THE INSIDE STORY: Seasoned market watchers would be aware of the 50:50 Gruyere Joint Venture (GJV) deal, Gold Road Resources (ASX: GOR) struck in 2016 with international gold producer Gold Fields Ltd.
They would also know Gruyere as a 3.5 million ounce project forecast for average annualised production of 270,000 ounces of gold for 13 years.
Gold Fields recently gave Gruyere a highly-public endorsement by acquiring, through subsidiaries, approximately 75 million Gold Road shares, consolidating a ten percent holding in the company.
The major company’s interest in the emerging producer is understandable, given it has paid $350 million, plus a royalty, to participate in developing the Gruyere Gold Project, which accounts for 114 square kilometres of Gold Road’s substantial 6,000 square kilometre Yamarna Belt tenement holding in Western Australia.
With such a relatively small segment of its large landholding being financed through to becoming a significant gold production facility, Gold Road has signalled its next objective is to find another big gold deposit, using cash flow from Gruyere to develop its next project.
“Our strategy is to build Gold Road to being a 500,000-ounce producer and to become a gold producer in our own right,” Gold Road managing director Ian Murray told The Resources Roadhouse.
“To do that, two further sizeable discoveries need to be made, and we aim to make the first of those discoveries while Gruyere is under construction.
“By the end of 2018, we aim having another project ready for studies, drill out and expansion, paid for by cash flow from Gruyere.
“While that project gets built, we aim for the third discovery to be made, which will be developed using cash flowing from the first two.
“We don’t need to do Joint Ventures going forward, as our first has funded, and de-risked the company and the project.
“Going forward we want to build any further projects ourselves.”
The size and potential of Gold Road’s Yamarna Belt package is clearly defined in this map.
The company owns the 2,300sqkm area in blue outright – 100 per cent – which encapsulates the Gruyere Joint Venture.
Gold Road will spend $15 million in this area on exploration in 2017 on top of money earmarked for GJV exploration, where it will be spending around $11 million.
The pink area defined in the south is a joint venture with Sumitomo Metal Mining where the exploration spend will be $3 million.
Gold Road believes the prospectivity of this area to be worthy of a much higher exploration spend, however its budget had already been set prior to striking the Gruyere Joint Venture.
“We thought we were going to be raising project finance and were anticipating the banks limiting our exploration spend,” Murray explained.
“This year we will push Sumitomo harder – we think a fair exploration spend in the south is $10 million.”
For those without calculators, that adds up to around $30 million Gold Road, with its joint venture partners, will be spending on, what will be, the largest greenfields exploration budget in Australia – and potentially the largest globally.
“We’ve looked around and we haven’t found anyone else conducting that level of greenfields exploration,” Murray said.
“There is plenty of brownfields exploration by companies seeking to keep hungry processing mills fed, but none carrying out this level of greenfields exploration.”
Greenfield exploration by other companies is most likely restricted by funding issues, a problem Gold Road resolved through the GJV cash injection.
A recent $70 million tax payment made a reasonable dint in the company coffers of $337 million, but not enough to defer its anticipated exploration spend.
The company will also be able to pay its $30 million share of the Gruyere project build in the fourth quarter of this year, after Gold Fields spends $100 million on its behalf.
This will bring the bank balance down to around $220 million by the end of the calendar year, enabling it to fund a $20 million exploration spend and a further $130 million share of the project build costs next year.
After all that, Gold Road will be sitting on around $60 million, which it considers to be a fair working capital balance when embarking on first production.
“Some people have asked about the possibility of us paying a special dividend, however we feel it makes much better sense to reinvest the cash into assets to benefit shareholders,” Murray explained.
“At the end of two years we will have enough of a working capital buffer, and going into production we should be generating around $100 million of EBITDA.
“If we don’t make another discovery that we want to develop, we will be able to start returning some money to shareholders through a dividend, and as we have paid our tax bill, that will be a fully-franked dividend.”
Construction at Gruyere is well underway with the establishment of offices and accommodation consisting of two former rail construction camps acquired from Roy Hill.
The further acquisition of two partially completed cancelled orders, in the shape of an 8.5 million tonnes per annum ball mill from Gold Fields West African project, and matching sag mill from Outotec, will shorten the time-frame determined by the original feasibility study and lower capital expenditure.
“The project team are building a 7.5 million tonne per annum project,” Murray explained.
“The operational team has now been tasked with de-bottlenecking the project, so should the JV partners want to increase throughput once we have started production we can easily ramp up.
“Construction is scheduled for completion at the end of 2018 with first gold coming in the first quarter of 2019.”
Gold Road has the added benefit of a Memorandum of Understanding within the GJV, whereby it is allowed access to the project’s gas pipeline, water and toll treating of all satellite deposits discovered beyond the JV area.
Immediately south of Gruyere, is YAM14, at which Gold Road encountered extraordinary drill intercepts.
Results from YAM14 include:
64mat 3.73 g/t gold, including 18m at 9.78 g/t gold, and 8m at 19.16 g/t gold;
39m at 1.52 g/t gold, including 13m at 2.24 g/t gold, and 7m at 3.55g/t gold; and
22m at 1.81 g/t gold, including 14m at 2.63 g/t gold.
“YAM14 was discovered when Gruyere was discovered, but obviously Gruyere was the big prize,” Murray said.
“These drilling results returned some nice good widths and good grades that are located just eight kilometres from the Gruyere process plant.”
South-west of Gruyere, at the Attila prospect, a 107,000-ounce Resource upgrade was recently announced taking it to 327,000 ounces, while just to the north of Attila sits the Alaric prospect with 50,000 ounces, which is currently being reviewed.
Gold Road intends putting these through a pre-feasibility study with the aim of declaring a maiden Reserve for those two deposits in the second half of 2017.
“These prospects are located within, what we call, the Golden Highway, running from Alaric in the north down to Attila in the south,” Murray said.
“It runs for 14 kilometres, covering an area where we previously had Resources declared, which were not JORC 2012-compliant and were removed.
“These are currently being re-assessed with the aim of establishing Resources that could be economic to be run through the Gruyere processing plant.”
Gold Road Resources (ASX: GOR)
…The Short Story
26 Colin Street
West Perth WA 6005
Ph: +61 8 9200 1600
Tim Netscher, Ian Murray, Justin Osborne, Sharon Warburton