Condor Gold: much closer to production

Stronger gold and a revised plan means this junior miner has cash flow in its sights much earlier than investors expect, writes John Cornford. 

Like most junior miners, Condor Gold (listed on AIM (LON:CNR) and in Toronto (TSX:COG)) has taken a long time developing its La India mine in Nicaragua, so apart from a few close followers the market has probably lost sight of its potential. Condor’s 2.32M oz of ‘in-ground’ gold mineral resource is valued at only $11/oz, which for a miner as far along its development path, with government permits already in place to construct a large mine, is at the very bottom end of valuations for other Canadian listed gold miners.

One reason for this is that most potential investors are probably still going by the results of the economic study for La India published in 2014 and not publicly updated since. At a gold price of $1,250/oz then, the 22% IRR (internal rate of return) didn’t look that compelling, and even now investors won’t be expecting a return until that mine starts production in at least two-three years’ time.

Even a preliminary note by new broker SP Angel still refers to that 2014 study and plan, and will probably not be updated until the broker gets around to researching its new client and its updated prospects over the next few months.

Importantly, what has been somewhat lost sight of has been a significant ‘reworking’ in 2015 of the 2014 economic study through a ‘Whittle Consulting’ optimisation study of the mine plan, which looks at the whole process from mining to processing and gold sale in greater detail to identify measures to improve profitability.

WCL is the recognised world leader in thus maximising the economics of a mine, and its optimisation studies are used by major mining companies such as Rio Tinto and Anglo. For La India, the study showed the vital rate of return, and the NPV (net present value), substantially improved even without any increase in the gold price. But such a study is not ‘compliant’ with the Canadian NI43-101 requirements for calculating a mining project’s economics and cannot be published in any reporting documents for a listed company. So Condor has not so far been able to emphasise this to investors.

But the results showed (for instance in the ‘base’ case) an increase in IRR from 22.0% to 30.4%, and a 77% increase in NPV – even at the now out-of-date $1,250/oz gold price. Similar improvements are seen in the other scenarios (described later) which all saw cash flow brought forward by 2-3 years and a consequent reduction in payback time.

These are substantial improvements, and an IRR over 30% is approaching what is considered to be a very attractive return in mining (giving comfort to financing providers). With the gold price more than $250/oz higher now than assumed in both studies, even that can be expected to have improved considerably more. With practically all its de-risking development milestones under its belt since 2015 – including government permits granted more recently for La India with its economically mineable reserve of 675,000 oz gold at 3.1g/t, and other permits expected soon for smaller satellite pits that will enable much cheaper and earlier exploitation than envisaged for the main La India pit in 2014 – the new broker can be expected to publish a considerably higher valuation.

Even more importantly for investors, any review will almost certainly point the way to Condor generating income much earlier than the market expects.

All of this means we can expect the shares to start a well-deserved recovery during the coming months, from an exceptionally depressed level plumbed throughout 2019, when the costs of gaining its permits and a need for new funds from investors coincided with a change in investment policy towards all its mining investments by the IFC arm of the World Bank, resulting in it selling its stake.

Political unrest (now subsided) in Nicaragua didn’t help, so that Condor had to issue more new  shares than existing shareholders would have liked.

But from now on, investors will be compensated by that updated and considerably enhanced value. Gold now looks fairly set for a steady price well over $1,500/oz compared with the $1,250/oz assumed in the 2014 and 2015 studies, which even a crude calculation would show will increase La India’s average bottom line cash flow for the 80,000 oz per annum base case production in the 2014 study by more than $13m a year (after tax) in only the first year of an eight-year mine life, over and above the average $34m arrived at there.

Compare that with Condor’s current market value of under $25m, and the Whittle optimisation study finding that the vital cash flow (at only a $1,250 gold price) in the base case could be more than doubled during the first 3-4 years after mining start.

Furthermore, Condor now also has options to considerably reduce the mine’s start-up costs assumed there, and to start mining much earlier from its satellite pits, which centre on collaboration with existing nearby producing miners – one of whom took a 10% stake in Condor in last July’s placing. Another, Canada’s Calibre Mining, has a currently under-utilised plant (acquired in October from another Canadian miner B2Gold) which could process selective higher grade ore from the permitted La India open pit and, once they are also permitted soon, from two smaller, but even higher grade, satellite pits (Mestiza and America).

These have mineral resources which if added – as in one of its options considered in the 2014 study – to those from the main La India pit, would add 50% to its annual gold output and thereby improve the economics even further, at relatively low additional cost.

However, the options which will please investors more, are those which will enable Condor to get into much earlier production even if at an initially lower rate, but at considerably less initial cost.

One is to build a smaller processing plant at La India (perhaps with cheaper, second hand equipment – for which we understand Condor has already received tenders) by which to process ore from the satellite pits first and generate early cash flow before, later on, spending more to get the main La India pit into fuller production on the older, longer-term, production plan.

This longer term plan, depending on extension drilling, aims to exploit the much wider scale potential which Condor’s airborne and other surveys leads it to believe exists on the extensive concessions it has been acquiring (now 588 sq km) around La India, and which it thinks could deliver a ‘gold district’ containing up to 5M oz. That would take it closer to having a major gold resource and a much longer life, as opposed to the ‘junior’ resource lasting up to 10 years that Condor is perceived to own at present.

In the shorter term, however, the two largest La India satellite pits, for which Condor expects permits in the next few months, will be easier and cheaper to extract, and have a 230,000 oz gold resource at a higher grade (5.5g/t compared with 900,000 oz gold at 3.1g/t) than La India. While the company has not yet announced a definite plan, we understand that engineering studies for this option are almost complete and envisage production of about 40,000 oz per year (for six years – ie at half the rate envisaged initially for La India) which would either be processed in the smaller plant, or, even more cheaply and, if it can be agreed, trucked to a nearby existing miner for toll processing, or both.

Condor had been discussing such an option with nearby Canadian miner B2Gold (who successfully tested its ores’ suitability) before Calibre Mining (also listed on TSX) took over the latter’s two mines at El Limon and La Libertad, respectively 80 and 230km from La India. With their acquisition only completing in October, Calibre has naturally been getting its feet under the table before resuming any talks with Condor, but has published its aim to fill spare capacity at La Libertad currently amounting to 600,000 tpa of ore, which would easily cope with Condor’s satellite pits’ output. (La India’s milling capacity to produce 80,000 gold oz pa was to be 2,300 tpd.)

This option, however, is not yet agreed, and Calibre might have others, among which is the development of its own new resource at Pavon, but which seemingly will take at least two and probably more years before producing any ore to utilise its spare capacity.

Another option might stem from the relationship Condor has built recently with the Nicaragua Milling Co, which took a 10.3% stake in last July’s £4m placing. It has its own relatively small milling plant in the country (producing about 12,000 gold ounces in 2019) but is 80% owned by TSX listed Para Resources which specialises in toll milling ore on behalf of producers like Condor and obtaining for them (and itself) income much earlier than if waiting to build a full scale plant. It seems unlikely that NMC would have taken a stake in Condor without some plan to progress such a toll milling idea for either La India and/or the satellite pits, especially since Randy Martin the owner of NMC, and CEO of Para Resources, has built five mines in Nicaragua and Central America in recent years.

Faced with these various options, and probably on-going negotiations, it is perhaps not surprising that Condor hasn’t yet gone live to investors about its thinking, although it has floated its various ideas in presentations. But bearing in mind that Mark Child, CEO and driving force since Condor’s  2008 inception, recognises the need after last year’s 48% expansion in issued shares (not to mention warrants) to limit shareholder calls from now on (the Directors own 20% of Condor’s equity), he will be concentrating on the need to re-program development to a more affordable level producing earlier cash generation and which could attract funding more easily.

So, in advance of details which we expect will be published some time this summer, it becomes possible to speculate about the financial implications for Condor, which should be elaborated further by its new broker who I believe will as a result be putting Condor’s attractions to its own investor base. Helping Child might also be the results of the upgraded (bankable) feasibility study that we understand Condor is working on at present and which could incorporate the Whittle study findings.

To summarise Condor’s best options, they would seem to centre around postponing the $110m capital cost that the 2014 PFS estimated is required to get La India to a 80,000 oz/yr production – but not before 2-3 years’ time – and instead, for well under half that initial cost, going for a combination of mining the satellite pits, selectively processing higher grades from the permitted La India open pit, and either processing on site with second hand plant or trucking to a nearby producer – all of which could possibly be put in train during the current year.

Source: Condor Gold November 2019 Presentation

With higher gold, a lower capital cost, those Whittle study improvements, and engineering studies to take the project into production nearing completion, obtaining a large proportion of the cost via a project loan, or a gold loan (which, unlike a streaming deal which is open ended and therefore incapable of being costed, is repaid to a given schedule) or perhaps a partial earn-in by Nicaragua Milling (or even Calibre), should be much easier.

To make a stab at a revised value, my readers will know that I don’t rate NPVs or share predictions based on them. (Because very different cash flow profiles can produce the same NPV, while achieved share prices, with no exception I’ve ever been able to find, fall a long way short of those based on NPVs – because the owning company’s shares’ NPV is only indirectly related to the project NPV). Instead I will quote later the annual cash flows thrown up by the studies and various scenarios which investors find easier to interpret.

For what it’s worth in NPV terms, and to show the improvement to the results from Condor’s 2014  scenario just from the higher gold price alone, the 2014 PFS (Preliminary Feasibility Study) shows that its base case (80,000 oz/yr) scenario would increase the 8% NPV from $65m at $1,250/oz, to $131m at $1,500/oz – ie double. (Condor uses the 5% discount rate normal for Canadian quoted miners whereas I use the 8% more commonly used by UK investors which typically almost halves the stated NPV.)

On top of that, the Whittle study showed that even at $1,250/oz the 5% NPV would increase further by 77%.

There are now too many options and resulting economics for us or anyone to reliably estimate what would be the results for any of them. But a back-of-the-envelope estimate at half production and half-capex will of course deliver a $65m NPV ($130m/2) at an 8% discount rate. Capital costs are likely to be much less than half however (with second-hand plant) and so also will be the initial stripping costs for the much smaller satellite pits. If the ore is trucked for processing elsewhere, sharing the processing costs will also be cheaper. But without details of any tolling deal we can’t really speculate further. All that can be said at present is that the cash costs for the base case 80,000 oz pa gold are already at a well below average $690/oz, producing an $810/oz gross profit margin with gold at $1,500/oz, and any of the mooted options for an initially cheaper, smaller, operation should show even better figures.

What I believe investors find more relevant than NPVs are the cash flows, and therefore Condor’s dividend paying ability. The 2014 PFS full-scale plan – adjusted for a $1,500/oz gold price – shows first full-year revenue of $85m, and a net cash inflow of $35m (after royalties and 30% tax, which won’t be paid until later) – rising to $118m and $47.7m respectively in year three.

A half-scale operation, mining higher grade ore from smaller pits, can be expected to incur well under half the full scale mining costs, offset by the trucking costs, while processing costs at (eg) Calibre’s spare capacity ought also to be less (at the margin). So, it seems reasonable to assume that each partner would earn a half-share of the extra revenue generated, offset by less than half a full-scale operating cost.

Assuming Condor could start by extracting and trucking only 1,000 tonne/day (to fill only half Calibre’s spare capacity – or someone else’s) allowing for 10% downtime, would produce 36,000 gold oz, $54m annual revenue, and cash profit to be shared at $1,500/oz gold amounting to over $28m (£21m) after royalties (but before tax, which would probably not be payable for some years).

That (and the possibility of double from a 2,000 tpd operation, not to mention the Whittle improvements) compares with Condor’s current £20m market value. While still speculative and dependant on the necessary agreements, bearing in mind that Condor seems to be homing in on this sort of deal, and that the resulting income could loom very soon after a decision is made, perhaps during this year, it would be strange if investors didn’t soon realise how cheap Condor must now be.

For perspective, Calibre Mining – with two producing, and one developing, mines surrounding La India – is valued in Toronto (TSX:CXB) at around US$220m (or £169m GBP).It has gold resources of 5.1Moz compared with Condor’s 2.3Moz, and this year expects to produce 140,000-150,000 oz at a cash cost over $840. Deducting its $36m balance sheet cash, Calibre’s enterprise value becomes £134m compared with Condor’s equivalent of about £17m.

Comparing mining companies’ market caps and enterprise values against their multitudes of characteristics is fraught with pitfalls. But, even so, that comparison shows how far below its potential Condor’s shares must currently be.

Condor still has a few more steps to complete before any of the options can start, and another cash raise before this year end can’t be ruled out. Land purchases to enable the pits are not complete, with some owners possibly holding out for the best price, so Condor has recently expanded its team of negotiators. A few of the 10 conditions for the main La India permit are still to be completed, as also is a bankable feasibility study (if one is required) before a project loan can be applied for. But a deal with Calibre or Nicaragua Milling might obviate the need for the latter.

Condor’s cash resources at the last reported date in November amounted to £3.37m, which will be supplemented over the next few months by the $555,000 proceeds from the recent sale of an unwanted concession separate from La India. Given a £1.04m cash outflow on operating costs in the previous nine months, and £1.3m in consulting and permitting costs, this cash can be expected to last some time into the current year, except for the commitments mentioned above and to progress La India’s longer term plan. But we would expect Condor will be able to raise at least a majority of the funds for a half-scale operation from a gold loan or similar.

As for 2018’s political unrest in Nicaragua, this stems from opposition to president Ortega who has been in power one way or another for 41 years and is regarded as a repressive dictator. Under him, however, the mining industry, whose gold exports are crucial to the economy and its third-largest export, has been strongly supported, and politics does not seem to have deterred six other TSX listed miners operating in the country, who between them have permitted three new open pits only recently.

Disclaimer: Readers will know that Master Investor’s Jim Mellon is a major investor in Condor. He has however had no part in my decision to feature the company which, in my view, and after some years when I believed it was too far from production to be included in my list of companies, has now reached a stage where it would be remiss of me not to start to highlight it. The company has helped with some factual information, but the opinions expressed here are solely my own.