True Gold taps new sources to raise capital

Mark O’Dea has to be the envy of every of nearly every junior mining CEO in the country.

As the executive chairman of True Gold Mining Inc., Mr. O’Dea has signed off on deals to raise $33.5-million of fresh capital since the start of May. That equates to more than half of True’s $60-million market value.

It is an enormous amount of money for a junior gold miner to raise at this point in time. Juniors are suffering through some of the worst market conditions seen in decades, as risk capital has fled the sector and equity financing opportunities have dried up due to lack of demand. The recent drop in gold prices only made matters worse.

Mr. O’Dea, a well-known mining entrepreneur, said he recognized the equity markets were a non-starter for raising capital. That caused him to take a different approach and look for strategic investors. His success demonstrates that money is available for quality junior companies, but they have to work a little harder for it than they used to.

“We’ve really tried to target a different style of niche investor, and different pools of capital from the traditional resource sector funds which have been really beat up,” the 45-year-old said in an interview.

Many juniors like to talk about how they are courting various “strategic” investors (particularly in Asia) but almost none are able to raise substantial amounts of money that way.

True Gold, however, was able to tap two different sources. Back in May, the Vancouver-based miner raised $10-million through a private placement with Canadian giant Teck Resources Ltd. And on Thursday, the company announced it is receiving a $23.5-million investment from Liberty Metals & Mining Holding LLC, a subsidiary of Liberty Mutual Insurance and a very long-term investor in the resource space.

True Gold was helped by the fact that Mr. O’Dea has a strong track record. He was the CEO of Fronteer Gold Inc., which made a discovery in Nevada and was sold to Newmont Mining Corp. for $2.3-billion in 2011. He also has a relationship with Teck that dates back to his days at Fronteer.

But on its own, that would probably not be enough to raise significant funds in this market.

Mr. O’Dea said the key was to match the project he wanted to build with the right kind of long-term investors. He said that Liberty was interested in True Gold’s Karma project in Burkina Faso because it has low capital intensity, with a construction cost of less than $150-million. That is a must in a market where capital is so scarce, and provides a useful lesson for juniors trying to tackle more ambitious projects.

“As the market began to turn, we recognized that projects with low capital costs, that can get into production relatively quickly, and can withstand downward pressure on the gold price are the projects you want to be in,” he said.


Wits Gold bids for Burnstone, decision expected next week

JOHANNESBURG – Witwatersrand Consolidated Gold Resources (Wits Gold) on Friday said that it had offered to buy embattled Great Basin Gold’s (GBG’s) suspended Burnstone gold operation, in Mpumalanga.

The TSX- and JSE-listed group aimed to deliver dividends to its shareholders and generate cash flow in the near term, as Wits Gold brought Burnstone into production.

“Moving to producer status will serve as a solid platform with which to start generating free cash flow for shareholders,” Wits Gold CEO Philip Kotze said, adding that the bid was in line with the company’s strategy of owning and developing shallow mines in South Africa.

Wits Gold would pay $7.25-million in cash towards GBG South African subsidiary Southgold Exploration’s debt, which was restructured and cut by 55% to $177.35-million.

Southgold would, from generated actual cash flow, repay the remaining $170.1-million liability.

Wits Gold would also advance a $100-million shareholder loan with an interest rate of 4%, which was also to be paid back on a preferential basis from Southgold’s operating cash flow.

The offer to buy the mine would be put to vote on July 11, but Wits Gold had signed irrevocable undertakings from the major creditors that its bid would be voted for to eliminate deal uncertainty.

Burnstone was put on care and maintenance in September, after several production setbacks and an inability to afford the mine’s required working capital to reach cash-flow breakeven forced the mine into business rescue.

Kotze noted that a new underground mining plan, which would allow for flexibility in the production approach, had been developed, after due diligence found the previous mine plan “far too ambitious”.

GBG’s mine plan had created market expectations, which had resulted in the team rapidly trying to deliver into high production, at 250 000 oz/y, without the required structures in place, he explained.

Burnstone, which started producing in 2010, encountered a geological fault that GBG did not find during exploration drilling, leading to the company having to revise its 2011 production guidance to 30 000 oz – which it missed by 6 000 oz – from the previous levels between 85 000 oz and 110 000 oz.

The mine’s production target – before suspension – for 2012 was 90 000 oz to 100 000 oz.

Wits Gold lowered production by 50%, with plans in place to potentially ramp up production in a gradual phased approach to a maximum 130 000 oz/y for a $100-million investment. First production is expected 12 months after the initial takeover.

“We have a number of options that require less capital for lower production or more for higher production [than the middle ground of 50 000 oz/y],” he said, noting the current Wits Gold plan for the mine required $50-million in capital expenditure and would enable production ramp-up to about 70 000 oz/y.

Wits Gold expected to take control of the operation – which has more than six-million ounces of gold in proven and probable reserves and a forecast life-of-mine upwards of 25 years – during the second half of 2014, after which the final mine plan would be decided on according to the market at the time.

Wits Gold aimed to initially focus on establishing the appropriate infrastructure for the relevant plan, and develop until enough ore reserve had been opened up for sustainable production.

The company would complete the footwall development in advance, and create a drilling platform to predetermine the geological structure and paychannels.

Wits Gold also planned a three-dimensional seismic survey, which would constrain the highly faulted underground structure and enable mine design optimisation.


Investing in White Gold!

hina circa 2008… six babies die from severe kidney damage while another 300,000 suffer kidney stones. As it turns out, melamine isn’t meant to be in infant milk formula! The result was a few Chinese businessmen taken out back and shot, literally… and a nation that, for good reason, doesn’t trust the dairy industry (for starters…).

Since then China has “enjoyed” multiple infant formula scandals, including formula containing aflatoxin, a known carcinogen, and a scandal involving milk powder containing mercury.

Outside of infant formula, but remaining on the topic of food found on Chinese supermarket shelves, it’s also possible to buy “glow in the dark” meat. Turns out bacteria-laden pork does that. I figure there may be a market serving it in night clubs, instead of glow rods you could have “glow kebabs” – call it theme food.

Not to be outdone by the Europeans, who were recently caught passing off horse meat as beef, below I present a list of culinary delights to be found in the middle kingdom:

  • Rice containing cadmium. A heavy metal which destroys your internal organs and causes cancer. Not a great ingredient in food methinks.
  • Rat, Fox and Mink meat sold as Lamb. Come on…let’s face it, most any meat deep fried and doused in sufficient amounts of soy sauce tastes pretty much the same anyway.
  • Dead, diseased pigs sold as food. This was stylishly referred to as “swine gate”. Turns out the pseudo-rabies virus in the pigs doesn’t gel well with humans.


Dead pigs in China
Deep fried with a bit hoisin sauce and it’ll be alright, no?

In short, buying food off a supermarket shelf in China is a high risk adventure sport. What the average man may risk on his own behalf, he is far less likely to risk on his precious spawn. Those reading this article who have loved ones, especially children will likely agree with me when I say I would NEVER let my kid so much as look at any infant formula originating out of China. Even if there is a statistically small chance of poisoning, the ultimate penalty is death. Yeah, thanks, but no thanks!

It appears many Chinese parents feel the same way, which has led to mainland Chinese buying infant formula in bulk from Hong Kong, Europe, the US, and Australasia, thereby prompting a rationing in some countries by companies such as Danone and Mead Johnson Nutrition Co.

In a move reminiscent of US anti-drug trafficking efforts, the Chinese Government, exhibiting the intellectual capacity of a stuffed bear, have since restricted imports to just 2 cans per person. This has opened up a massive smuggling opportunity. You know the world is a screwed up place when transporting something so innocuous as infant formula is a punishable crime!

Hong Kong border officials last year arrested more people for smuggling baby infant formula than they did for heroin!

Markups now exceed 100% above retail prices in Europe, Hong Kong, Australia and New Zealand. When you consider I’m talking about the retail price and not the wholesale price, those of you who are not asleep, stoned, or dim, will quickly realise the obscene profits that smuggling generates. The average Chinese newborn consumes 22,630 grams of formula in their first 6 months of life, equating to a US$1,544 retail value. Demand is overwhelming supply right now.

When a market accepts and trusts people whom they don’t know from Adam, selling infant formula out of their garage, then you know you have a market ripe with opportunity. Done properly the potential exists to create a powerful “trusted brand”.

At present 70% of the imported infant formula market is controlled by foreign brands, with most of the independent brands run by small “Mom and Pop” companies from NZ and Holland, who as far as our analysis shows are successful mainly due to their product coming from “safe” jurisdictions. None we’ve found have strong marketing or endorsement programs, or are taking advantage of this opportunity in a well thought out manner.

Below is a graphic representation of the major players in this $12.5 billion sector:


Mark and I, along with our CPAN members have recently completed a “friends and family” seed financing round in a company seeking to change this.

Using a strong marketing platform they will seek to establish themselves as a niche, high-end supplier of infant formula to the China market. I’m here in NZ, and I just met with the CEO who is sourcing supply from a boutique New Zealand dairy company. He commented to me, “you know I wouldn’t know what to do here in NZ, all the problems seem to be solved.” This is exactly what excites us about emerging and frontier markets. There is NO shortage of problems, and the greatest profits always go to those who solve problems.

We believe this company is in the right market, has a solid strategy which they are systematically executing on, and most importantly they have a very well-established team of professionals with solid track records of operating in China. Those factors, combined with a compelling valuation, are some of the reasons we got involved.

As mentioned on our blog numerous times, we ALWAYS bet on talented, proven management first and foremost. By doing so we think the odds are stacked more in our favour than otherwise. Executed well, the rewards in this sector promise to be substantial. What is a sure bet is that someone in this space is going to make a fortune.

We have placed our bet, now let’s see how it plays out. Time will tell, and nothing in private equity is ever a sure thing. However, I’m always cognizant of the deals which have vaulted my own portfolio, and most have had the ingredients of this one. We’ll likely introduce readers again to the company in question once they hit cash flow, but prior to going public.