Randgold, AngloGold to revive Obuasi

In what would become their third partnership in a decade, Randgold Resources (LSE: RRS; NASDAQ: GOLD) and AngloGold Ashanti (NYSE: AU) have signed an investment agreement to consider setting up a joint venture that would redevelop and operate the iconic but troubled Obuasi gold mine in Ghana.

Randgold will lead and fund a development plan for Obuasi that will build on an internal feasibility study AngloGold finished earlier this year. The development plan will look at ways to create a more efficient and mechanized operation, and will be submitted to the boards of both companies for approval by Jan. 31, 2016.

“Obuasi is a world-class resource — we now have to see if we can convert it into a world-class mine,” Randgold’s CEO Mark Bristow said in a press release announcing the agreement. 

AngloGold acquired Obuasi in 2004 when the company merged with Ashanti Goldfields, but has impaired the value of the asset at various stages of its ownership by US$1 billion. (AngloGold has invested US$600 million into the mine from its corporate funds and pumped another US$500 million into the operation from funds generated by the mine itself.)   

In May 2014, AngloGold announced that Obuasi would be managed as a special project to address operational challenges, and in December suspended underground production and retrenched the mine’s entire workforce. It pushed ahead with a decline ramp, however, as well as processed tailings and above-ground stockpiles, while embarking on the feasibility study.

Obuasi — a large, high-grade gold deposit, 320 km northwest of the capital Accra in Ghana’s Ashanti region — has proven and probable reserves of 24.5 million tonnes grading 6.70 grams gold per tonne for 5.29 million oz.

The mine has produced 5.6 million oz. gold over the past 15 years at total cash costs of US$519 per oz., according to an analysis by BMO Capital Markets’ mining analyst Andrew Breichmanas.

But in recent years, Obuasi’s cash costs and all-in sustaining costs have soared. AngloGold reported total cash costs of US$1,086 per oz. in 2014, US$1,406 per oz. in 2013 and US$1,187 per oz. in 2012, while all-in sustaining costs reached US$1,374 per oz. in 2014, US$2,214 per oz. in 2013 and US$2,201 per oz. in 2012.

“The bottom line was that it was a mining method ill-suited to the mine, and as a result, productivity was nowhere near where it needed to be for an asset like that,” AngloGold’s senior vice-president of investor relations and corporate communications Stewart Bailey explains. “In layman’s terms, you had people drilling the orebody using handheld drills. The mine had just been operated in a manual fashion.”

“Now what you’re going to have is jumbos — mechanized drill rigs with several drill bits that can drill at a fast rate — and the advancement rate will greatly improve,” the executive says in a telephone interview from the sidelines of the Denver Gold Forum.

Another constraint was the lack of flexibility in getting men and material underground to depths of 1,500 metres, and retrieving the ore from underground to surface, Bailey continues. In 2012 the company developed a ramp access in order to supplement the vertical hoisting infrastructure and help debottleneck the operation.

“We think the combination of the decline ramp and the existing shaft infrastructure will get the productivity up,” Bailey says. “It’s difficult to just snap your fingers and change the mine from a labour-intensive one into a mechanized operation. You need to redesign it and retrench a lot of people, and that’s a difficult transition to make. We’ve done it now, and that transition has been made.

“Let’s not forget that it’s a world-class orebody,” he adds. “It’s big, it’s high-grade and there’s potential to convert resource to reserves, but it only works if the mine is making a margin, and this is what this redevelopment plan with Randgold is aimed at doing.”

In a presentation at the Denver Gold Forum, AngloGold’s CEO Srinivasan Venkatakrishnan pointed out that the companies have worked together on two  mines — Morila in Mali and Kibali in the Democratic Republic of the Congo — with excellent results, and noted that “this move for us is a no-brainer.

“Both companies bring in complementary skills and have mutual respect for one another, and needless to say, Mark’s track record in continental Africa is well understood by everybody.”

If Randgold’s development plan meets both parties’ investment criteria, the groups will form a joint-venture company and jointly fund Obuasi’s redevelopment. Both companies will have an equal number of directors on the board.

Alka Singh, an independent mining analyst in Toronto, points out that Randgold’s Bristow “has talked for months about the company’s willingness to acquire the right asset to add to its operating mines.

“Among the major gold producers, Randgold has coped with the declining gold price and other problems affecting the industry better than most of its rivals,” she says. “In my view, it is a better operator than AngloGold, and their history of working as partners will help in pooling the resources at Obuasi and turning it around.”

Singh notes that Ghana is one of the most geologically prospective countries in Africa, with four main gold belts — Kibi, Ashanti, Asankrangwa and Sefwi — and that the Ashanti belt, home to Obuasi, has been the most productive gold-bearing zone in the area to date, having produced gold for centuries, and mined by European operators since the 1800s.

“If I had to go and build a mine in Africa, Ghana would be my first and only choice,” she says, noting that Ghana is the continent’s second-largest gold producer — with eight mines in production — and enjoys a stable government, has a favourable mining and tax code, excellent infrastructure and a well-trained labour force.

BMO Capital Markets’ Breichmanas estimates that following redevelopment, the mine “should be capable of reaching production rates of 450,000 to 550,000 oz. per annum achieved before operating problems emerged.

“While the development plan should better demonstrate the capital required and the anticipated economics, the ability to acquire an interest in a world-class asset through sharing costs and investing in infrastructure appears to enable Randgold to achieve its investment criteria,” the London-based analyst wrote in a client research note.

“For example, assuming total capital costs of US$0.5–1 billion and production of 500,000 oz. per annum … the project could generate an internal rate of return approaching 20% if costs comparable to those achieved at [Randgold’s] Loulo can be demonstrated.”

As for Randgold, the proposed joint venture for the revival of Obuasi “shows we’ve still got lots of energy, and certainly have no intention of losing our momentum or direction,” Bristow said during a presentation at the Denver Gold Forum, adding that the debt-free company he heads celebrated its twentieth birthday in August.

“Unlike many of our peers, we are not worrying about survival, we are planning for growth,” Bristow continued. “Organic growth through discovery and development remains our core growth strategy, but as the recent Obuasi deal shows, we are also ready to take other routes to test whether we are ab
le to convert world-class deposits into world-class mines, when the situation meets our investment criteria.”