True Gold quickly develops North Kao at Karma

True Gold Mining (TSXV: TGM; US-OTC: RVREF) is on track to pour the first gold at its Karma project in Burkina Faso in late 2015, with the mine plan envisioning five open pits that will be developed in sequence to feed a heap-leach operation over an eight-and-a-half-year mine life.

But this mine life could be extended by another two and a half years, according to a preliminary economic assessment (PEA) of a sixth zone at the Karma project called North Kao, whose leachable ounces were not included in a 2013 feasibility study.

True Gold has advanced North Kao from a blind discovery to a PEA-stage asset in just over a year, and the latest study shows that the deposit would add US$118.6 million in after-tax free cash flow to Karma and US$70 million to the project’s after-tax net present value.

North Kao could produce an average 118,000 oz. gold a year for two and a half years starting at the end of Karma’s mine life (years nine to 11), with direct cash-operating costs of US$577 per oz. and all-in sustaining cash costs of US$652 per oz. 

Initial capex including contingency is estimated at US$17.7 million, with after-tax payback taking about five months.

The PEA is based on a US$1,250 per oz. gold price and an inferred resource of 9.9 million tonnes grading 0.98 gram gold per tonne for 312,000 contained oz. gold.  

North Kao’s after-tax net present value at a 5% discount rate is estimated at US$69.6 million, with a 213% after-tax internal rate of return.

“With North Kao representing just one of six discoveries made by True Gold since the start of 2013, today’s study highlights the potential for further economic gains at the project, with additional exploration,” Haywood Securities mining analyst Tara Hassan wrote in a research note on Oct. 21.

Andrew Breichmanas, a London-based analyst for BMO Capital Markets, notes that the PEA demonstrates “the prospectivity of the Karma district, the ability to rapidly delineate additional resources and the opportunity to further optimize pit sequencing to enhance project returns.” He says it’s likely that “mining would be accelerated to follow the Kao pit around year five of operations, and the overall impact to the Karma project may be higher than presented.”

True Gold will need to complete an environmental and social-impact assessment — as it has for the other Karma project deposits — and will need a relocation plan for 400 people in nearby settlements.

The Karma project is in north-central Burkina Faso, 185 km northwest of the capital Ouagadouogou. Its five main deposits are: Goulagou I, Goulagou II, Rambo, Kao and Nami. The deposits are on three of the company’s six exploration permits.

True Gold owns 100% of the permits, which are subject to various royalties, including a 3–5% sliding-scale royalty to the government.

In August the company concluded a US$100-million financing agreement with lenders Franco-Nevada (TSX: FNV; NYSE: FNV) and Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND). Under the deal, True Gold must deliver 100,000 oz. gold over five years — or 20,000 oz. per year starting from March 2016 — and thereafter 6.5% of the equivalent amount of gold produced at Karma for the life of the project, in exchange for ongoing payments.

True Gold has the option to increase the financing package by US$20 million by delivering another 30,000 oz. gold on a fixed payment schedule.

The lending syndicate — split between Franco-Nevada with 75% and Sandstorm with 25% — will pay True Gold 20% of the spot price for each gold ounce it delivers over the five-year delivery period.

Alex Holmes, True Gold’s vice-president of development, says there is a lot of exploration upside on Karma’s 850 sq. km land package, as North Kao has shown. 

“We’ve got 40-plus targets outside of the 2013 feasibility study and North Kao,” he says. “Last year we chose to fix on six of those and intersected mineralization in each one, but North Kao was the only one we took to resource category.”

Holmes adds that “not all projects have the ability to bolt on resource ounces into an an economic scenario as quickly” as Karma, and that “it speaks to why groups like Liberty Metals & Mining is invested in us, why Franco-Nevada and Sandstorm have invested in us and why Teck has invested in us — because they all believe there are more ounces to be discovered, and it’s a matter of time and a disciplined exploration approach.”

True Gold has “pretty significant shareholders who have financed us along the way,” he adds, “and they are not in the business of short investment horizons. They’re looking for businesses and teams they can invest in that have long-life assets that have recurring revenue.”