At just 0.55p a share, Metminco (LSE:MNC) has so far struggled to capture the market’s imagination since refinancing, shaking up its board, and shifting its strategic focus onto Colombia earlier this year. With the business expecting drill results from a potentially gold porphyry-bearing prospect in August and concluding negotiations on two more sites, could now be a good time to get in ahead of a news-driven re-rate?
Here, Metminco’s executive chairman Kevin Wilson tells us what Colombia has to offer and how the firm plans to make the most of it.
Since Wilson, an experienced geologist, joined Metminco in March, the business has undergone a strategic shift away from mine development and onto exploration. Specifically, it wishes to demonstrate the potential of its Colombian gold exploration assets. It is also freeing up additional cash by reducing operating costs and financial liabilities. Indeed, it has already reduced the size of its board and is looking at ways to divest its two non-core assets in Chile.
A significant development came in April when Metminco carried out a AUD5.6m (c.£3.1m) rights issue. After paying off most of its creditors to limit debt exposure, the company was left with around A$3m (c.£1.6m) cash to launch a high impact exploration programme in Colombia.
Wilson told us the rights issue was crucial in enabling Metminco to pursue the first steps of its new strategy: ‘The success of April’s rights issue has given us the funds to begin our exploration strategy and get our foot in the door in an area with real potential.’
Metminco’s 100pc-owned Colombian assets are collectively called the Quinchia portfolio and found in the country’s prospective Cauca Belt. The area hosts more than 60Moz gold and is home to many large gold porphyries, the best known of which is perhaps AngloGold’s 28.5Moz La Colosa deposit.
Economically, Colombia is currently in a sweet spot, boasting 4.7pc GDP growth a year in the decade to 2017. It also contains plenty of infrastructure and massive gold reserves. However, it has been historically underexplored thanks to decades of political instability and warfare.
Thankfully, this appears to be changing, with Colombia’s government and its largest rebel group, FARC, signing a landmark peace treaty in 2016, majorly reducing security risk. Things took another step forward in June this year when the country’s presidential election managed to pass without any violence, with social conservative Ivan Duque emerging as victor. According to Wilson, political developments like these represent a visible step change in Colombia’s stability as an operating environment. He told us:
‘When you think the country is coming out of a very long era of conflict and polarisation, the fact that nearly everyone accepted the result of the election is a credit to the nation, its democratic institution and the steps forward they have made. I look forward to seeing this continue.’
The positive implications on Colombia’s mining sector can already be seen, with the country taking in$10bn of foreign investment last year alone. With the government planning to expand port and railways by 2020 as part of a $70bn mining infrastructure program, the good times are primed to continue.
The first stop in Metminco’s exploration drilling programme at Quinchia is a prospect called Tesorito. Three holes drilled by the prospect’s previous owner intersected more than 250m of anomalous gold mineralisation and found higher levels of copper and molybdenum at depth.
At the start of June, Metminco began a 1,500m diamond drilling program at the site with the hope of confirming and expanding these intersections, to identify a gold porphyry system. Given the nearby presence of many large porphyries, Wilson is hopeful that assay results from the drilling at Tesorito – expected next month – can trigger a positive re-rate in Metminco’s shares. With a tranche of his performance shares vesting on the delivery of 1MMozs gold from the site by December 2019, a lot is riding on him being right:
‘Previous results suggest there is a lot of gold in the system at Tesorito. We are essentially following up these results which were delivered by the previous owner. At the moment, this is not at all priced into our share price so delivering early drilling results here could get us noticed.’
The second prospect that Metminco plans to drill this year is Chuscal. The opportunity is a significant gold porphyry target that features a large, undrilled gold geochemical anomaly based in an area where artisanal mining has already unearthed encouraging channel sample grades.
As it stands, Metminco is in discussions with the current owner to formalise a farm-in/JV agreement over the site and exploration drilling is not expected to begin until later this year when these talks have completed.
Based on the value of existing porphyries, Wilson is encouraged by Chuscal’s potential. He believes the site could house a ‘ large deposit’ that may end up being transformational for Metminco:
‘A similar porphyry in Ecuador has an asset value of $1bn, so that is the sort of potential you can get if you hit the right discoveries, and we already know there are a lot of those in this region. Chuscal is about 50km north of AngloGold’s La Colosa porphyry deposit, in the same belt, and not too far from another called Marmato, which contains 8.6Moz gold. These properties can be worth $500m to $1bn. What’s more, because the gold is at surface, the cost of drilling is modest. Chuscal could be a key part of Metminco’s future story.’
Metminco will also continue permitting work for its Miraflores project at Quinchia, where it is investigating options for gold production from a proposed mine site. The project contains an 840koz measured and indicated gold resource at 2.8g/t and a 457koz proved and probable gold reserve at 3.3g/t. A DFS completed at the site in late-2017put production at 45koz per year for 9.5 years, giving it an NPV(8) of $72m and all-in sustaining costs of $643/oz at $1,300oz gold
With local law requiring a plan of work (POW) and environmental impact assessment (EIA) before work can start, work for gaining these permits has occurred this year. In January, Metminco submitted a work plan for mine development approval to the Colombian Mining Agency. Wilson argues that Miraflores’ resource provides investors with a degree of downside protection. As he put it to us:
‘If you look at any valuation of Miraflores’ resource, you can come up with a number that is in advance of Metminco’s current market cap, and that is without considering cash or giving any value whatsoever to the upside at Tesorito and Chuscal that drilling should produce.So,you have that protection of value as you’re buying in cheap and the potential for a re-rating over the short term- as we have only recently shifted our focus, our story is still becoming known.’
Time for a re-rate?
With Metminco’s market cap sitting at just £5m, Wilson’s point about value protection has merit –the resource figures and data released about the business’s assets do not seem to be holding much sway in the market at all. If his instincts turn out to be correct, then it could be sat on two sizable gold porphyries in Tesorito and Chuscal, whose value – based on nearby discoveries – would make its current market cap look paltry. If they turn out to be duds, then Miraflores isn’t even being fully valued into shares based on the company’s calculations.
Although it is likely that Metminco will have to raise cash at some point to continue its development, short-term newsflow could make it worth considering a punt at the firm’s current price on the expectation of a re-rate.