We have been keeping an eye on Columbus Gold (CGT.V) the past few years as we were very impressed by the quality of the Paul Isnard gold project in French Guiana when we visited it several years ago. And indeed, Columbus Gold was able to increase the resources at Paul Isnard from 1.9 million ounces to 4.3 million ounces last year and we are expecting a further resource increase within the next few weeks.
The Paul Isnard project
Columbus Gold owns 100% of the Paul Isnard project in French Guiana and we generally consider this to be one of the most exciting exploration projects in the entire world. The property contains eight mining concessions for a total surface area of in excess of 13,000 hectares.
There has been some historical artisanal mining since the second half of the 19th century but the Paul Isnard project hasn’t really seen any modern exploration techniques being applied until Paris-listed AuPlata acquired the project and discovered a 1.9Moz inferred resource estimate. However, it was only when Columbus Gold acquired the property that exploration efforts were shifted into a higher gear resulting in an updated resource estimate of 4.3 million ounces at an average grade of 1g/t gold using a cutoff grade of 0.4 g/t. This resource estimate is very robust as even at a cutoff grade of 0.5 g/t, the project would still contain 4 million ounces at an average grade of 1.1 g/t.
Keep in mind that resource estimate was based on ‘just’ 101 additional holes for a total of almost 23,000 drilled meters. It’s important to note the company has recently finished another drill program consisting of an additional 126 drill holes which were aimed at both a resource upgrade and an expansion as the mineralization remained open along strike and at depth.
The deal with Nordgold
Columbus Gold signed a joint venture agreement with Russian gold producer Nordgold in March of last year. As it became clear Columbus was a bit too small to start an aggressive exploration program at Paul Isnard, it started negotiations with Nordgold. The final terms of the joint venture agreement seem to indicate Columbus was in the driver’s seat and it most definitely is not a ‘shotgun marriage’.
Nordgold can earn a stake of 50.01% of the Paul Isnard project by spending no less than $30M in exploration expenditures and completing a bankable feasibility study before the end of March 2017. Needless to say this is a very aggressive time line as not a lot of company are able to advance a multi-million ounce gold project from the exploration stage to a feasibility study in less than three years (keep in mind Columbus Gold still needs to release a first PEA on the property). On top of that, Nordgold pays Columbus Gold an ‘operator fee’ which resulted in a cash inflow of almost C$650,000 in the final quarter of last year.
So Nordgold has very strict deadlines to meet if it wants to earn a 50.01% stake in the project and it’s in the company’s best interest to cough up the cash to make sure the exploration and technical work continues without any interruption. This shouldn’t be a problem at all as Nordgold has generated $528M in operating cash flow (before changes in working capital) in 2014, so the Russians should be able to fund all expenses (and even the initial capital expenditure) without any problem.
Why Columbus Gold is very likely a buyout target
Paul Isnard isn’t just your average exploration project and in this section we will explain why Paul Isnard ticks a lot of important boxes that might trigger Nordgold’s desire to obtain 100% of the property.
A first consideration is the total amount of ounces. If you thought a 4.3Moz open pit resource is already quite nice, then you will very likely be surprised by the company’s next resource upgrades.
As we said before, Columbus Gold has completed another 126 hole drill program (fully funded by partner Nordgold) and we expect this program to contribute to an improved resource estimate. As you might remember from our earlier blog posts, there were some ‘gaps’ in between mineralized zones which were obviously excluded from the resource estimate. Columbus has drilled several holes in these gaps and we are quite comfortable this round of infill drilling will have a substantial impact on the overall resource estimate and we are expecting a 5Moz+ resource estimate with at least 70% of the ounces in the indicated category.
On top of that, an additional $10M exploration program is expected to start in April for an additional 21,500 meters mainly consisting of infill drilling to determine near-surface oxide zones and to define a measured resource estimate for the starter pit (which will undoubtedly focus on the higher grade areas of the project).
A second box to tick is the metallurgical test work. According to Columbus Gold, the initial studies are indicating the recovery rate of the Paul Isnard ore could be as high as 97% (and ranged between 95% and 97%). This means that at an average grade of 1g/t, the recoverable net value per tonne of rock is approximately $36/t but we wouldn’t be surprised if the average grade of the project would increase after seeing the results of the 2014 drill program.
Two very important technical boxes have now been ticked, and a third important parameter is the geopolitical risk. Not all investors seem to realize French Guiana isn’t ‘just another Guyana’ as it’s an integral part of France. This means there’s an extensive legal framework in place and it’s unthinkable any mining project will be expropriated by the government just because it wants to. French Guiana is without any doubt the safest place in South America to do business in as all of France’s laws and procedures are integrally applied in this overseas territory.
An additional advantage of operating in French Guiana is the strong US Dollar. As the base currency in French Guiana is the Euro, the purchasing power of one US Dollar has increased tremendously in the past few months.
Whereas the EUR/USD exchange rate was 1.35 last summer, this ratio has now decreased to 1.10 effectively resulting in an 18% cost saving on domestic expenses (and this will also have a sizeable impact on the initial capital expenditures). Even though the gold price is trading at just $1200/oz, the gold price expressed in Euro is trading near the highest level in approximately two years.
As Nordgold is now mainly operating in Africa and Russia, the geopolitical risk level of the consolidated company could be lowered by acquiring an asset in an ultra-safe region.
The new exciting discovery in Nevada
Until halfway last year, Columbus Gold was pretty much a one-trick pony as Paul Isnard was its only advanced stage exploration asset. The company did own some smaller early stage exploration plays in Nevada but we didn’t take the value of these properties into consideration.
However, things have changed over the past few quarters as it’s now starting to look like Columbus Gold has struck gold (pun intended) on its Eastside project in Nevada. The project is located just 30 kilometers from Tonopah with access through a paved highway until 10 kilometers before the project. There’s also a high-voltage power line running right through the property that could be seen as icing on the cake.
The company discovered oxidized gold mineralization at Eastside a while ago with drill intercepts of 21 meters at 1.6g/t, 53 meters at 1.1 g/t and almost 50 meters of 0.92 g/t. The fact that this is oxide mineralization plays a key role here as it will be extremely easy to use the ore for a heap leach operating plan, and preliminary metallurgical test work has indicated the recovery rate could be as high as 95% which is really extraordinary for any heap leach project.
The big question now obviously is how large Eastside could be and if it could really benefit from economies of scale. Columbus Gold has outlined five high-priority drill targets as it wants to drill-test some of the targets to find out what it really has on the property. The company has scheduled an exploration program of up to 47,500 meters for a total budget of $6.5M which should start in the second quarter of this year. This should result in a maiden resource estimate by the first quarter of next year and we think it’s not unlikely this first resource estimate could come in above the ‘magical’ 1Moz mark.
Conclusion
Columbus Gold has spent a lot of efforts to de-risk the Paul Isnard property and as the resource base in French Guiana has more than doubled, the company is definitely on the right track to continue to advance the property. It doesn’t have to spend a single dime in South America as JV partner Nordgold is funding the first $30M of the exploration expenditures and is actually paying Columbus to spend the Russian cash.
We expect the upcoming updated resource estimate to contain in excess of 5 million ounces of gold with the majority of the ounces in the indicated resource category. And it won’t stop there. Based on the exploration results we still expect the project to be an 8Moz+ deposit as the mineralization still remains open at depth and along strike.
This will very likely trigger Nordgold’s interest and we wouldn’t be surprised if Nordgold would make a move to secure full ownership of the project. Keep in mind Nordgold has always bought out its minority partners in projects (like for instance High River Gold in Burkina Faso a few years ago to secure full ownership of the Bissa gold mine), and we anticipate Columbus Gold’s status will change within the next 12-24 months.
As CGT has been making considerable progress on its Nevada assets as well, we think Nordgold might make an offer to acquire Columbus Gold for a cash payment and a new share in a SpinCo which would retain the other assets.
Columbus Gold has a very healthy cash position and 2015 will be filled with a steady news flow and that’s what makes the company one of our favorite exploration stories for this year as it will continue to advance on two fronts.
Disclosure: Columbus Gold is a sponsor of the website. We also hold a long position. Please see our disclaimer for current positions.
