Anaconda Mining (TSXV:ANX) is a small gold mining company that has successfully pulled itself up by it’s bootstraps. Over the past five years, the company developed a gold mine on the Baie Verte Peninsula, Newfoundland, and reinvested the free cash flow from the mine to help ensure the company’s future.

The company has 209M shares outstanding and 243M fully diluted. Cash at August 31, 2016, was $400K, although the company raised an additional $400K in a provincial loan since then, which brings total cash to $800K and total debt to approximately $1M. You can find out more on the company’s website, which is full of good content.

The Point Rousse project generated approximately $35M in operating-level EBITDA for Anaconda Mining over the last five years and funded “the lion’s share” of exploration and capital expenditures during the bear market of 2011-2016. Anaconda raised equity investment for the first time in five years in July, 2016, using flow-through shares issued on first regulated equity crowd funding platform for mining, Red Cloud Klondike Strike.

Funding exploration and capital expenditures through cash-flow from operations is a great way to avoid dilution and position the company for the next bull market in gold stocks. To see just how well the company is positioned, please read this quote from my interview with Mr. Dustin Angelo, CEO:

What we have now is the full pipeline of projects. We have pure exploration, exploration and development, and development and production projects. We are growing this pipeline centered around this milling infrastructure, the port facility, and the tailings capacity that we have at the site. The three legs of the stool.

Funding exploration with cash flow from mining is great, but it has a downside: the company spends the cash flow and doesn’t build up working capital. You can see this reflected in Anaconda’s relatively low cash balance. This aggressive reinvestment also has some subtle effects on the cost profile, which I will now discuss at length.  

Please understand that I’m not an accountant, but I have always found all the rules and conventions of the discipline fascinating. A sort of anthropology of the business world.

What follows is my own attempt to explain things and any errors are my own.

All-in sustaining cost is an important measure of profitability for a mining company. You could say, simply, that all-in sustaining costs are just cash costs plus sustaining expenditures. Anaconda faces one big sustaining expenditure: exploration to find new deposits that will extend the life of the mine.

Prior to raising equity in 2016, Anaconda's costs were approximately as follows:

All-In Sustaining Cost = Gold Price

This occurred because the company adjusted its total exploration spending to match the free cash generated by the mine. The exploration costs were treated as part of the all-in sustaining costs, so the all-in sustaining costs were approximately equal to the price of gold.

Mr. Angelo explained it as follows in our interview:

The all-in sustaining cash cost for the last two years has been about what the gold price is. Just because of what I said before, we are trying to grow and we used our cash as we had it available. Everything we generated, we used. Our all-in sustaining is pushing against our revenue per ounce because of that. Ultimately, as we delineate more ounces we expect that sustaining cash cost to come down and be more in-line with what you expect. If we can also increase ounces through the mill and leverage the infrastructure, then we can certainly bring down the operating costs to under $1,000 per ounce. Maybe $900 or $800 range. That's the long-term goal, the five-year horizon.

Since raising new capital in 2016 for exploration, Anaconda’s costs are starting to look a bit different:

All-In Sustaining Cost > Gold Price

This occurs because the company continues to spend their free cash on exploration, as before, but now spends some additional amount provided by the flow-through financing. The financing in 2016 is allowing the company to do more exploration, which is a good thing. As Mr. Angelo said in our interview: "We can't go at the pace of our cash flow. We have to go a bit faster and demonstrate the potential of the region". I don’t know how much more the company will spend, but I think it is important to understand where this money is coming from and why the company is spending it. 

Again, Mr. Angelo explained it well in our interview:

Our biggest challenge is the fact that we don’t have the ounces in a 43-101 format. We have over 100,000 ounces of resources at Viking. Roughly 50,000 -- 25,000 each indicated and inferred -- at Stog'er Tight, which is the second deposit we have been developing. We have roughly 30,000 ounces of reserves at the Pine Cove pit we are currently mining. It is a very good base, but the market wants to see more. That's why we did the capital raise, we need to accelerate the pace of exploration. We can't go at the pace of our cash flow. We have to go a bit faster and demonstrate the potential of the region.

All that to say: please be careful how you interpret Anaconda’s all-in costs. It’s not quite right to say that the company is not profitable because all-in sustaining costs are greater than the gold price, in my opinion. I don’t know how much information the all-in sustaining cost even provides for an analyst trying to understand Anaconda right now because those costs are based on a mine that is nearing the of it’s life. How do you value a company when it’s flagship mine is nearing the end of it’s known life?  

Anaconda's cash costs may prove more useful to an analyst trying to understand the company. Anaconda has a positive operating margin, which is the source of the free cash that helps fund the company’s exploration and expansion efforts. Mr. Angelo told me that the cash costs for the Point Rousse project are around C$1,100 per ounce.  With gold trading around $1,500 per ounce of gold, there is a pretty good operating margin. 

But even the cash costs have some subtle things going on because Anaconda started selling their waste rock as construction-grade aggregate in 2016. This was a great business deal that shows the company as a positive force in the community and provides a non-dilutive source of funding. It also reduces mining costs: 

From an environmental perspective, it's phenomenal. We're taking waste-rock, which is essentially an environmental issue, and shipping it offsite. Not only leaving our site, it's going to another country. We're moving 3.5 million tonnes. It's an environmentally friendly project and it helps with our mining costs. The movement of the waste rock that comes out of the pit is a shorter distance than for our standard waste dumps, so we lower our costs. We're getting 60 cents per tonne, so it offsets our mining costs as well. It appears on the P&L statement. And if we reverse-engineer it, then we could import ore as well.

There is even another thing that may reduce cash costs in the future: an increase to the gold grade of ore fed into the mill. Anaconda’s exploration priorities are areas with higher grade material that can be processed in the near term, and the company has already run a pilot project to demonstrate that they can put such material through the mill.  

Our goal in the exploration program is to identify specific areas that have higher grade gold. For instance, the Thor Deposit in the Viking Project -- 60% of its indicated resource is three grams or more. It's an average 2-gram deposit right now, but it has high-grade zones. We are looking for areas across the Point Rousse and across Viking with high-grade mineralization. We did a test-case at Stog'er-Tight, which is another 43-101 Resource with 25,000 ounces of indicated and 25,000 of inferred. It's about 3.5KM from our mill. We put out that resource estimate at the end of the year in 2015.
We established a resource on it and we continue to develop it -- it's permitted. We did additional development in May-June 2016 and actually discovered an area where there was a high-grade pod at surface that was 3 gram per tonne gold. So, we took 10,000 tonnes in a bulk sample, brought it over to the mill, processed it in about a week's time, and produced more than two-times our gold production. Same cost structure, everything is the same except the feed-grade. If we can do that at a larger scale, which we think is possible from what we are seeing around the Point Rousse project, then that produces a lot of leverage. That is the leverage to feed-grade I was talking about earlier as a way of increasing our returns.

That will be a beautiful thing, if (when?) it comes together.  

There’s a lot to like at Anaconda, whether it’s the pipeline of gold projects in close proximity to the existing mill, the logistical options available through water access, or the management team that has demonstrated an ability to bootstrap in lean times and take advantage of the market in good times. Don’t let the financials blind you to what is taking shape at the company:

We are focused on growth. We have plans for production increases. We produce about 16,000 ounces of gold per year right now but, with all these projects together, we are working on a five-year plan where we will be producing between forty to fifty thousand, maybe sixty thousand ounces of gold per year. We will deliver it through the Pine Cove Mill, which is a central point in the infrastructure for a "hub and spoke" system around these projects since they are fairly close in terms of geography.

It was my pleasure to these prepare comments on the company. Thanks very much to Mr. Angelo for our past interview. I look forward to another one soon! Thanks for reading, from Peter Bell.