Galane Gold: A Deeply Undervalued Gold Producer

Galane Gold (hereinafter referred to as 'Galane' or 'the Company') is an unhedged low-risk gold producer with 2 operating mines in Southern Africa.

Source: Company Presentation

In 2019, Galane produced 33,200 ounces of gold comprising 30,300 ounces from Mupane Gold Mine ('Mupane') in Botswana and 2,900 ounces from Galaxy Gold Mine ('Galaxy') in South Africa. Both mines are 100% owned by the Company.

Galane is listed at the TSX Venture Exchange under the symbol 'GG' and currently trades at CAD 0.08.

Near Term Catalysts

Q4 2019 Financials: I expect Galane to deliver a third consecutive quarter of profits following on from net earnings of USD 163,000 and USD 484,000 in Q2 & Q3 2019 respectively. Results should be out by mid April.

Commissioning of a new 30,000 tonnes per month processing plant at Galaxy is expected in May, doubling the current capacity and marking the completion of the 1st phase of expansion.

Publishing a Preliminary Economic Assessment in Q2 2020 for a 60,000 oz Au a year operation at Galaxy. The PEA will lay the groundwork for the commencement of the 2nd expansion phase and has the potential to significantly re-rate the valuation of the Company. Increased economies of scale at Galaxy will lead to reduced cash costs per ounce. Galane expects to implement the 2nd phase of the expansion in 2021.

Medium Term Catalysts

Exploration Upside

Mupane

In October 2018, Galane announced that B2Gold, a 1 Million oz Au per year senior producer currently trading at a valuation of CAD 6.1B, had agreed to proceed with an earn-in agreement to acquire a majority stake in a joint venture with Galane for 520km2 of exploration tenements surrounding the Mupane property, in the Tati Greenstone Belt.

B2Gold has the option to earn a 70% stake by spending USD 4M on exploration within 4 years from the date of earn-in. The joint venture is targeting a resource of +1 Million ounces of gold, considerably more than the approximately 770,000 ounces Mupane has produced in its entire 15 year operating history.

With 120 exploration targets already identified, the joint venture presents an incredible opportunity for Galane to add significant ounces in the ground at no cost of its own.

Source: Company Presentation

Galaxy

The Galaxy mine currently hosts a resource of 1.5 Million ounces - 600,000 oz Measured and Indicated at 3.01 g/t Au and 900,000 Inferred at 3.40 g/t Au.

Galane will target 6 of the 21 ore bodies present at Galaxy for exploration, potentially growing the resource to 4 Million ounces grading between 3.0 and 5.0 g/t.

An update on Galaxy's resources will published in conjunction with the Preliminary Economic Assessment in Q2 2020. 

Source: Company Presentation

Acquisitions

The management at Galane has proven adept at bringing brownfield projects back into production.

Mupane was acquired from IAMGOLD in August 2011 and began life as an open-pit operation. Early on, it was a high-cost operation, mining at multiple open pits at grades of 1.8 - 2.2 g/t Au. Though profitable at the then prevailing gold prices, it began to haemorrhage cash as gold plummeted. A new mine plan that shifted focus to the development of the higher grade Tau Underground ore was implemented in late 2013. This transition was completed in 2017 and resulted in a steady decrease in cash costs. Mupane is now a profitable and cash flow positive operation.

Seeking an additional asset, management proceeded to acquire the Galaxy mine in 2015. Their aim was to take an under-performing asset and return it to full and profitable production. Galane outlined a USD 10M plan to restart operations through a mixture of debt, equity and cash flows from Mupane. In October 2019, Galaxy achieved positive cash flows from operations, showcasing management's ability to execute.

With the team looking to draw on its experience in successfully revitalising mothballed operations, the Company has in the recent past made attempts to acquire other projects:

In May 2017 Galane entered into a Letter of Intent to acquire all of the outstanding shares of Vantage Goldfields Limited, a company with 2 mines located within 30km of Galaxy in the Barberton area of Mpumalanga Province.

Vantage's Barbrook and Lily mines were placed under Business Rescue in 2016 due to financial difficulties. Galane had hoped to leverage operating synergies between Galaxy and the Vantage mines with the combined business having a resource of 5.8 Million ounces of gold and a production of 160,000 ounces per annum.

The companies were however unable to conclude a binding acquisition agreement as a result of Vantage not meeting the conditions set out in the Letter of Intent.

In October 2018 Galane announced an agreement to acquire the Andy Well project in Australia for AUD 10M from Doray Minerals, an ASX listed company. The project had in November 2017 been placed under Care and Maintenance but still possessed a mineral resource of 500,000 oz Au at 8.8 g/t. Galane's offer was however eclipsed by Westgold Resources', another ASX listed firm, who would later go on to cancel its offer.

Despite Galane's past 2 attempts at acquisitions being a miss, management remains on the lookout for opportunities as they continue to reshape the Company into a long-life and low-cost operation that can produce returns for investors across commodity cycles.

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Gold Price

Galane is highly leveraged to a rising gold price. With expected production of 48,000 oz of gold this year, every USD 100 increment in the price of gold will add USD 4.8M to the bottom line and cash balance at no extra capital cost. For a company with a market cap of CAD 20M, such a prospect is very tantalising.

An advancing gold price also gives the Company the added advantage of rapidly paying back its debt. In the last two quarters alone, Galane has paid down its outstanding debt by USD 2.2M.

With USD 7.2M in deferred royalties owed to the Government of Botswana falling due this year,  the Company will be able to comfortably meet this obligation by utilising significantly increased cash flows from operating activities as a result of higher gold prices. In this regard, Galane has been making monthly installments of USD 600,000 beginning January 2020 to fully settle the outstanding principal and interest.

Valuation

For a long time, the market has valued Galane as if it were merely a junior exploration company. This is despite the Company having a 5 year average production of 29,500 oz.

At the Venture, a host of companies with no production or resources to their name are valued at multiples of Galane.

The commissioning of the new plant at Galaxy as well as the delivery of a Preliminary Economic Assessment for the project will act as catalysts for higher valuations.

Galane is primed to achieve full year profitability in 2020 for the first time since FY 2014 when it achieved net earnings of USD 1.9M.

It is also worth noting that in 2012, Galane produced 49,000 ounces of gold at an average selling price of USD 1671 per ounce, raking in USD 17.4M in profits.

This year Galane expects to produce 48,000 oz with the bullion price today at similar levels to 2012. Back then, despite the bull market in gold being on the wane, Galane was trading at twice its current valuation.

At the moment, there is a renewed positive sentiment towards the precious metals sector. Mid-tier and major gold producers have delivered spectacular gains over the past 6 months. Galane itself bounced to a high of CAD 0.13 in November 2019 from its 52 week low of CAD 0.04 in May 2019 -  a gain of more than 200% in 6 months.

The price has recently consolidated around CAD 0.08 - 0.10. This, in my opinion, represents real value.

I have an initial 1H 2020 price target of CAD 0.25 for Galane, representing a 200% upside on the current price. This will give it a valuation of CAD 55M based on current shares outstanding.

As the Company continues to hit fresh milestones in the second half of the year and beyond, step changes in its valuation will unfold.

To summarise, Galane has a lot going for it:

Production Growth

Galane has a clear pathway to nearly triple annual production from its existing assets in the next 3 years. The Company is fully financed for this growth:

2019 - 33,000 oz

2020 - 48,000 oz

2021 - 60,000 oz

2022 - 90,000 oz

Exploration Upside

Mupane

The joint venture between the company and B2Gold is targeting a minimum of 1 Million ounces of gold. With 30% net to Galane, this will represent at least 10 years' worth of current production.

Galaxy

The company has a plan to expand resources at Galaxy to 4 Million ounces of gold.

Potential Acquisitions

Galane is keen on acquiring accretive brownfield projects, similar to Mupane and Galaxy. Any potential acquisition will build on the company's strategic plan of transitioning to a mid-tier gold company through the acquisition of near-term production assets with existing mine and processing facilities that will present Galane with the ability to increase both resources and production in easy manageable steps.

Management have been regulars at investment conferences in recent months, no doubt looking to ensure the necessary financing is readily available should a viable acquisition opportunity present itself.

A rising price of gold...

The gold price has been on a tear lately and if it maintains its current trading range, Galane will be highly profitable. Should the rise continue throughout the year, it will only add more fuel to the fire.

All in all, 2020 promises to be a banner year for the Company and at current prices, Galane presents one of the most compelling risk/reward opportunities in the market.

ALL THE BEST

Disclaimer: I have a position in Galane Gold. This article solely expresses my opinion. I have not received any compensation for this article.