Newmont takes 19.9% stake in Continental Gold

In what will be Newmont Mining’s (NYSE: NEM) first investment in Colombia, the gold and copper producer is plunking down US$109 million for a 19.9% stake in Continental Gold (TSX: CNL) to get a piece of the junior’s high-grade, fully permitted Buritica gold project.

Newmont’s foray into the South American nation follows the company’s decision in March to get its first toehold in the Yukon, where it is investing an initial US$39.5 million in Goldstrike Resources (TSXV: GSR), a junior that owns the Plateau gold project.

Under the deal with Continental Gold, Newmont has agreed to buy 37.4 million shares in a non-brokered private placement at $4 per share — a 46% premium to Continental’s closing share price the day before the investment agreement was announced.

Gary Goldberg, Newmont’s president and CEO, said in a press release that Newmont is “impressed with the quality of the deposit, the caliber of the management team, the community’s support for the project and the prospects for future growth.”

Concurrently with the Newmont investment, RK Mine Finance Master Fund I Ltd., also known as Red Kite, bought 8.59 million shares at the same price per share for a 4.6% stake, generating proceeds for Continental of US$25 million. (Red Kite had committed to the investment previously as part of a larger debt-financing package.)

Buritica is on track to pour its first gold in early 2020, and Continental Gold says it can capitalize on Newmont’s experience to kick off formal construction later this year.

Newmont and Continental will also form joint-management technical, exploration and sustainability committees, and the major will get one seat on the junior’s board of directors. In addition, the companies will form a strategic alliance to evaluate partnership opportunities on Continental’s other properties in Colombia.

Drillers at Barkerville Gold Mines’ Cariboo gold project in British Columbia. Credit: Barkerville Gold Mines.

Newmont’s deep experience in South America makes it a great partner for Continental, the junior says. Newmont operates the continent’s largest gold mine — Yanacocha, in Peru — which started commercial production in 1993, along with the Merian gold mine in Suriname. 

Newmont’s Merian mine achieved commercial production in October 2016, on time and $150 million below budget, and the company expects it will deliver more than a decade of profitable production.

South America accounts for 8% of Newmont’s attributable gold production (not including anticipated production from Merian in 2017), and the region contains 9% of the company’s gold reserves.

Continental says it is now fully funded to build an underground mine at Buritica for US$389 million.

A feasibility study released in February 2016 envisioned that the capex could be paid back in 2.3 years in a base-case scenario, using a US$1,200 per oz. gold price and US$15 per oz. silver price.

The mine is expected to produce 3.49 million recovered oz. gold and 6.43 million oz. silver over a 14-year mine life. Life-of-mine annual production will average 253,000 oz. gold and 466,000 oz. silver.

Continental says total cash costs of US$411 per oz. gold, including silver credits, will put Buritica in the lowest cash-cost quartile globally. Life-of-mine average operating costs are expected to come in at US$111.59 per tonne milled, including royalty, doré transport and refining charges.

Buritica’s maiden reserve for the project’s Yaragua and Veta Sur veins totals 3.7 million oz. gold and 10.7 million oz. silver in 13.7 million tonnes grading 8.4 grams gold per tonne, and 24.3 grams silver per tonne.

The study estimated the base-case, after-tax net present value at a 5% discount rate of US$0.9 billion, and a 31.2% post-tax internal rate of return.

“We’re always looking for opportunities and assets that will fit our profile in the sense that they are efficient, long-life, low cost and have low or manageable risk,” Newmont’s group executive of corporate communications Omar Jabara says. “We feel that Buritica fits those criteria quite nicely. Continental has a good, strong management team — they’ve done a good job of bringing this project along to this point — and we look forward to playing a role in supporting them and bringing our project-development expertise and success to help further advance Buritica and achieve commercial production.” 

Jabara adds that Continental has held Buritica since 2007 and the project “has good support from the local community,” and that the company employs nearly 200 people in the area.

At the end of April, Continental updated investors on the project, noting that since getting a senior-secured debt facility in January, management has been ordering long lead time equipment and hiring key project personnel ahead of major earthworks scheduled later this year.

The company has completed the first phase of a 6 km access road connecting Buritica to the future plant and infrastructure site in the Higabra Valley. The second phase of the access road, which will upgrade it to accommodate plant and infrastructure equipment deliveries, is expected in the fourth quarter.

Clear-cutting sites in the Higabra Valley to accommodate the plant and surrounding infrastructure is 55% complete, management said, and should be finished in the fourth quarter.

Site excavation is scheduled to start in the third quarter, followed by initial concrete pours in the fourth quarter. This work will be completed by the end of 2018.

About 30% of the underground mine development equipment is expected to arrive in the third quarter.

Continental also said that beginning in the third quarter, two mechanized long-hole stopes — each measuring 25 metres along strike by 15 metres high — will be mined in sequence nearly 30 metres vertically in the Hanging Wall vein.

The company says the extraction of more trial mining stopes this year and additional long-hole stopes planned during the construction phase will help train employees, while providing reserve reconciliation data with actual mining results.

Last year, the company reported that two side-by-side mechanized long-hole stopes found twice the gold grade and twice the ounces of gold when reconciled with the mineral resource model.

Meanwhile, Continental says it will resume exploration drilling in the second quarter with a minimum 12,000-metre drill program. The drill program will be the company’s first in the last two years.

The Buritica project encompasses an aggregate area of 699.8 sq. km in northwestern Colombia’s Antioquia Department. It is located in the middle Cauca belt and is a two-hour drive on the Pan-American highway from Medellin, Colombia’s second-largest city.

News of Newmont’s investment sent Continental’s shares up 32.5% to $3.63 in mid-afternoon trading.

The company has traded in a 52-week range of $2.32 per share to $5.75 per share. It has 142 million shares outstanding for a $515-million market capitalization.

In a research note, Brian Quast of BMO Capital Markets said Newmont’s strategic investment is “positive” and “a major vote of confidence for Buritica.” The mining analyst kept his “outperform” rating on the stock and gave a $6.50-per-share target price.