Red Eagle Mining’s (RD.V) Santa Rosa project is one of the very few low-capex and low-opex stories out there that have a good chance to be developed in a relatively short time frame. We were extremely charmed by the company as it was able to advance the exploration and development programs at Santa Rosa very aggressively; Red Eagle started drilling the project as a public company in 2011 and just 3 (!) years later it was already able to release the results of a feasibility study.
Such a short period between initial drilling and a feasibility study is almost unheard of in the mining sector and it emphasizes the importance to have the right team in place. As 4 directors of the company each own in excess of 2 million shares in Red Eagle, the interest of the board is very much aligned with the interest of all shareholders of the company.
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Santa Rosa – a gem in the making
We already explained in previous reports how the recently completed feasibility study confirmed the Preliminary Economic Assessment. The economics are superior compared to a lot of other projects as the initial capital expenditure is just $70M (including a 10% contingency) and a $4M recoverable VAT payment on top of that.
In return for this initial investment, Red Eagle’s mine will produce a total of 388,000 ounces of gold at an all-in sustaining cost of just $763 per ounce, resulting in an impressive operating margin of almost $450/oz at the current gold price. The payback period will be less than 2 years as the mine plan has outlined a strategy whereby the higher grade zones will be mined first. This will allow the San Ramon zone to produce 143,000 ounces of gold in the first 24 months of the mine life as the first 700,000 tonnes of ore to be processed will have an average grade of almost 6.5 g/t.
Our impressions of Santa Rosa
There’s only so much you can read about a project in press releases and presentations, and there’s only so much you learn from meeting with the management team, so going to Colombia and getting our boots on the ground is a great opportunity to get to know the people working on the project first-hand.
The infrastructure is quite good (actually much better than you’d expect) as there’s a paved road from Medellin to just a few kilometers from the mine gates and the dirt road which is connecting the paved road with the actual mine site is in an excellent condition. The actual base camp is located at an elevation of approximately 2,500 meters above sea level and there’s no doubt all activities can be conducted year round.
The Santa Rosa project truly must have been a prolific gold district throughout the times as by now, Red Eagle has discovered over 2,000 adits on site and some of them are still in good shape as we were able to go underground in one of those historic adits (see images).
We were also stunned to see the amount of work completed by Red Eagle’s community relations team. One of the main aspects of being successful in doing business in South America is making sure to get the approval and support of locals. That’s something Red Eagle immediately understood and throughout the past few years it invested a lot of time, energy and resources in being as transparent as possible with the local community of Santa Rosa de Oso, which is approximately 20 kilometers away. This was an extremely important step to get all the permits in a timely manner.
Our expectations of a lower opex and capex will be confirmed
In our previous report we suggested the weakened Colombian Peso might result in additional capex and operating cost savings. During our site visit we tried to quantify the total impact of the currency depreciation and finance director Ezequiel Sirotinsky confirmed our suspicions.
Approximately 50% of the capex and 90% of the operating expenses are denominated in the local Colombian currency. This means that a 10% change in the exchange rate compared to the USD/COP exchange rate of 1,900 that was used in the feasibility study could reduce the capex by $4M and the AISC by $70/oz.
Based on the current exchange rate of 2350 Colombian Pesos per US Dollar, the savings could be as high as $7M on the capital expenditures and $125 per produced ounce of gold. Keep in mind this is our own guesstimate and isn’t the official point of view of Red Eagle. We just want to indicate there’s a very realistic chance the project will come in under budget and we wouldn’t be surprised at all to see Red Eagle producing gold at an all-in sustaining cost of less than $700/oz. If our (bold) assumptions are correct, the NPV5% of San Ramon could easily increase by $15M using a gold price of $1200/oz.
The project is almost fully financed now
Right before Easter, Red Eagle announced a comprehensive financing package whereby Orion Mine Finance (‘OMF’) invested US$5M in equity on top of making a credit facility of $60M available after the company raises an additional $15M in equity.
This deal gives us two important pieces of evidence that lend credibility to the project. First of all, it’s quite unheard of to see a project being 80% financed by debt ($60M of the expected $74M), which by itself already says heaps about not just the perception of the country risk but also about the veracity and credibility of the numbers of this project in the mining sector.
The Orion people will have thoroughly vetted the feasibility study and by providing $65M in financing, it’s pretty clear the technical and financial executives at Orion were fine with the numbers presented in Red Eagle’s feasibility study. Additionally, by providing the cash, Orion is also making an important statement about the geopolitical risks in Colombia. Orion clearly sees a future for mining in Colombia and as the only collateral for this deal is the Santa Rosa project itself, OMF clearly believes in the judicial system and legal framework of Colombia.
Okay, the debt isn’t cheap, but again, everything comes at a price and we’re already positively surprised to see a high Debt to Equity ratio in the financing mix. And as CEO Ian Slater already told us before, every potential debt financier included a ‘catch’ in its proposal. As Slater personally owns more than 2 million shares of Red Eagle, you can be sure he indeed took the deal which was the best for all shareholders.
About the exploration potential
The mill at San Ramon will kick off with a capacity of approximately 1,000 tonnes per day, but Red Eagle Mining is ambitious and is already taking all necessary steps to ensure the mill capacity could be doubled for an incremental expense of just $14M.
This is a smart approach. On one hand, Red Eagle wants to go into production as fast as humanly possible, even though the reserve estimate contains less than half a million ounces of gold. On the other hand it doesn’t want to jeopardize its future and because the exploration potential at Santa Rosa is extremely exciting. Red Eagle thinks the mineralized zone is continuing towards the eastern boundary of the property and that’s the main reason why the company acquired a 1,673 hectare land package from AngloGold Ashanti which is directly adjacent to the currently known resources at San Ramon.
This ‘bet’ on a continuing mineralized zone towards the East doesn’t come at a high cost as the land was acquired for a cash payment of just $375,000 as well as granting AngloGold a 2% NSR on the gold that might be produced from the land package. We will know soon enough whether or not the theory gets confirmed as Red Eagle is planning to drill-test this zone later this year, along with highly prospective regional exploration targets. This will also ensure a continuous flow and the drill program will prevent from Red Eagle seeing a classical temporary dip in its share price during the construction phase.
Conclusion
The San Ramon zone at the Santa Rosa project will be a gold producing and cash flowing mine before the end of 2016. Approximately 80% of the necessary capex will be funded through debt (which already is a huge achievement considering the project is located in a second-tier country). Right now we’re only waiting for the final piece of the puzzle, the mandatory $15M equity financing, to be completed (which we expect to happen shortly).
The current mine plan at San Ramon should be considered to be just a ‘first step’ and we expect a large part of the cash flow to be deployed in the ground to add more ounces to the current reserve estimate. A first drill program will kick off later this year and will aim to test the eastern extension of the San Ramon zone which is likely continuing onto the newly acquired land package.
Our recent site visit has strengthened our opinion Santa Rosa will very likely be much larger than what the market is currently anticipating. Red Eagle is currently already trading at a dirt cheap valuation of approximately 0.5 times the after-tax NPV5% using a gold price of $1200/oz and a total amount of outstanding shares of 150 million (versus the 92.4 million shares right now). So you can buy the company for just half of the fair value and you get the additional exploration upside and the benefits of a weaker Colombian Peso thrown in for free.
Disclosure: Red Eagle Mining is a sponsoring company. Please see our disclaimer for current positions.
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