does not always make a deposit). They put too little emphasis on grade continuity (isolated high-grade drill results are meaningless—you need the dots to connect and a lot of them) and costs (you don't put grade in the bank; you put the difference between the gold price and the cost). Also, you need to take into account all the costs. My all-in cash costs include the direct mining and milling costs, royalties, sustaining capital, taxes, corporate general and administrative expenses and financed amortized capex.

TGR: Thank you for your time.

Dan Hrushewsky, senior precious metals analyst at Jennings Capital, is primarily responsible for African precious metals. He joined Jennings Capital in Toronto from NCP Northland Capital Partners, and was previously senior vice president, corporate development with Chalice Gold Mines and vice president of High River Gold. Hrushewsky has nearly 30 years of experience within the mining sector. Hrushewsky holds an engineering degree from the University of Toronto, a Master of Business Administration degree from McMaster University and is a CFA.

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1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Fission Uranium Corp., Roxgold Inc., Teranga Gold Corp. and True Gold Mining Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Dan Hrushewsky: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has participated in a syndicate that has raised money for Roxgold Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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