This document summarizes the challenges facing development stage gold mining companies. It notes that these companies currently trade at an enterprise value of $16 per ounce of resources, but that average development costs are $91 per ounce. It also discusses how institutional investors have lost confidence in the sector due to issues like cost overruns and resource nationalism. The document advocates focusing on sustainable development approaches that emphasize attractive investment returns, staged development, and low political risk.
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Development Stage Gold Companies Value Proposition Timeline
1. Development Stage Gold Companies Value Proposition Timeline
American Exploration & Mining Association 120th Annual Meeting
Reno, Nevada
Joel Schneyer – Managing Director
December 4th, 2014
2. Difficult Investment Landscape for Miners
2
Source: Novagold - Presentation San Francisco Gold Conference November 2013
Mexico: New 8% tax
on gold profits
South America
1. Peru: Construction halted at largest mine due to
gov’t review and social unrest.
2. Ecuador: Political obstacles and windfall tax
discourage foreign investment in mining.
3. Venezuela: Five mining companies seeking
compensation through World Bank’s arbitration
court following nationalizations.
4. Bolivia: Nationalization of various natural
resources assets.
5. Argentina: Miners required to repatriate
revenues from foreign sales, limitations imposed
on foreign exchange. Controls on imports of
equipment/supplies have also been tightened
Africa
6. Ghana: Increase in tariffs on mines and introduced
a windfall tax, halting project expansions.
7. Guinea: New law gives government a 35% stake;
threat of nationalization.
8. Mali: Recent military coup creating political
uncertainty
9. Kenya: Rising mineral royalties and drilling fees for
mining.
10. Congo: Plans to revise mining code, raise taxes and
increase stake in mining projects
11. Zimbabwe: Gov’t plans to seize control of foreign-
owned mines.
12. South Africa: Ongoing dialogue to nationalize
mining industry.
Russia, Asia & Australia
13. Indonesia: Newly proposed legislation
limits foreign ownership of mines to
49%.
14. Philippines: New royalties and taxes
being imposed on mining companies.
15. Mongolia: Drafting investment law to
restrict foreign ownership.
16. Australia: Government passed Mineral
Resources Rent Tax of 30%
17. Kyrgyzstan: Parliamentary motion
calling for increased government stake
in one of its largest mines
Recently Highlighted Regions/Countries with Heightened Geopolitical Risk
8. 8
The Institutional Money has lost confidence …
˗ that costs can be controlled
˗ that capital discipline will occur
˗ that restructurings can deliver on promises
˗ that returns on capital employed will improve
˗ that the industry won’t pile back into too many new projects or expensive deals when
prices rebound
˗ that resource nationalism will not overwhelm the industry
˗ that commodity prices will not collapse
˗ that “stuckholders” have an exit
… and the markets reflect this loss of confidence
Institutional Money Is Not Buying Public Gold Company Lottery Tickets
9. Why Buy An Illiquid Share When You Can Buy An ETF?
9
10. No control – generally passive
Upfront payment for metal –
generally passive, much more
important financing source
today
Rise of PE as active investors and
generally absolute control
May have board representation,
early toehold in projects
The rise of state backed
investments (e.g. China and
Korea)
10
Company
Project
Retail
Sovereign Wealth
InstitutionalMoney
Private Equity
Streaming & Royalty
Strategics
Merchant Traders
Mutual Funds
Major Shift In How Institutional Money Invests In Sector
11. 11
Development Stage Gold Companies trade at an Enterprise Value of $16 per ounce of M, I, & I
(NI 43-101) with average estimated project development costs of $91 per ounce
*EV = (share price x # shares) – current assets + total liabilities
**9/29/2014 share prices at close Au=$1219.50/oz, Ag=$17.58/oz
However The Development Stage Business Model Looks To Be Unsustainable
12. 12
Once the Project enters the Development Investment Analysis Phase (PEA – Prefeasibility – Feasibility),
companies see a long period of share price erosion as studies, permitting and de-risking drag on
Life Cycle of a Gold Mining Share – Dec 2013 119th Annual Meeting
De-risking
&
13. 13
Once the Project enters the Development Investment Analysis Phase (PEA – Prefeasibility – Feasibility),
companies see a long period of share price erosion as studies, permitting and de-risking drag on
Life Cycle of a Gold Mining Share – Dec 2014 120th Annual Meeting
14. 14
Development Stage Gold Companies Trade on Average at $16/oz Resource
Costs to Complete Drilling, Feasibility & Permitting ~$10/oz Resource
Capital Development Costs $91/oz Resource
Owners Costs Not in Feasibility (25%) $23/oz Resource
Total $140/oz Resource
Actual Trading Market Multiples
• Small Gold Producers $71/oz Resource
• Intermediate Gold Producers $70/oz Resource
• Large Gold Producers $129/oz Resource
• Silver Producers $128/oz Resource
So What Is the Problem?
15. Focus On Sustainable Development And What You Can Control
Mining investors are increasingly focused on investment returns.
Focus less on project IRR’s and more on Project rank on cost curve
Attractive Returns
& Economic
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Staged Development
Low Political Risk
Available Workforce
To minimize capital risk, design around an initial high grade starter pit with
scaled expansion & investigate the lower cap intensity heap leach option
Conventional process circuit. Will take project thru “detailed engineering”
before seeking project finance
Favorable jurisdiction with long established mining laws
Host jurisdiction has available trained and or trainable work force, only
need modest number of expatriate supervisors
Permitting &
Social Issues
Have local stakeholders (partners) with financial stake that are on
record supporting project and EIS process
Completion &
Overrun Risk
16. The Headwaters Difference
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