Guyana Goldfields New Com (GYGC)

[Tommy]

$GUYFF - $GUY.V - Guyana Goldfields Is Highly Undervalued

Aug 6 2013, 04:26 | about: GUYFF.PK (GUYANA GOLDFIELD NEW)

http://seekingalpha.com/article/1606462-guyana-goldfields-is-highly-undervalued?source=email_portfolio&ifp=0

This article is about Guyana Goldfields (GUYFF.PK). Guyana Goldfields has a market capitalization of $204 million, or $215 million fully diluted. It owns two projects in Guyana: the Aurora Gold Project, and the Aranka Project.

The Aurora Gold Project is currently in the development stage. It contains an estimated 8.5 million ounces of high grade gold, and the company expects to bring it into production by the beginning of 2015 at over 100,000 ounces per year. This figure is expected to exceed 300,000 ounces per year at the peak of the mine's life.

The company is advanced in getting the Aurora Gold Project into production. It has already obtained permitting from Guyana's government, and it has $123 million of the $205 million that it needs in order to develop the mine. Further, given that the mine is estimated to have relatively low production costs, it should be very profitable, and therefore Guyana Goldfields should have no trouble securing the $82 million or so that it needs to develop the Aurora Gold Project.

Given that the company has a market capitalization of just $204 million, and its $123 million cash position, it is very inexpensive relative to its estimated resources and its anticipated production. It therefore seems to be a solid investment opportunity for gold bulls.

Guyana Goldfields' Properties

Guyana Goldfields has two projects: the Aurora Gold Project, and the Aranka Project, containing the Sulphur Rose deposit. Both properties are located in northern Guyana.

(click to enlarge)

A; The Aurora Gold Project

The Aurora Gold Project is by far Guyana Goldfield's most valuable property, accounting for the vast majority of the company's resources and all of its foreseeable production.

Resources

Guyana Goldfields has an estimated 8.4 million ounces of gold, with 3.5 million ounces of reserves at 2.8 grams of gold per ton, and 4.9 million ounces of gold resources at roughly 3.3 grams per ton. The following tables detail this information. Note that Guyana Goldfields counts its reserves also in its measured and indicated resources in the two tables.

(click to enlarge)

(click to enlarge)

With the company's cash backed out its high grade in-ground gold is very inexpensive at just $10 per ounce.

Production

Production at Aurora is expected to begin in 2015. It will expand until it peaks in 2020. At first the company will mine ore at the surface using open pit mining, and it will begin underground mining in 2017. This information is detailed on the following chart.

(click to enlarge)

As the mine ages Guyana Goldfields will mine more and more underground, which means that as the mine moves past peak production it should be producing less gold at higher prices (underground mining is more expensive than open pit mining). The following charts the company's anticipated production plan for Aurora.

(click to enlarge)

Aurora will have low production costs, with cash costs being around $300/ounce for the first five years of the mines life. In the next 5 years of the mine's life the company will mine more underground ore, and its costs will go up to $380/ounce. It predicts that its all-in costs will be $783/ounce and $814/ounce for each respective timeframe. The following chart itemizes the company's estimates of its production costs.

(click to enlarge)

Given the company's production and cash cost estimates the following table estimates its future cash flow. I have provided four estimates of this at each of six gold prices. I assume production of both 150,000 and 250,000 ounces of gold per year in order to take both the early (2015 - 2017) and later stages (2018 - 2023) of Aurora's life into consideration. I also calculate each of these estimates for $800/ounce production costs, and a more conservative $1,000/ounce production cost.
Gold Price (U. S. Dollars Per Ounce) 150,000 Ounces of Production (Cash Flow in Millions of U. S. Dollars) 250,000 Ounces of Production (Cash Flow in Millions of U. S. Dollars)
1,000 0 - 30 0 - 50
1,250 37.5 - 67.5 62.5 - 112,5
1,500 75 - 105 125 - 175
1,750 112.5 - 142.5 187.5 - 237.5
2,000 150 - 180 250 - 300
2,500 225 - 255 375 - 425

From these figures it appears that Guyana Goldfields is highly undervalued relative to its future estimated cash flow. Even if we assume the worst case scenario for the company's cost of production, at $1,250 gold the company will see cash flow in 2015 of $37.5 million, and the company's shares trade at just 5.4 times this cash flow. Even if we factor in the money that Guyana Goldfields needs to raise by either diluting shareholders or selling some of its gold to a royalty company, it still trades conservatively at around 8 or 9 times cash flow. Keeping in mind that this cash flow is only a year and a half away, and that this is a worst case scenario for the company, the shares appear to provide excellent value based on these figures for Aurora.

B: Aranka (Sulphur Rose)

Given that the Aurora project is so close to production and requires so much capital and labor the Aranka project is of little importance to the company at this point in time. It is an exploration project with roughly 500,000 ounces of resources, the details of which are found on the following table.

(click to enlarge)

Thus far the company has not found enough for a mine. Furthermore, there is a reasonable possibility that the 100,000+ underground ounces occur at too low a grade to be mined economically. Thus in order to determine if the property has any value the company has to do additional drilling in order to find more resources. Given the company's high capital needs, however, I would not expect this to take place until after Aurora goes into production at the very earliest, and probably not until the company begins mining underground in 2017.

Risks

A: The Price of Gold

Guyana Goldfield's share price will be correlated to the price of gold, which has plummeted as of late as is evidenced in the following chart. However it seems to have found support at $1,200 per ounce.

(click to enlarge)

The price increase above $1,300 appears to be bullish, which suggests that the downtrend in gold may come to an end. Still, the downtrend is intact, and lower gold prices will be reflected in Guyana Goldfields' share price.

B: Mining in Guyana

Guyana is a relatively stable place to mine with transparent regulatory and taxation policies. Furthermore, gold mining is and has been an essential part of Guyana's economy for decades. There doesn't seem to be a significant risk of work stoppages, which are prevalent in many African countries such as Tanzania or Egypt, and there is no history of property usurpation as there has been in Venezuela. Nevertheless Guyana is an impoverished third world country, and these are especially prone to capricious government action or violence due to terrorist organizations. Thus investors should not shy away, but they should be on guard and unwilling to pay as much for Guyana Goldfields as they would for a similar mine in a safer jurisdiction such as most of Canada and the United States.

C: Guyana Goldfield's Size

Guyana Goldfields essentially has one property. If for whatever reason the company cannot mine Aurora, then the company is worth the cash on its balance sheet. Fortunately for now this is more than half of the company's market capitalization, although keep in mind that it will be using this capital over the next several months to build Aurora, and that in a few months there may not be nearly as much cash to cushion the shares should anything happen to Aurora.

Conclusion

Guyana Goldfields appears to be an undervalued, solid investment for those who are bullish on the price of gold and who have a long-term investment horizon. Even in conservative scenarios the company trades at a very low multiple to its future cash flow. Furthermore, the company has most of the capital it needs to develop Aurora, and it should have little trouble securing the rest of what it needs in a way that is not very punitive to existing shareholders.

The only caveat is Aurora's location. But while Guyana is not as safe a place to mine as Canada or Sweden, there are no immediate threats to Guyana Goldfields' properties. Ultimately for investors who are willing to endure this somewhat heightened political risk Guyana Goldfields is an excellent investment opportunity.