Thursday, September 03, 2015

True Gold Mining Has True Problems

True Gold Mining is losing money. I just thought I'd say that right off the bat so we don't waste any time beating around the African bush. The company has been around in some form since 1987 according to Yahoo Finance. That's plenty of time to get out of the market's basement and generate some wealth.

Their current CEO is a former investment banker, and his bio on the company website says nothing about academic qualification as a geologist or specific operational success. I see this over and over again in junior mining companies. The company's Yahoo Finance profile says their chairperson is making an obscene amount of money for a company with no revenue in several years. Guess what, when you put a bunch of investment bankers in charge of a mining company, don't expect to see a bunch of metal coming out of the ground.

The Karma Project in Burkina Faso is their big show. Burkina Faso is ranked 85 out of 175 on Transparency International's Corruption Perceptions Index and 102 out of 178 on the Heritage Foundation's Index of Economic Freedom. Its absolute scores in those rankings are abysmal. Demonstrations forced True Gold to halt its Karma Project in January 2015. Unrest has a funny way of messing up business in a poor, corrupt country.

I read the Karma Project's NI 43-101 preliminary economic estimate dated August 10, 2014. The indicated and inferred resources are decent grades and sizes, but I believe their assumed gold price of $1557/oz is too high given present gold market conditions. The probable reserve grades average to 0.85 Au g/t; that's still decent but not inclusive of proven reserves. I also wonder why they chose a gold price assumption of $1250/oz for their economic analysis that differs from the $1557/oz assumption for the resource estimate. Adding their estimated cash operating cost of $630/oz and capital cost of $207/oz gives us a total cost of $837/oz, unless I'm missing something. That is below gold's current spot price but above its long-term average historical price, so the project is very vulnerable to a prolonged bear market in gold.

The Liguidi Project in Burkina Faso is their side show. The project's fact sheet includes some sample drill results but I don't see anything that resembles a 43-101 report. The final Liguidi results will have to wait for daylight if Karma ever gets going. All of the international ranking data on corruption and freedom apply to both projects with equal validity.

The former investment bankers running True Gold need to raise US$132M to bring Karma into full production. I reviewed their consolidated financial statements dated June 30, 2015. The company's burn rate of $1.4M/month and cash on hand of $23M means they can survive for about 16 months before needing another capital raise. Shareholders will experience dilution if True Gold raises a big chunk of that $132M at some point. The accumulated negative retained earnings of -$81.3M shows how little progress the management made towards productively employing capital they raised in the past.

I will not invest in True Gold. The main project looks decent enough but it's in a bad neighborhood called Burkina Faso. Investment bankers should learn about geopolitical risk before they agree to run mine exploration companies.

Full disclosure: No position in True Gold Mining (tickers TGM.V and RVREF) at this time.