Barrick Gold (TSX: ABX; NYSE: GOLD) is selling its 90% stake in the Massawa gold project in Senegal to Teranga Gold (TSX: TGZ; US-OTC: TGCDF) for US$300 million in cash, US$80-million worth of shares and contingent payments linked to the gold price of up to US$50 million.
The Massawa project is within 25 km of Teranga Gold’s Sabadola mine, the largest producing gold mine in Senegal, 650 km east of Dakar.
“You would always prefer to pay less than more for anything, but Massawa is the highest-grade open-pit development project in Africa, and it’s adjacent to our infrastructure, so it makes tremendous economic sense for us,” Richard Young, Teranga Gold’s president and CEO, says in an interview, adding “it won’t take much to bring Massawa into production.”
Teranga will start processing free-milling ore from Massawa’s Sofia deposit at its existing carbon-in-leach (CIL) plant in the second half of 2020 at a cost of US$5 million to US$10 million.
Massawa’s high-grade reserves (2.6 million oz. from 20.9 million tonnes grading 3.94 grams gold per tonne) will be mined and processed on a priority basis, and more than half of the ore processed through the Sabodala plant could come from the Massawa deposits by 2021, the company says.
Sabodala, which Teranga acquired in 2010, started commercial production in 2009, and has produced over 2 million ounces. The mine — made up of 10 open-pit deposits — has a remaining 13-year mine life based on reserves of 2.4 million oz. gold from 55.7 million tonnes grading 1.35 grams gold.
The combined Massawa–Sabodala operation, along with production from its newest gold mine, Wahgnion, 600 km away in Burkina Faso, will reposition Teranga as the next low-cost mid-tier gold producer in West Africa, the company says.
“It makes us a mature gold producer with very competitive costs vis-à-vis our peers,” Young says.
Teranga’s all-in sustaining cost (AISC) guidance for Sabodala this year is between US$825 and US$900 per oz., and Young says the company is targeting first-quarter AISCs for the combined operation below US$800 per ounce.
The company plans to complete a prefeasibility study on the integrated Sabodala–Massawa complex within six months of the transaction closing, and a definitive feasibility study in 2021.
Massawa was discovered by Randgold Resources, which merged with Barrick in January. About 80% of the ore from Massawa is expected to be processed through Sabodala’s CIL plant, but the other 20%, which is refractory, would be processed through a BIOX circuit. An earlier feasibility study on Massawa estimated that building a BIOX circuit would cost US$80 million.
Young says Teranga plans to start a US$5-million to US$10-million drill program annually over the next two years to help determine the size and timing of bringing the BIOX circuit onstream, while it completes trade-off studies for the definitive feasibility study.
“There’s quite a bit of potential in both oxide and refractory deposits,” Young says. “When Randgold discovered the main deposits were refractory, they immediately pivoted to look for free-milling ore, which is the Sofia pit,” Young says. “They never went back and extended any of the refractory opportunities. The pits were drilled at US$1,000 per oz. gold so there are opportunities at depth and along strike and on the regional land package. We’re very encouraged, as Barrick was, and working with the Barrick exploration team we have an exploration program laid out that we will execute over the next two years.”
Under terms of the sale, Barrick and its joint-venture partner at Massawa, Compagnie Senegalaise de Transports Transatlantiques Afrique de l’Ouest, will receive 19.2 million shares and 1.6 million shares of Teranga. The government of Senegal will keep its 10% interest in the project. Each share is valued at $5.10 apiece.
Of Teranga’s US$300-million cash payment, US$225 million will be funded under an acquisition facility agreement by Teranga’s lender Taurus Funds Management, which is contributing US$200 million, with the other US$25 million provided by Barrick as part of the lending syndicate under the facility. Young says he expects Teranga can repay its debt by the end of 2022.
The contingent payment includes US$50 million if the gold price averages more than US$1,600 per oz. over three years and US$25 million if the gold price averages between US$1,450 and US$1,500 per ounce. If gold is below US$1,450 per oz., no contingent payment is required.
Analysts had different opinions on the price.
“We value Barrick’s 83.3% stake at US$388 million [5% net asset value (NAV)], which would imply a US$420-million value for the 90% stake sold, in line with the US$403-million purchase price,” Jackie Przybylowski of BMO Capital Markets commented in a research note.
Kerry Smith of Haywood Securities saidthe sale price was below his NAV.
“We valued the joint venture’s 90% interest in Massawa at US$465 million at a long-term gold price of US$1,425 per oz., and the US$380-million selling price represents a discount to our NAV,” he wrote in a note to clients.
Once the transaction closes, Barrick will be Teranga’s second-largest shareholder with 11.45% of the company and can nominate one member to the company’s board of directors.
Teranga’s largest shareholder, Tablo Corp., controlled by Teranga director David Mimran, invested a further US$45 million to keep its 21.2% stake.
“His family has been active in West Africa for more than 60 years,” Young says of Mimran. “They have been the largest private employer in two of the three countries we operate in [Senegal and Côte d’Ivoire], so it’s good to have someone considered to be a local on your board.”
In addition to its operating mines — Sabodala in Senegal and Wahgnion in Burkina Faso — Teranga is advancing its Golden Hill project in Burkina Faso (6.4 million indicated tonnes averaging 2.02 grams gold for 415,000 oz. gold and 11.95 million inferred tonnes grading 1.68 grams gold for 644,000 oz. gold).
The company also has two projects in Côte d’Ivoire. It entered Côte d’Ivoire in 2016 through a joint-venture agreement with Tablo Corporation. In December 2017, it added a second joint-venture project with Sodim, a private investment company.
Next year, Teranga expects to spend between US$5 million and US$10 million on exploration at Sabodala and Massawa; US$10 million at Golden Hill; US$1 million to US$2 million at Wahgnion; and between US$5 million and US$10 million on its projects in Côte d’Ivoire.
News of the Massawa purchase sent shares of Teranga up 56¢, or 10%, to $6.19. Over the last year, the company has traded in a range of $2.98 to $6.24 per share.
Teranga has 108 million common shares outstanding for a $666-million market capitalization.