Dippenaar's great leap of faith
Michael Coulson
Posted: Fri, 19 Jan 2007
[miningmx.com] -- AT some stage in their careers, many executives in big companies are faced with a choice: stay comfortably where they are, even though the chances of further promotion are limited, or take the risk and move on and out to a more senior position in a smaller operation.
One who took the latter course was Ferdi Dippenaar when he took the role of CEO of Great Basin Gold (GBG) in December 2005, six months after that company first approached him and at the third time of asking.
For years, Dippenaar had been seen as Harmony CEO Bernard Swanepoel’s right-hand man. But both are in their mid-40s, and with Swanepoel seemingly a fixture, Dippenaar had got as far at Harmony as he could. It’s possible, too – though he doesn’t say so – that he also felt a little sidelined from the main action in his role as executive director of corporate affairs.
However, GBG offered him the opportunity to build up his own mining group. The Canadian-based explorer, whose main original project was the HDB venture in Nevada, bought the Burnstone project in South Africa’s South Rand gold basin, about 80km south-east of Johannesburg.
The two make an interesting package. HDB is a relatively short-life mine that should come into production in 2008 and almost immediately hit its full capacity of 160,000 oz/year of gold equivalent (including 760,000 oz of silver). Burnstone, which was assembled over many years by the veteran geologist John Handley, is a typical, but relatively shallow, long-life South African mine that, if all goes well, will build up slowly to full production of 214,000 oz in 2011.
So the strategy is clear: use HDB as a cash cow and minimise, if not eliminate, GBG’s need to dilute its equity by raising capital for Burnstone. But how feasible is that?
The uncertainties are so great that back-of-the-envelope calculations are all that’s really possible. The first point is that another North American mining group – Hecla – is conducting advanced exploration and development work at HDB to take it into commercial production, which theoretically will earn it a 50% interest in HDB.
So only 50% of HDB output, equivalent to 80,000 oz, will accrue to GBG, plus a $50/oz royalty on the balance. GBG’s maximum cash commitment to HDB is $10m.
HDB’s total costs are estimated at $258/oz. At the current price of around $600/oz, that gives a profit of around $350/oz – or $28m/year on 80,000 oz. Over the four years between 2008 and 2011 that grosses up to $112m, or R820m at the current US dollar/rand exchange rate. Burnstone’s capex is estimated at R800m to production, or just over R1bn life-of-mine.
Those are heroic assumptions but show that it could just be possible and that GBG has a plausible game plan. In practice, too, Burnstone may not have to be financed entirely by equity.
Click Here to subscribe to our daily newsletterGBG listed on the JSE last October. In its prelisting document, net present values (NPVs) were calculated at $118m for HDB (of which only half is attributable to GBG) and $140m for Burnstone. But Dippenaar reckons that assets are broadly split 50:50 between the US and South Africa. At the listing, GBG also had cash on hand of $34m, while HDB covers only 5% of the Hollister property.
Both HDB and Burnstone are actively looking to increase their reserves, and Burnstone is also planning to explore several other properties on the outcrop of the South Rand basin. Moreover, the basic calculations for both projects were done at a gold price of $450/oz and at $1/R7. Gold at $600/oz and the US dollar at R7.30 make a big difference: in the prelisting presentation, Dippenaar said that at $600/oz Burnstone’s NPV is $523m.
Apart from anything else, that reflects a substantial extension of Burnstone’s life from the current projected 14 years.
The prelisting statement puts GBG’s objectives as to be a medium-tier producer with output of 500,000 oz of gold within three years by developing its existing projects into high-margin operations; acquiring prospective companies and/or assets; and focused exploration programmes.
It’s clear that GBG has ambitions that go well beyond its current HDB and Burnstone projects and it’s implicit that Dippenaar would ultimately like to do with GBG what Swanepoel did with Harmony.
South African investors haven’t gone overboard on GBG. The company undertook to make 20% of its equity available in South Africa – though there can be no guarantee that it’ll all be available to trade. In the first 30 days on the JSE, trading volume was 1.8 million shares – but more than one million of that was on one big day and most days trade is negligible.
The range since listing is 2,000c to 1,090c, and the latest – 1,230c – is much closer to the bottom end. It equates to a market cap of R1.4bn, exactly the same as the figure in Canada immediately before the listing.
It’s too early to tell whether Dippenaar’s leap of faith will be justified. Experienced investors need no reminding that, however impressive geologists’ reports and drill results may be, only when you actually get underground can you be confident of a project’s success.
So far, it all looks good. And as progress reports are published this year, we’ll see whether GBG can justify its share price moving up towards those NPV calculations as HDB nears production.
News 
Market Data 
Discover 
