By Peter @Newton Bell, 14 November 2016
Apparently, Dylan Thomas had his first success with a poem titled "Light breaks where no sun shines", which reminds me of something that some junior mining investors say. They say: Markets don't make bottoms on good news. Now, I don’t know if that's true exactly, but it has been a helpful phrase for me over the last few years because it's helped me look past the darkness for the light just beyond the horizon.
Dylan was a pretty morbid writer and his most famous poem was "Do not go gentle into that good night". The line "Rage, rage against the dying of the light" comes to mind when I think of Anaconda Mining (TSXV:ANX). They have a gold mine that has been producing fifteen thousand ounces (ish) of gold per year steadily for the last five years, but is now coming into it's final years. They have not been well-rewarded by the market for their dilligent production -- partly because it has been a terrible bear market, partly because it is unclear what the future holds for the company after the mine is exhausted, and partly because it looks like they make no money on their production.
I say that "it looks like they make no money" because their AISC has effectively been the same as the gold price over the last two fiscal years. The operating cash cost is well below the price, but the AISC has tracked unit revenues as they have been reinvesting all available cash into expansion to help the company survive after their mine is exhausted.
Mr. Dustin Angelo, CEO and President, said: "We produce about 16,000 ounces 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." That would be a massive success that could change the company's profile from a small miner with a few years of production left into a sustainable (and profitable!) operation.
Could Anaconda really triple production over the next five years? Easier said than done, but the plan that Mr. Angelo described to me to get there was compelling. I have prepared a transcript of our conversation that goes into great detail and will post it on CEO.CA immediately.
It's hard to see how Anaconda will pull it off, but you can catch a glimpse of the future here or there. They ran a pilot project for a week at their mill with 10,000 tonnes of higher-grade ore from their second deposit called Stog'er Tight near the existing mine and successfully doubled gold output without changing the cost structure. That was a small success that may hint at things to come. Mr. Angelo said it best: "If you found 100,000 or 200,000 more ounces around the Point Rousse project where our mill is located, the incremental cost to monetize them is just the incremental mining and minimal transportation since all prospective gold areas are within 3 to 8 kilometres of the mill. More goes to the bottom line, with the potential for higher returns. Or the threshold for what is economic is lower, with the potential to extend project life. It's a pretty good situation."
Anaconda spent the last five years driving all of the net proceeds from their mine back into acquisition, expansion, capital expenditures, debt repayment and corporate expenses, reinvesting thirty-five million dollars into a unique 'hub and spoke' style gold district in Newfoundland. They now have a relatively complicated business model, but I think it's worth the effort to understand it. This could prove to be a great case study of how to bootstrap a junior mining company.
Anaconda did their first equity financing in five years in July 2016. This is not to say that the markets were closed to them, but that they had enough money from their mining to fund their expansion efforts. Now, Mr. Angelo says: "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." The financing in July was for $2M of flow-through shares, which the company must spend on certain qualifying expenditures. I don’t know if this round of expenditures will be the one that moves the needle on their resource base or market sentiment, but this is the type of work that needs to be done to help the company grow as new light breaks the horizon.