Capital 10X Primer – The Undervalued Play on Guyana Goldfields

Executive Summary

Guyana Goldfields [stock_market_widget type="inline" template="generic" color="default" assets="GUY.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is a mid-tier Canadian gold miner with a healthy balance sheet, experienced management team, and strong growth potential. Aurora, its sole commercial operation, is the largest gold mine in Guyana, a stable English-speaking democracy in South America.

Guyana Goldfields’ share price fell almost two-thirds in 2018 on the back of production and development delays and lower-than-expected head grades. With these issues close to being resolved and the bad news already priced in by investors, Capital 10X believes there could be significant upside in Guyana Goldfields.

Guyana Goldfields Has a Cash Filled Balance Sheet

GUY’s net debt-to-equity ratio stood at 11.48% at the end of Q3 2018. It paid down around US$4.45 million in the final quarter in 2018, reducing net debt to around $40 million at Dec. 31, 2018.

GUY’s debt-to-equity ratio is lower than that of many other mid-cap Canadian gold miners and significantly lower than the average of 31% reported by the world’s 40 largest miners at the end of 2017, according to PwC.

Balance Sheet: Guyana Goldfields vs other mid-cap gold producers

Net D/E Cash Balance MC (4) Stock Price (4)
Guyana Goldfields 11.48% (1) US$82M (2) C$223.9M $1.29
Argonaut Gold (3) 2.13% US$15.38M C$332.5M $1.87
Teranga Gold (3) 14.35% US$46.61M C$458.3M $4.26
New Gold (3) 81.30% US$103.7M C$666.0M $1.15

(1) End of Q3 2018. (2) End of Q4 2018 (unaudited). (3) End of 2018 (final). (4) TSX Pre-market, March 22nd, 2019.

EPA Has Okayed Resumption of GUY’s Aurora Underground Development

GUY plans to turn Aurora into a combined open pit and underground mine, which would make it Guyana’s first modern underground mine.

As its name suggests, Guyana Goldfields operates exclusively in Guyana, a stable parliamentary democracy on South America’s Atlantic coast. GUY’s expansion plans centre around brownfield development of its only producing mine, Aurora. It is also investigating the economic viability of the Sulphur Rose deposit, 23km away from Aurora, and is conducting exploration work around northern Guyana.

A major growth impediment was removed on Feb. 20 when GUY announced that the Guyana Environmental Protection Agency had permitted it to resume development work of an underground decline at its Aurora gold mine. Aurora has been in operation as an open pit mine since 2016. GUY plans to turn Aurora into a combined open pit and underground mine, which would make it Guyana’s first modern underground mine. GUY had been working on the exploration decline at Mad Kiss for only eight days when the EPA ordered it to halt work on Nov. 19 so it could carry out inspections.

Did Gold Grade Reductions Lead to a Market Overreaction on GUY’s Stock?

Guyana Goldfields stock fell 47% on Oct. 30 after reporting that grades in the Rory’s Knoll diorite were not as high as originally believed. In a recent update, the company said the 2012 resource model overestimated the average gold grade at Aurora. In particular, it said high-grade domains (more than 5 g/t Au) were allowed to influence surrounding lower-grade domains.

While this is certainly bad news for GUY, a reduction in gold grade as extreme as 75% still leaves them in the same grade-ballpark as their industry peers, though it would affect their total reserves. However, this still raises the questions of whether the market overreacted to the news of the downgrade.

A revised estimate is scheduled for completion in late March, and if the news isn’t as bad as the market perceives it to be, the stock price will likely see a partial recovery.

Proven & Probable Reserves: Guyana Goldfields vs other mid-cap gold producers

Location of Assets Tons (Millions) (2) Au grade (g/t)
Guyana Goldfields Guyana 43.04 (1) 2.871
Argonaut Gold Mexico 193.0 0.61
Teranga Gold West Africa 92.69 1.45
New Gold Canada, Mexico 344.00 0.742

(1) Yet to factor in the downward revision of grades at Aurora. (2) Gold only, excluding copper and silver resources

Aurora Saw Delays in H1 2018, Recovered by Year’s End

Now that things are back on track at Aurora, GUY is targeting a mining rate of around 70,000 tpd, and milling throughput of around 7,000 tpd in Q1 2019.

It was a tale of two halves at the Aurora gold mine in 2018. GUY had planned to ramp up production to 75,000 tonnes per day (tpd), but was restricted to mining less than 40,000 tpd in the first half due to the late arrival of the contract miner and equipment. The situation was resolved by the end of the third quarter, and the mining rate increased 74% from 39,600 tpd in Q2 to 69,200 tpd in Q4. The milling rate was steady through the final nine months of 2018, at around 7,000 tpd.

GUY initially targeted 190,000-210,000 ounces gold production in 2018, at a cost of sales of $850-$900 per ounce, cash cost of $430-480/oz, and all-in sustaining costs of $830-880/oz. Ultimately it only produced 150,450 ounces of gold in 2018. Full-year costs will be revealed when GUY publishes its annual report in late March. In the first three quarters, cost of sales was $958/oz, cash cost was $681/oz, and AISC costs were $1,094/oz. The company said the increase in costs was largely attributable to lower grades and a higher strip ratio due to mine sequencing.

Now that things are back on track at Aurora, GUY is targeting a mining rate of around 70,000 tpd, and milling throughput of around 7,000 tpd in Q1 2019. Phase two of the mill expansion was commissioned in late February, which GUY expects will further improve recovery by 2% and throughput by 10%. GUY will release full-year guidance in late March, after the reserves and resources update.

Dissident Shareholders Fanning the Flames

GUY’s problems were exacerbated in 2018 by internal infighting, which culminated with the removal of executive chairman Patrick Sheridan and the implementation of a single reporting structure under president and CEO Scott Caldwell. Sheridan is now leading a group of dissident shareholders holding 5.4% of company stock. A special meeting of shareholders has been set for the same day as the annual meeting on May 22.

Dissident shareholders, often referred to as “concerned shareholders”, have a distinct bias towards portraying every challenge or slight misstep in a negative light. They have even gone as far as hiring investigators to try and find new reasons to drag down the management team and GUY with it.

They also like to give the impression that the company has been deliberately lying about the progress of their Aurora underground mine development. In reality, the case seems much less sinister. Ultimately, it appears as though some investors and even Guyana’s Minister of Natural Resources misunderstood a February press release stating that GUY “has received environmental authorization from the Guyanese EPA to resume construction and development work on an underground exploration decline at its Aurora Gold Mine.” They believed this to mean mining has commenced — this is clearly not the case, nor what they stated. It’s unfortunate the company didn’t correct people sooner, if not to save everyone the headache.

On top of this, the dissidents like to point to salacious statements from Guyana’s EPA Head, Dr. Adam Vincent, however, these too appear to be overblown. According to Guyanese media, even Dr. Vincent acknowledges his disappointment “that the company failed to expeditiously clarify in the media, the purpose of its permit.” A far cry from claiming the company was outright deceitful or breaking any laws.

Make no qualms about it, the company has unfortunately had another misstep with the Guyanese EPA, possibly straining its relationship further, but it’s hardly unrecoverable. No Guyanese laws were broken according to available information, and if you read their actual press release, it’s very obvious the news is focused on the development of the mine and not mining activities themselves. If there’s anything GUY investors need to be concerned about, it’s the mud-slinging dissidents who want nothing more than to see management fail.

Overhaul of Guyana Goldfields Management Team Paying Dividends

In recent months, GUY has made a raft of appointments, including a new non-executive chairman, chief financial officer, chief operating offer, head of human resources, senior VP of technical services and corporate development. All its appointees have extensive mining industry experience with Guyana Goldfields or other TSX-listed companies. Caldwell himself served as president and CEO of Allied Nevada Gold Corp for seven years, prior to being appointed president and CEO of Guyana Goldfields in 2013.

The most important appointment in recent months may well have been that of Perry Holloway, former U.S. Ambassador to Guyana, as Senior Vice President of Strategy and Corporate Affairs. Holloway was appointed in early January and was involved in the talks with the EPA to resume underground development.

Our Conclusion

At the time of writing, Guyana Goldfields had a market cap of less than C$300 million. Almost all other TSX-listed gold miners with sub-C$300 million market cap are only involved in exploration and development. In comparison, Guyana Goldfields offers investors a fully-fledged producer with growth potential at a sub-C$300 million market cap.

In general, mid-tier gold producers present investors with an interesting risk/reward proposition and Guyana Goldfields is a perfect example of this with its strong fundamentals overshadowed by various issues related to operations, management, and life-of-mine profile in 2018.

While some of these issues are now resolved, others remain in the balance. We expect their next earnings release, estimated for March 26 (AMC), to shed light on many of the unknown factors listed above. If you believe the market has overreacted and dissident shareholders have only been fanning the flames to suit themselves, then GUY could be an excellent play.

At this stage, Capital 10X believes Guyana Goldfields presents an attractive proposition given its low share price, however investors must keep the position appropriate for a speculative stock. The more cautious investors should be ready to buy in if good news is reported.

Nadav Shemer is a writer, researcher, and analyst specializing in mining, energy, innovation, and consumer finance. While at Mining Journal, he compiled the publication's inaugural list of the world's top 100 mining companies by revenue and reported on visits to mine sites in the U.S., Africa, and Europe. He has also worked at FCBI Energy, where his publications included a series of white papers on decommissioning of North Sea oil rigs and reports on petrochemicals construction costs. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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