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Introduction
Galane Gold (OTCQB:GGGOF) is a very promising mining company that has made a number of important moves recently. These actions include selling the Galane Mupane gold mine in Botswana, enlarging the Galaxy gold mine in South Africa while improving its efficiency, and engaging in preparatory work on the recently purchased multi-ore Summit property in New Mexico. The Mupane sale has directly impacted Galane’s balance sheet to the good, while expanding Galaxy and enhancing its efficiency and raising Galane’s profitability potential.
The overall picture that emerges is of a company with excellent resources and forward-looking, risk-taking management committed to changes within a strategic plan. I believe that the leadership will continue to execute well – to the benefit both of Galane and its shareholders.
Naturally, there are questions and concerns that skeptics will raise and whether the envisioned profitability will be realized. While such concerns are certainly valid, the picture of Galane that I have formed is a positive one.
I believe that GGGOF is a Buy with a well-earned place in the speculative portion of an investment portfolio.
The Galane Business & Bull Case
Galane is pursuing a multifaceted strategy that integrates several elements. Its primary focus is production and enhancing the efficiency of that production to drive revenues and profits. This includes expanding existing facilities (Galaxy) while building towards reopening recently purchased sites (Summit).
I see this strategy as one of strategic opportunism. My sense – from my research and dialogue with CEO Nick Brodie – is that Galane will continue to follow this approach, which should drive growth well into the future.
Efficient & Expanded Production
Efficiency in mines is best measured by AISC (All-In Sustaining Cost). AISC quantifies the cost of producing an ounce of ore. Low AISC metrics are a sign of excellent profitability. While there are other factors such as the inherent grade of ore produced – an inefficient mine may be profitable thanks to the innately high quality of its ore – systematically reducing AISC directly produces a gain in profitability.
Galane proved itself as a low AISC producer at Mupane before the recent sale of that facility, reducing the figure from greater than $1400 per ounce cost to $1050. Mupane production reached its highest level of production in 2018, when it yielded over 35,500 ounces of gold. It began to decline the following year, dropping to just over 30,000 ounces.
Mupane eventually stopped contributing to Galane’s cash flow and had associated liabilities. The divestment not only cuts deeply into Galane’s debt, it frees up resources for Galaxy and Summit.
Galane is currently implementing Phase 2 of its Galaxy operations; when completed the company expects to sell 43K ounces per year at less than $750 per ounce. As a point of comparison with mines operating in the same Barberton region of South Africa, Pan African extracts higher grade ore, but at an AISC of more than $900 per ounce.
Combined with a total expected output of greater than 2.4 million ounces, low AISC at Galaxy will drive profitability. The company also intends to expand ore extraction across various ore bodies within its boundaries. The result should be large and growing gold output at a projected low AISC.
Managing The Balance Sheet
One of the chief challenges for small companies and ‘junior’ miners is the need to create and maintain a solid balance sheet, keeping debt to a minimum. Debt has been an issue for Galane, in that its major debt load discouraged potential investors. Until the balance sheet improved, greater investor interest remained a question mark.
To keep debt down is a challenge, given the need to raise funds to build significant levels of production.
The sale of Mupane, a site with a limited future production compared to Galaxy, was a logical move to address the balance sheet. CEO Brodie stressed that divesting Mupane opens up a universe of potential investors.
Strategic Opportunism
The emphases on lowering AISC and increasing production through enhancement of Galaxy and the reopening of Summit demonstrate a strategic opportunism. That is, the end goal remains a growing profitability that returns value to shareholders, but there is a very practical plan to achieve that goal. Galane has shown the ability to execute on an intelligent and integrated path to expanded revenue and profits.
The sale of Mupane and development of Galaxy are tangible evidence of this plan, and the purchase of Summit demonstrates the commitment to growth. The success at Galaxy is an indication of what may be expected from Summit once active.
Galaxy And Summit – An In-Depth Look
Following the sale of Mupane, Galane’s present and near-term futures reside in the Galaxy and Summit mines.
Galaxy
The Galaxy mine facility is in northeastern South Africa, in the Mpumalanga province near the town of Barberton. It is situated in a rich ore belt called the Barberton Greenstone Belt. Gold prospecting in the region dates back to the 1880s.
Since reopening following transition to care-and-maintenance status in 2007, the Galaxy site has yielded 1.3 million ounces of gold. It is an underground mine, with 21 east-west trending gold ore bodies and four prospective bodies between 600 and 2000 meters in depth. Importantly, the existing infrastructure includes adit* access to all mineral bodies and a functional shaft to 700 meters depth.
*An adit is a horizontal drive from the surface to the ore body.
The Galaxy mine plan is based on fully mechanized long-hole stopping as well as cut-and-fill mining. The processing plant operates on conventional crush, mill and floaton, and the current capacity is 600,000 tons per annum. Galaxy produces a concentrate with high sulphur content, which makes it attractive to the roasters that melt the gold into consumer form. There is a recovery rate of 75% from the sale of the concentrate.
Galane has doubled the resource and tripled the size of the processing plant. These increases were enabled by the shift to a large volume, mechanised underground mine and by the production of concentrate, a process that unlocks the value of refractory ore.
These changes and upgrades offer strong evidence of a strategic plan based on an increase in ore output and steady reduction in AISC.
Summit
The Summit facility, owned by Galane but still in a care/maintenance state, is located in the Steeple Rock mining district in Grant County, New Mexico near the Arizona border. There are well-maintained access roads to the site, and state highway access to those access links.
Summit is comprised of patented and unpatented mining claims and leases covering about 4000 acres. It is ready to resume operating activity once Galane has engaged contractors to reopen it. About 60 miles south of Summit sits the Banner Mill mine with 15,000 feet of operational infrastructure and assay lab, mine offices and a shop/warehouse adjacent to the mine. While Banner Mill is also inactive, it can be restarted at previous levels of production.
The area contains silver-gold mineralization associated with quartz-carbonate veins. The Summit fault zone strikes northwest, and is 50 to 100 feet wide. Deposits extends over a 2000 foot strike and a depth of 1000 feet. There are additional veins that are not included in the mine plan because of their depths, and additional sub-parallel structures along both the strike and at depth.
Galane has not provided specific details on the schedule or mechanism for reopening Summit, but plans to update the market in Q2. Once the groundwork is laid, production can restart nearly immediately. Currently, the company is evaluating the steps needed, talking with prospective mining contractors and working with ‘off-takers’ (ore wholesalers) that might also provide funding for operations.
When these steps are complete, Galane will recommence Summit production.
Note: Off-takers are intermediaries that gather ore from the production site and transport it to the roaster/smelter. They typically have contracts with multiple ore producers and can offer ore from multiple sources to the roaster/smelting companies. A high grade of both gold and silver concentrate make the project attractive to the off-takers.
Summit Projections
Galane believes that its $17 million purchase price for Summit translate to less than 20% of its potential Net present value (NPV) – the difference between the present value of cash inflows and the present value of cash outflows over a period of time. As Summit is a fully permitted operation that includes a processing plant, it requires minimal capital cost and offers a clear path towards realizing value within a relatively short period of time.
Cost assessment is based on the last three years of operating data as well as quotations from contractors anticipated to perform portions of the work. The projected direct operating cost is US $126/ton and the cash cost estimated at US $578/oz AuEq(2). Capital costs are estimated at million, with an additional working capital of US $4.5 million indicated.
A pre-tax economic evaluation for project base case yielded a cumulative pre-tax net operating income of US $79 million with an internal rate of return of 29% and a net present value of US $52 million (10% discount rate).
Once reopened, Summit should be an integral piece of the overall Galane Gold story. Given the relatively hard heads of savvy investors, a second quarter update from Galane on Summit reopening plans will be key to provoking greater interest in the company.
Galane: Track Record Of Expertise
Galane has a very impressive leadership with a proven track record in the mining industry, starting with CEO Nick Brodie. He is a mining executive with 27 years of experience. Brodie joined Galane in late 2012 as CFO; two years later he was promoted to the role of CEO. Under his leadership, Galane executed these actions:
- Transitioned the Mupane facility from a short-life, high-cost open pit mine to a long-life, low-cost underground operation;
- Restarted the Galaxy operation in South Africa and implemented an efficiency-and-expansion plan to raise production to over 40,000 ounces per annum;
- Acquired Summit and Banner Mill in New Mexico with a plan to bring it back into production in the short term.
Mr. Brodie was previously the CFO of Katanga Mining (OTCPK:KATFF), an advisor at Metallon Gold (Zimbabwe), CFO of Copperbelt Energy Corporation (Zambia) and Head of Finance at Total SA. He is a Fellow of the Chartered Certified Accountants and has a B.Sc (Hons) Geography.
CFO Andrew Bishop, a recent entry to the Chief Financial Officer position, is a Chartered Accountant with a Master’s degree (Honors) in Chemical Engineering. For the past 14 years, Mr. Bishop has progressed to increasingly senior roles in the industry, including At Aureus Mining, Inc., Avesoro Resources Inc. and Golden Star Resources Ltd.
Additional information about key Galane personnel – including Board members – is available at the company website.
Risks
Risks certainly exist for current and prospective Galane shareholders. Its current slotting as a junior miner dependent on a few facilities/sites – only one of which (Galaxy) is currently operational, basically suggests much of the risk. Should there be a negative turn at Galaxy in production, in the conduct of contracts with middlemen (off-loaders) or smelter/roaster clients of the ore produced, it would expose a practical vulnerability.
If the government in South Africa, a country with its history of political unrest, should decide to enforce changes in policies towards mine producers, another risk would be exposed.
Given the role of Summit’s reopening, any serious delay in the reopening of the Summit facility would certainly make Galane’s future look less positive.
If key personnel – most notably CEO Brodie – were to depart the company, the impact would certainly be felt. If current financing sources or major investors were to become disenchanted, another risk could be manifested.
Galane is a very small company and with its OTC status cannot expect to easily draw in the ‘big money’ without producing some sensational results. This may not be a company functional risk per se, but it highlights the challenges of a young miner in a formative stage.
I think the primary risks relate to the actual production of the ore and progress at Galaxy coupled with Summit reopening. Based on my research, I believe that those risks are tolerable. The political risk looks manageable, given the importance of industrial/mining revenue to the South African authorities.
The company leadership seems talented, very experienced and committed to the enterprise. Those factors and an integrated strategic plan in process mitigate issues that may arise.
Summary
Galane falls within the category of speculative stocks. It is a young miner in transition. Galane currently depends on rather impressive production from a single site at present. While it has suffered from past high debt levels, its leadership has addressed these with the sale of Mupane.
At the same time, Galane has emphasized the construction of a strategic plan, which it is currently executing successfully. CEO Brodie and his team have worked systematically to 1) reduce the debt load, 2) decrease production costs at Galaxy while expanding the mine and 3) purchase Summit while planning for the resumption of operations.
I am optimistic about the positive composite picture. Unlike most junior miners, Galane is both profitable and on the path to becoming a multi-site mining enterprise operating efficiently and growing ore production year-by-year.
I am personally long GGGOF and plan to wait patiently as the company continues its progress into the future.
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