Red Back's intriguing gold web

How is it that an African gold miner has moved into leadership position of the global listed gold stocks sector?

JOHANNESBURG  - 

Two gold miners with operations in Africa, Red Back, and Randgold Resources, have moved into stock price performance leadership among some 200 gold stocks listed across the world. Both stocks rank as Tier II names; Randgold Resources is a well known company, not least due to the extensive and expansive long term publicity generated by its CEO, Mark Bristow. By comparison, Red Back, associated with the Lundin group, is relatively unknown. 

Red Back holds interests in and operates gold mines at Chirano (Ghana) and Tasiast (Mauritania), and could be producing 500,000 ounces of gold a year by 2012, from around 250,000 this year, if its own projections unfold as planned. Both mines appear to be situated in gold provinces that could yield up further deposits. Red Back may also move further up the production ladder on the back of corporate activity. 

Last month, Red Back bought a 13% stake in Mineral Deposits, which also has interests in Africa. Where Red Back currently holds 6.2m ounces of gold in the resource category, and 4.1m ounces in the reserve category, Mineral Deposits holds a 3.5m ounce gold resource and a 1.4m ounce gold reserve at its Sabodala Project, in Senegal, which is due to produce gold within three months. Mineral Deposits also holds a world class, but unfunded, mineral sands project 

Where Red Back currently generates net cash from low cost gold mining, and holds around USD 40m in cash, Mineral Deposits currently holds little in the way of net cash. Since 1 July 2007, Mineral Deposits has raised AUD 175m (with portions also in CAD) in equity and has arranged USD 130m of group debt to fund completion of the Sabodala gold mine, and progress work at Grande Côte. 

Mineral Deposits remains fully financed at Sabodala, which is more than 87% complete with construction, to be completed by the end of 2008. The target for 2009 is to produce 168,000 ounces of gold at a cost of around USD 400 an ounce. The USD 70m Macquarie bank project finance facility (part of the USD 130m package) will require hedging to cover some of the first four years of production with operating margins of 40% and higher at current gold prices. 

Immediately adjacent to Sabodala, Canadian junior Oromin has delineated a 1.4m ounce initial resource at 1.73 grams per ton, allowing a regional gold story to start emerging. Mineral Deposits is seen as holding first mover advantage, with excess power, water and infrastructure, and a mill configuration which can expand from 2m to 3m tons a year with only a modest capital outlay.  

In taking the Sabodala story further, Mineral Deposits recently signed a new joint venture with Axmin, a Canadian exploration company, covering three exploration permits within 30 kilometers of the Sabodala gold plant. 

Meanwhile, Mineral Deposits's Grande Côte mineral sands project north of Senegal's coastal capital of Dakar awaits financing; the plan is that the construction team from Sabodala will move over to Grande Côte early 2009, pending financing, to construct a long life low cost 85,000 tons a year zircon and 700,000 tons a year ilmenite mine. So far, around AUD 90m has been spent on the fully permitted Grande Côte; long lead items have been secured.  

In recent months, zircon and ilmenite prices were reporting as trending higher, amid fresh constraints and supply discipline and steady demand growth from the developing world. The leading mineral sands industry consultant TzMi recently revised upwards zircon forecasts for 2009; firmer titanium dioxide pigment prices are pulling ilmenite and other feedstock prices higher. Grande Côte proximity to northern hemisphere markets is seen as giving it a pricing advantage compared to Australia's dominant export producers. 

Red Back's stock price has proved among the most resilient of any listed gold stock. The Mineral Deposits stock price has been heavily sold off, while Oromin and Axmin have taken more severe punishment. Given the generally parlous state of equity and debt markets, and the powerful status of net cash, Red Back may be poised to consolidate its growing web of interests. 

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