Teranga Gold (TGZ.TO, ASX:TGZ) has released the results of a definitive feasibility study on the Banfora gold project in Burkina Faso. Even though the mine life was based on a reserve estimate of 1.2 million ounces, the results were actually disappointing.
Teranga might be ‘pleased’ with a ‘solid’ base case, but an IRR of 15% using a gold price of $1250/oz is very disappointing. On top of that, spending $232M in capex on a property which has a NPV5% of just $90M is questionable. A rule of thumb is that the NPV should be higher than the capex, and that’s definitely not the case here. On top of that, we would even dare to say using a discount rate of 5% is questionable at best. A discount rate actually is a ‘risk premium’ required by an investor, and not a single African country deserves a low discount rate of 5%. Even economic studies on North American projects are using at least 5-6%.
Needless to say we are absolutely underwhelmed by the results of this study. Teranga should NOT be ‘pleased’ with a 15% IRR and a double digit net present value. And it’s actually even worse. Teranga acquired Gryphon Minerals for $63M, and this expense has not been included in the total value ‘creation’ chain. And it doesn’t get better; Teranga Gold also owns just 90% of the property, so just $81M of the NPV is attributable to Teranga Gold.
Long story short, Teranga paid $63M to create $81M in value for a net accretive value of $18M. As this excludes any exploration drilling since 2016 (thus excludes the current 65,000 meter drill program), it’s safe to say Teranga Gold won’t have created a single dollar of additional value for its shareholders using a $1250 gold price scenario.
Teranga Gold should not be ‘pleased’ with the results of the feasibility study, but embarrassed.