Galane Gold: The Most Undervalued Gold Company You’ve Never Heard Of

This article was originally published on Gold Investing News on October 14, 2014.
You might not have heard of Galane Gold (TSXV:GG), and for a long time, that’s the way the unhedged, Botswana-focused gold producer liked it.
After purchasing the Mupane mine from IAMGOLD (TSX:IMG) in 2011, the company took an unorthodox approach to making operational improvements and extending its mine life, using only its operating cash flow and never issuing shares or going to the bank for funding.
Now, however, with its cash position growing faster than its market cap, Galane is looking to attract a bit more attention from the market. Gold Investing News (GIN) spoke with the company’s chairman and acting CEO, Ravi Sood, to find out a bit more about what Galane has been up to lately and why Sood – and others – believe the company’s stock is currently undervalued.
GIN: Galane Gold has been described as flying “under the radar.” What approach has Galane taken that sets it apart from other companies in this way?
RS: With respect to our public profile, we’ve been very quiet, almost invisible, for the past two years. In 2013, the sharp drop in the gold price caused us to make some significant changes to our operations, and with our changing story and the complete lack of investor interest in the sector at the time, we went completely quiet.
As we’ve gotten the last few quarters under our belt, our operations have fundamentally changed. Our cost structure is now several hundred dollars lower, and we’ve gone back to adding to our cash position by generating free cash flow, even with the lower gold prices of 2014 and the end of 2013.
Recently we realized that in the face of more M&A in the sector, we really needed to focus on our profile with the investor community. For example, I was on the board of a company called Elgin Mining (TSX:ELG), which is a 45,000-ounce-a-year gold producer. It has a similar cost structure to Galane’s, an almost identical resource and a combination open-pit and underground mine. We sold Elgin to Mandalay Resources (TSX:MND) in a deal that valued Elgin at $75 million, and it was very well viewed by the market. Mandalay’s stock went up on the purchase.
By comparison, Galane is sitting at a market cap of $10 to $11 million, and our cash position is more than that. With that modest position, I think we could be vulnerable to a takeover.
There’s a thousand and one gold stocks to own. Nobody rolls out of bed and decides that they need to own yours – you need to go out there and sell it. That’s what we’ve been doing over the past couple of months – trying to get above the radar.
CIN: Galane recently commissioned a screening plant to process low-grade ore, financing it entirely from the company’s operating cash flow. What are the benefits of the plant and what other options is Galane looking at to continue reducing cash costs?
RS: It just adds another dimension to our flexibility, and has allowed us to make use of otherwise uneconomic ore. We acquired the screening plant from a neighboring nickel mine that’s in shutdown mode, so we were able to acquire it for pennies on the dollar compared to what it would’ve cost for us to buy the same plant and commission it from scratch.
That’s enabled us to process lower-grade ores and sub-grade ores that we’ve stockpiled from previous mining activity. So it’s really given us a lot of flexibility to react to lower prices and given us more options in terms of sequencing the ore that goes through our mill.
For example, we had a motor failure in Q2, which set us back. We had a spare, but we were only able to operate at reduced throughput. However, we were able to use some of the previously mined material to reduce our cost and mining rates and hold our ground in terms of our cash position.
GIN: You also recently entered a gold prepayment agreement with Samsung Electronics (LSE:BC94,KRX:005930) in order to raise funds to repay early, and in full, your debt and accrued interest to IAMGOLD. Why did you choose that type of funding – a gold prepayment agreement – to repay IAMGOLD? Your company has avoided share dilution, so did that also drive this decision?
RS: We could have funded the early repayments to IAMGOLD from our own resources, but we wanted to do a deal with Samsung because the terms were excellent. There’s no dilution, there’s no equity kicker and there are no structuring or standby fees. It’s effectively a very low-cost, non-dilutive form of financing, which is a major accomplishment. We also felt it was a major endorsement to have world-class global company like Samsung doing due diligence on us and finding everything satisfactory.
Most importantly, this is potentially a prelude of things to come. If we can present Samsung with opportunities now, we will be far better placed to do a much larger deal with them in the future – potentially with them as a financial partner that will allow us to expand our operations.
Ultimately, our mission is to create shareholder value in the long term, so if we can minimize our share dilution at the same time as increasing our production and fundamentally lowering our cost structure, we view that as positive. From what we’ve seen, there’s no better partner than Samsung for that approach.
GIN: What sparked Samsung’s interest in partnering with Galane Gold?
RS: There are several drivers for them, but one important factor would be the “origins and traceability” of all components used by Samsung Electronics.
The global smartphone industry uses about $3.5 billion worth of gold a year for components, and Samsung accounts for almost a third of that demand. Of course, Samsung is also a major manufacturer of televisions and various other electronics that all use significant amounts of gold.
They want to comply with the Dodd-Frank Act in the United States. It deals with conflict minerals, and gold is highlighted as one of the minerals for which you have to find an origin and chain of custody for. It’s virtually impossible to do that without sourcing the gold directly from mines, so that’s what Samsung has done here.
Beyond that, many global companies are also looking to integrate their supply chains. So with this deal Samsung has not only a visibility and a sense of compliance with Dodd-Frank Act, but they have a relationship with the ultimate supplier as well.
GIN: I also noticed that with the repayment to IAMGOLD, Galane has been released from several pre-existing conditions. What does that mean for Galane and what do the prospects look like for offering dividends to your shareholders in the future?
RS: You’re correct. That was part of the covenant of that time, and it also restricted us from various other forms of corporate equity. By repaying the debt in full, all of those things are now on the table. We are willing to consider any of those.
At this point, I think we want to see what happens next, with gold being at a critical juncture, before we do anything. We’re certainly interested in pursuing more of those avenues, but that will depend on what we view as the visibility of the gold market, the underlying gold price and our all-around financial flexibility.
GIN: Just to talk a bit about the expansion potential at Mupane, how is exploration work progressing at your other prospects around the mine and in the Tati Greenstone Belt?
RS: When we acquired the Mupane mine, we inherited a massive amount of exploration work and data that had been done over the last 30 years.
Well over $30 million have been spent on exploration in our tenement so far, so all of our priority targets are what you would call “brownfield” in that they have already been drilled, and in many cases have actually produced gold. In the pantheon of risk in mining, those are very low-risk targets.
Furthermore, when work was done there in the 70s, 80s and 90s, gold prices were in the $300s, or even lower in some cases, so 1.5-gram-per-tonne hits were walked away from. Those are entirely economic for us now. There is greenfield potential in the area as well, but for now, our plan is to continue to pursue what we consider to be low-risk brownfield targets and continue to add to our mine life.
That life of mine was less than three years we took over. Now, we have a five-plus-year mine life ahead of us based on what we have already proven. We have every confidence that we could continue to extend that year after year with very methodical, low-risk exploration work.
GIN: What about your progress with Tau Deeps and the Tekwane extension?
RS: The Tau Deeps and the Tekwane extension are very important for us. We managed to commence operations with Tau underground this year for a very modest amount of expenditure – again, entirely self-funded. We believe over both the short term and long term that operation will supply us with about 30 percent of the ore feed required to keep our mill at capacity.
So that’s a key operation for us right now, but going forward, it’s also proven that we are capable of bringing an underground mine into production and doing it on budget and on schedule.
We’re optimistic that part of the future of our operation is indeed underground, and that this won’t be our last underground mine. We do expect to go underground elsewhere on our tenement.
GIN: I’ve heard you say that Galane would have good leverage on gold prices if they were to improve. However, gold’s performance of late has been lackluster, to say the least. What does that mean for Galane?
RS: We’ve fundamentally altered the cost structure of the operation. Whereas Mupane had all-in costs in the vicinity of $1,400 to $1,500 when we took over, we are now looking at all-in costs in the $1,000 to $1,100 range.
We also have a plan that allows us to continue operating in a $900 gold price environment. We lose some ounces that way – our production profile is curtailed – but we lower operating costs.
The order of the day, again, is to survive and make it through to the other end without blowing up our share structure. We don’t want to fund it by equity, and we don’t want to get into the bank; we want to be able to survive any scenario on our own. That’s what we believe is best for shareholders.
GIN: Do you have an ideal production cost that you’re targeting?
RS: Yes, we think realistically we should be around $1,000, or $1,100 at the very high end, as a range for all-in costs, with cash costs being around $800 per ounce, or even lower. We think that’s a reachable number for our operation.
The $900 plan involves us giving up some of our resources. We lose some of our total ounces and some of our annual production, but we do continue to be viable at that lower price.
That’s just something a company like us needs to look at and have pre-planned with gold behaving that way it has.
GIN: Galane’s stock is undervalued, but it’s up about 200 percent so far this year. Do you think the market is starting to correct that valuation?
RS: Well, it’s really just started. I think that we’ll move up and down with the sentiment of the sector for sure, and currently it’s quite negative or non-existent. So that does constrain our ability get the share price to reflect the actual underlying value of the company.
Having said that, our market cap is no more than our current cash position, and it doesn’t in any way reflect the underlying value of our capital equipment, of our growing concern, and our ability to generate cash flows. We have tremendous optionality to gold that is not reflected in our share price. It’s not there in the share price of many companies.
I think there are a lot of inexpensive gold companies out there, particularly so with Galane because we happen to have a strong balance sheet as well.
GIN: What do you think is important for investors to consider when looking at gold companies?
RS: At this point in the market, if you have some sort of positive view on gold – for example, over the next one or two years, you expect a gold price rebound – you want to focus on the companies that are going to be able to survive and come out the other end, and that will have maximum leverage to the gold price upside after that
If a company has to issue a lot of shares to survive, that’s no good. And if it comes out the other end and doesn’t have that much leverage to the gold price anyway, that’s not good either. We want to have viability and sustainability combined with leverage to the upside, and we think we have that.
Of course, with gold at $500, every mine in the world would be out of business. But with gold at $1,000, we have a plan. You have to plan for the worst and hope for the best, and that’s exactly what we’re trying to do.
GIN: Great. Thank you for taking the time to speak with me today.
RS: Thank you.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Galane Gold is a client of the Investing News Network. This article is not paid-for content.