Mandalay shines in tough markets

It’s no surprise analysts have been praising Mandalay Resources (TSX: MND; US-OTC: MNDJF) for meeting its production guidance and paying dividends, which many competing juniors are struggling to do in the bleak commodity price environment.

Equipped with a strong technical team, Mandalay has created value at the assets it has acquired over the years by finding exploration, mining, metallurgical or commercial opportunities that previous owners overlooked or could not implement. 

“We see if we can make a substantial value difference in the asset,” Mandalay Resources president Mark Sander says in an interview. “Is there something in the way the asset is financially structured or being managed that we can improve upon, so that we can get a three to five times value gain over the first three to five years of owning it?”

Since late 2009, the firm has completed three acquisitions of undervalued producing assets, including the gold-antimony Costerfield mine in Australia’s Victoria state, the flagship Cerro Bayo silver-gold mine in southern Chile, and the Bjorkdal gold mine in northern Sweden.

The junior has been paying a consecutive quarterly dividend since December 2012, which amounts to 6% of the trailing quarter’s revenue. Of note, total shareholder return, including dividends at the end of 2014, increased by 235% as of September 2009.

Over the years, the firm has been getting good returns from its two older assets, Costerfield and Cerro Bayo, and it is now focused on the recently acquired Bjorkdal mine. 

Mandalay picked up the combined open-pit and underground Bjorkdal mine through its $70-million acquisition of Elgin Mining in September 2014. On a conference call at the time of the purchase, Mandalay CEO Brad Mills said his team would completely redesign the mine plan.

Activities done to date include balancing production from the open pit and underground while lowering dilution, contracting a 24-hour lab for grade control, running metallurgical surveys and ore-sorting studies to improve plant performance and publishing a new resource and reserve estimate. 

Bjorkdal churns through 3,500 tonnes per day and has permits to expand to 4,500 tonnes per day. But the company doesn’t expect it will need the extra capacity, as it intends to produce more gold at the current capacity by controlling grade.

The mine generated 11,458 oz. gold from 334,000 tonnes grading 1.23 grams per tonne. Cash costs were US$870 per oz. from Sept. 10 to year-end 2014. 

Because Bjorkdal is a lean operation, with 150 people on-site, Sander says the company will drive up grade to boost production. “When we can deliver a gram and a half gold or more to the mill from the operations, the cost per ounce will start to come down into the seven hundreds and below. So the chief strategy is not to cut costs, because they are already very low costs per tonne — it is to improve success at grade control, and for the same essentially fixed cost operation, produce more higher-grade gold.”

The improved grade should emerge in the next six months after Mandalay redevelops the underground mine to focus on the higher-grade areas, when the assay lab is ready, Sander says.

This year Bjorkdal should deliver 46,000 to 52,000 oz. gold at cash costs of US$850 to US$950 per oz. The mine has reserves of 6.5 million tonnes grading 2.05 grams for 432,000 oz. gold. The company plans to spend US$3 million in exploration this year at Bjorkdal.

Meanwhile, the firm is pleased with the progress it has made at its other two assets. At Cerro Bayo, Mandalay has been working on plant performance. It has installed a flotation automation system to improve recoveries and a preventive maintenance system to boost mill availability to accommodate the higher mining rates.

Starting September 2014, Cerro Bayo operated for the first full quarter at the higher 1,400-tonne-per-day mining and processing rate, as well as higher grades. Mandalay also replaced Cerro Bayo’s reserves and resources through exploration last year, and plans to invest US$3 million on exploration at the mine in 2015.

Cerro Bayo has reserves of 2.4 million tonnes grading 2.13 grams gold and 220 grams silver for 165,000 oz. gold and 17 million oz. silver.

“We bought this mine with a three-year mine life and we’ve been mining for four, and we got a five- to six-year life now, which we think we could extend for at least another three to four years,” Sander says.  

Mandalay acquired Cerro Bayo from Coeur Mining (NYSE: CDE) in August 2010. Coeur had been mining the asset for 10 years, using an older mining method and 1,100 people on-site, with costs on a by-product basis of US$17 per oz. silver. At the start of the economic downturn in 2008, it put the asset on care and maintenance. 

After acquiring Cerro Bayo, Mandalay resumed mining in late 2010 and restarted milling in 2011. It changed the mining method from shrinkage stoping to mechanized blast-hole open stoping, and ramped up throughput from 1,200 tonnes per day to a total rate of 1,400 tonnes per day from Cerro Bayo’s three deposits. By modernizing the mine, the junior slashed cash costs and reduced the workforce to 400 people.   

In the fourth quarter of 2014, the mine churned out 9,052 oz. gold and 1 million oz. silver at cash costs of US$3.95 per oz. silver, net of by-product credits. Sander notes the costs were low, given the gold grades in the quarter were “extraordinary.” The mill processed 134,000 tonnes at a gold grade of 2.39 grams per tonne, up 37% from a year ago, while the silver grade was down 13% at 266 grams per tonne. 

During the full-year 2014, Cerro Bayo churned out 27,600 oz. gold and 3.3 million oz. silver at US$5.30 per silver oz., on a by-product basis. This year it should deliver 23,000 to 27,000 oz. gold and 2.7 million to 3.1 million oz. silver at cash costs of US$6 to US$8 per oz. silver, net of gold credits. 

Sander points out the 2015 costs are slightly higher than last year as the average grade will be lower as the company reached the bottom of the two veins it has been mining for four years. “We just started developing the next vein, and when we get to that in 2016 that is the highest grade vein we have in our reserves. But meanwhile this year, there is a bit of a gap and the grades are down.”

At the Costerfield mine, Sander says the story is really about getting the most out of the mill on site. The mine has been gradually improving performance over the last three year, with the mill reaching its maximum capacity in late 2014. As a result, the firm has been building a stockpile and reducing costs. 

“So, basically for this year, Costerfield is kind of our cash cow. It’s in the highest production rate it can get,” Sander says.

With roughly US$1 million of exploration a year, the company aims to continue its strategy of replacing annual depletion. “We replaced reserves last year and we believe we can do it again this year and stay at a four- to five-year mine life.”

Reserves at Costerfield stand at 430,000 tonnes grading 8.1 grams gold and 3.6% antimony for 112,000 oz. gold and 15,600 tonnes antimony.

Mandalay bought Costerfield on care and maintenance in late 2009, and quickly restarted the mine. It boosted production from 170 tonnes per day in 2009, to 460 tonnes per day in the fourth quarter of 2014. The higher output and related cost reductions are mainly due to switching the mining method from cut-and-fill to blast-hole stoping with cemented rock fill; increa
sing sub-level spacing to 10 metres from 6 metres; replacing the underground equipment; and adding a mobile crusher to reduce the size of mill feed, among other changes.

Last year the mine generated 35,751 oz. gold and 77,900 tonnes antimony, up 24% and 55% from 2013. Cash costs were US$771 per equivalent oz. gold, down 6% from 2013.

In 2015, Costerfield is set to produce 32,000 to 37,000 oz. gold and 3,200 to 3,500 tonnes antimony. Estimated cash costs are US$625 to US$750 per equivalent oz. gold.

Total 2015 gold-equivalent production from the company’s three assets is set at 167,000 to 185,000 oz., up from 154,810 oz. in 2014.

On the development front, Mandalay is advancing a feasibility study on its Challacollo silver-gold deposit in northern Chile, due out shortly. It plans to submit its environment permit application in the second quarter, with approval expected within 12 to 18 months, after which it will make a construction decision.

The firm took on a US$50-million debt facility in early 2014 with the idea that it could fully fund Challacollo. “Since then the markets and the gold prices have declined, and there are some substantially good potential acquisitions out there, and it may be there is something better to do with the money in the short term than save it for Challacollo,” Sander says.

The company is considering the possibility of acquiring more producing assets, he notes. “The number of distressed assets out there is growing. And some of them can be fixed and some of them can’t, and the trick is to separate the two as quickly as we can and focus on the ones that we think we can fix.”

While Mandalay reported a strong fourth quarter, its full-year 2014 profit was US$17.6 million, or US5¢ per share, down from the US9¢ earned in 2013. The junior plans to pay a quarterly dividend of US98¢ per share on March 9.

The company has a US$49-million cash position and total debt of US$60 million. Its top shareholders include West Face Capital, which holds 22.3%; Sentry Investments, 10.1%; Plinian and management, 8.3%; and Sprott Asset Management, 7.9%. Mandalay shares recently closed at 93¢, within a 52-week range of 81¢ to $1.22.

Raymond James analyst Chris Thompson has a “strong buy” recommendation and a $1.30 target on the stock. He says Mandalay is a top-quality story, given its “strong management team, robust and prudent growth profile, diversified metal and jurisdictional mix, history of delivering and beating expectations and ability to deliver free cash flow at current metal prices.”

Desjardins analyst Michael Parkin rates Mandalay as a top pick, with a $1.50 target.