As countries worldwide continue to deal with inflation, gold is beginning to catch the interest of generalist investors globally. Gold prices in U.S dollar terms are up 10% in the past six months, while the risk-on trade has undoubtedly lost its steam.
Bloomberg recently reported that gold sellers are swamped with demand as fear ripples throughout the global economy. It is worth noting that we saw strong demand for physical gold last year, especially in the western world.
According to the World Gold Council, demand for bars and coins hit 1,124 tons in 2021, which was the highest in almost a decade. With the recent uptick in demand, premiums have also surged as to gold buyers are paying as much as $100 over the spot price.
Steppe Gold (TSX: STGO)
A company I have covered for awhile is Steppe Gold.
As many of my readers know, Steppe is a gold production story based in Mongolia and has aggressive expansion plans in the years ahead.
Last October, the company published its feasibility study for the ATO Gold project, demonstrating robust and long-life operations of 106,000 ounces of annual gold production with average all-in sustaining costs being $853/ounce.
Steppe Gold recently announced gold and silver production resumption at the ATO mine.
Throughout 2021, the company faced significant reagent supply issues related to COVID lockdowns and border closures, notably with China. Having explored numerous supply alternatives, Steppe has secured new supplies and recommenced heap leach ore processing. The company is back on track to produce 60,000 annually with industry low cash costs.
Today, I am joined with the company’s Executive Vice President & Director, Aneel Waraich, to provide another update on the company.
Alexander Deluce:
Hi Aneel, great to be speaking with you once again. It has been a while since the last time we spoke; what is new with Steppe?
Aneel Waraich:
Hi Alex – thanks for the opportunity to share Steppe’s story with your readers again: it is certainly a great time to bring investors up to date with our progress. First and foremost, our team is very excited that we were able to share a crucial milestone on March 1st, in the resumption of production. We were forced to defer production in 2021 while waiting on key reagents to produce gold and silver, but now the timing couldn’t be better to bring production back online, with the current, higher gold pricing. Luckily while waiting, our team was able to build up a very strong inventory so we could hit the ground running once back online. We now have about 85k ounces on a recovered basis sitting on our ROM, leach pad and blasted in our new pit at ATO4. That’s a lot of paid for inventory, that we can process over the next 12-18 months. On top of that inventory, we plan on continuing to blast, mine and crush additional ore, which will result in a very exciting and profitable next couple of years for Steppe, while focusing on bringing our phase 2 expansion online.
Speaking of our Phase 2 expansions, we released a significant update in October of last year: Feasibility Study results that added another 10.5 years of mine life, doubling our current production profile from Phase 1. We now have 12.5 years of mine life ahead of us, with what we believe to be significant growth still. We announced 100k ounces/year average for Phase 2 which we believe we can grow both for LOM and also on production profile, targeting 125-150k au eq oz’s per year once online, with no additional or meaningful capex requirements.
In addition to announcing the robust FS figures at $130M USD capex, $853 AISC, very quick payback and solid economics, we also received a landmark $60M USD debt package. This is sponsored by the Bank of Mongolia, and was announced just two weeks after the release of the Feasibility study! That is very fast and allows us to continue our Phase 2 expansion efforts without waiting for the full financing package, which we expect to have in place later this summer.
Alexander Deluce:
With the resumption of gold and silver production at ATO, for new readers, can you touch on the compelling economics of this project and how it feeds into the phase 2 transition?
Aneel Waraich:
I can’t emphasize enough the earlier points around Steppe’s paid for inventory and healthy cashflow, combined with the current gold pricing will inevitably lead to a very strong value proposition for the next couple of years. All of this will help fund the equity component and a smooth transition into Phase 2, as Phase 1 should still be in production while bringing Phase 2 online.
At conservative gold price estimates of $1600 we should have the ability to generate a significant amount of free cash. Conservatively, that still puts us at $50M USD of cash over the next couple of years, allowing for a large contribution to our Phase 2 capex of $130M USD. As a reminder, we expect to fund ~70% of our Phase 2 with debt ($60M USD already secured).
In addition to the contribution to the Phase 2 equity component, the oxide production at ATO has the ability to provide a cushion of cashflow if things take longer. And we’ve all experienced delays lately; things inevitably do take longer in this current environment.
So, if Phase 2 takes a bit longer and doesn’t come online in 2 years, but in 2.5 years, we expect Phase 1 to still be in production generating cash to provide a nice buffer should it be required. It’s a nice position to be in, and not a luxury that we had during Phase 1 construction.
Alexander Deluce:
What is the plan for the next 12 months regarding exploration of the company’s three exciting assets?
Aneel Waraich:
We hope to drill ~20,000m across our ATO and Mungu deposits, and of course the very exciting and highly prospective UK project. All of this exploration can be funded by cashflows as well, which is great. We could double that drill program based on the success of one or both projects.
Our drilling on UK will be a priority this year and we really hope to get down to that exciting site in April or May of this year. Our peers and colleagues, Erdene Resources (ERD), have had tremendous success in drilling and exploration on their adjoining licences. If we can replicate any of that success on our own licence, it will be quite exciting for Steppe shareholders given that it’s an exploration licence that really has no reflected value in our current share price.
If you recall, Alex, we had some positive initial sampling/trenching results down there with 4 discoveries to drill on which included 1.49gpt gold, 450gpt silver, 2.98% copper and 3.98% lead over a meter and highlighted a mineralized system of at least 700m in length and up to 12 m wide.
In terms of exploration at ATO/Mungu we do expect to do start later in Q2/early Q3 which could include step-out, at depth exploration/extensions and drilling further north on the ATO4/Mungu trend.
Alexander Deluce:
Can you highlight how mining is going to play a key role in Mongolia in the years ahead?
Aneel Waraich:
It is hard to dispute the numbers coming out of Mongolia, related to our sector. Mining accounts for 20% of the nation’s GDP, which has grown at an average rate of 7.2% per year since the advent of large-scale mining in 2004.
The potential is undeniable with the volume of yet untapped land mass and resources across the mineral-rich country, and the strategic geographical location in the pan-Asian context.
The Mongolian government has recognized the need to modernize and make it easier to conduct business in-country, to meet global investor expectations, and has targeted the mining sector specifically with some of these initiatives.
Recently, Mongolia’s Ministry of Mining announced a digital strategy to entice more explorers to the country: companies will now be able to electronically apply for a licence and receive a response within a month. They have also expedited new rail infrastructure, to make exports easier for those transporting materials through the South Gobi corridor.
Furthermore, the financial backdrop of that nation is positively dynamic. The Mongolian Stock Exchange’s (MSE) Top 20 Index, the national benchmark, soared 132.7% last year, by far the world’s best performance, as recognized by Bloomberg.
And top of everyone’s minds these days, is the great Rio Tinto bid. The Oyu Tolgoi mine, for all of the attention that it has received, is a tier one asset and is expected to be among the top five largest copper mines in the world by 2030. The resolution of their issues with the Mongolian government, is very symbolic for the mining world. It has shown Mongolia’s commitment to being a stable and business-friendly mining jurisdiction, significantly reducing uncertainty for future mining projects. And, this $2.7B bid by Rio Tinto reinforces their long-term commitment to operating in Mongolia. We’re all excited to see this news!
Alexander Deluce:
What is your current take on the precious metals industry? With trading around 2000, do you think we have turned a corner with regards to prices?
Aneel Waraich:
I do think that we have turned a corner with regards to precious metals prices. To be clear, I’m not an economic forecaster, but Gold has performed exactly as it has in the past during times of inflation, and as a hedge against any type of market risk, including the current geopolitical tensions.
Gold has been setup for a higher price, before COVID, during and now more so than ever before.
Steppe’s current business model is based on a very high margin, and will continue that way in Phase 2. We have also built in a $1000 cushion in our modeling, in case there are sell-offs before gold goes up even further. The market sentiment has shifted for gold and gold equities…so we will take that!
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