Positive signals from new generation of local gold players

KALGOORLIE can feel like a small town at the best of times. If you’re the head of one of the city’s few locally based miners and things aren’t going to plan, it can feel extremely small indeed.

Fortunately for Les Davis, a Goldfields boy who still calls Kalgoorlie home, he doesn’t have to worry about any awkward conversations when he bumps into shareholders while walking along Hannan Street.

Mr Davis is the managing director of Silver Lake Resources, a gold mining company he set up in 2009 with a number of former colleagues from the old WMC Resources.

His Kalgoorlie connections meant plenty of locals bought into the company’s $30 million float, among them the owner of the town’s famous Exchange Hotel, Ashok Parekh. So far it has proved to be a very canny investment.

Silver Lake shares have climbed from their 30 cents issue price to around $1.70, having hit as high as $2.69 late last year. The company is now valued around $400 million.

Unusually for a junior mining company, Silver Lake has recorded a profit each year it has been in business. The company’s Daisy Milano mine has been consistently pumping out gold, and has helped fund Silver Lake’s extensive – and successful – exploration campaigns.

For the people of Kalgoorlie and the surrounding region, the success of Silver Lake to date is about much more than just the financial gains.

The company’s exploration success has helped counter perceptions that, 120 or so years after Paddy Hannan, Tom Flanagan and Dan O’Shea found the first gold at Kalgoorlie, the state generally and the region in particular are exhausted as a source of new, significant gold discoveries.

Over the course of its short history, Silver Lake has grown its resource base from 830,000 ounces of gold to about 3 million ounces, having taken 160,000oz out of the ground along the way.

“This has been a West African-style resource build,” Mr Davis told WA Business News, in reference to the recent spate of major gold discoveries in nations such as Ghana and Burkina Faso, “but it’s been done in Western Australia.”

The company is boldly targeting to grow its resource base to 5Moz by 2012, a target Mr Davis believes is aggressive but achievable.

And the company has near-term plans to lift its production to 200,000oz of gold a year, which would put Silver Lake in rarefied territory in the Australian gold sector.

There has been a distinct shortage of mid-tier gold producers in Australia in recent years, following a wave of acquisitions in the late 1990s and some well-publicised collapses in the early 2000s.

The same mistakes that characterised much of the junior WA gold industry in the early 2000s – bad hedging strategies, overly ambitious mergers and acquisitions, the vagaries of geology and general management incompetence – could all still yet bite the new generation of up-and-coming gold miners in the state.

But the deposits being defined in WA by companies such as Silver Lake and Regis Resources are of the scale that should support much healthier businesses than many of their predecessors.

Major international miners North America’s Barrick Gold and Newmont Mining, Australia’s Newcrest Mining and South African duo Gold Fields and AngloGold Ashanti still rank as the state’s biggest gold producers.

Silver Lake and Regis are part of a new generation promising to deliver sizeable gold output in the near term, helped by a strong and sustained gold price.

Regis has been more successful than Silver Lake to date, with its Garden Well discovery shaping up as a company-maker for the group.

It is just more than two years since the trio of former Equigold directors Mark Clark, Nick Giorgetta and Morgan Hart ousted the incumbent Regis board at an extraordinary general meeting.

The rise in Regis shares since then has been phenomenal, climbing from less than 40 cents a share to as high as $2.60, and lifting the company’s market capitalisation to around $1 billion.

The appreciation is based on Regis’s exploration success at Garden Well, a virgin discovery that forms part of its Duketon project, 350 kilometres north-east of Kalgoorlie.

The Garden Well find has to date delivered a 1.8Moz gold reserve ready for mining.

It has helped lift Regis’s overall reserve base at Duketon to 2.5Moz, and it has a 5.8Moz resource at the project that it hopes to upgrade to reserve status with extra drilling.

Regis is poised to release a feasibility study into Garden Well’s development shortly, with the deposit set to support an 180,000oz per annum operation.

Combined with the 100,000oz/year from its nearby Moolart Well mine, which came on line late last year and which should effectively finance Garden Well’s development, Regis expects to be producing at an annualised rate of between 280,000 and 300,000oz by mid 2012.

At that sort of production level the company would become one of the largest Australian-listed domestic gold producers, behind industry giant Newcrest.

Having been a pure exploration play just a couple of years ago, Regis is now starting to contemplate the prospect of paying dividends once Garden Well is up and running.

“By 2013, we should be producing between $250 and $300 million in free cash flow. By that stage we would have maximum debt of around $60 million,” managing director Mark Clark said.

“I do not see any reason why we should not be able to pay a dividend some time around the end of 2013.”

Equigold had a policy of paying out 60 per cent of earnings as dividends, and Mr Clark believes that is a good template to follow.

“We don’t have a formal board resolution, but that would broadly be our thinking,” he said.

The rise of Regis and Silver Lake marks a major turnaround in the fortunes of WA’s gold industry.

The rising gold price has made previously marginal projects profitable and helped increase gold exploration spending.

Australia’s annual gold production – of which around three quarters is from WA – will climb about 44 per cent between 2008-09 and 2013-14, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

The reopening of Newmont’s giant Boddington gold mine has been a big contributor, but much of the production growth is also coming from new discoveries.

Regis’s Garden Well deposit represents a brand-new discovery, and the company is eyeing several similar-looking prospects elsewhere around its Duketon landholding.

Silver Lake, meanwhile, has a quirk of history to thank for much of its exploration success.

Up until they were acquired by Silver Lake, the company’s core Mt Monger leases were held by a private group of prospectors without the financial resources to fully explore the ground’s potential.

A due diligence study by Anglo American identified the potential for the ground to hold two to 4.5Moz of gold, but the South African giant passed up the chance to acquire the ground.

“I think we can make at least the lower end of that range. Can we get to 4.5 million ounces? Time will tell,” Mr Davis said.

“It’s 160 square kilometers of the most highly prospective, under-explored piece of real estate east of Kalgoorlie.”

Arguably the most promising gold find in the state’s recent history is the Tropicana gold discovery, owned by AngloGold (70 per cent) and Perth-based Independence Group (30 per cent).

The discovery, made in virgin territory 330km east-north-east of Kalgoorlie, has grown into a 3.3Moz deposit that is forecast to produce 330,000 to 410,000oz of gold a year over an initial 10-year mine life.

Those sorts of successes have helped ease some of the bad memories associated with WA’s gold sector.

The high-profile failures of local gold miners such as Sons of Gwalia, Croesus Mining and Michael Kiernan’s Monarch Gold Mining damaged the sector’s reputation, but Hartleys resources analyst Mike Millikan said the improved gold price and recent exploration success had investors seeing WA gold opportunities in a more positive light.

“There really is in the next few years going to be some pretty large upswings in gold production out of WA,” Mr Millikan told WA Business News.

“There’s a lot of guys building production towards and past 100,000 ounces, and a few are heading past 200,000 ounces towards 300,000.”

Mr Millikan said the growing production rates and healthy operating margins were certain to lead to continuing mergers and acquisitions in the sector, such as Avoca Resources’ recent merger with Canada’s Anatolia Minerals and St Barbara Mines’ recently launched takeover bid for Catalpa Resources.

While he describes Regis and Silver Lake as the standouts, Mr Millikan said smaller miners such as Focus Minerals – which expects to produce 100,000oz a year from its recently commissioned operations near Coolgardie – and Tanami Gold showed lots of promise.

Tanami recently bought an old mine near its Tanami Desert operation that will help lift production from around 50,000oz a year toward 150,000oz.

The increased amount of spending on gold exploration means the industry should continue to grow, according to Mr Millikan.

“With the higher gold price and the improved margins that come with that, a lot of people are investing it back into the ground,” he said.

“There’s a lot of areas out there where people have not previously had the funds to throw back into the ground.”

While the increasing production and exploration under way in WA may look like a renaissance, those who have followed the industry for decades note there is still a way to go before the industry replicates its heydays of the 1990s.

Sandra Close, the managing director of Melbourne-based gold consultancy Surbiton Associates, said the tendency of companies to concentrate their drilling efforts at ‘brownfields’ targets – ground with a history of gold production – rather than new, untested ‘greenfields’ prospects was not in the industry’s longer-term interests.

While the past 18 months have marked the end of a more than 10-year slide in Australian gold production, Ms Close is concerned that the rebound in exploration spending has not extended to exploration in frontier regions.

“Brownields is better than nothing, but greenfields is what underpins the longer term,” Ms Close said.

“Exploration spending totals are still lower compared to the early 1990s. There are lots of other minerals that are taking those funds, like iron ore, copper and uranium.”

In a business in which investor sentiment is such a force, it will be the growth in production from the likes of Regis, Silver Lake and Independence at Tropicana that will be the best advertisements for ongoing investment in WA’s gold industry.