Grandich's Blog

I spoke with Graham Harris today about the recent activity in ATW Gold (ATW-TSX-V)

The purpose of my discussion was to better understand ATW’s recently announced gold loan facility. The market had appeared to have mixed views of the loan – opening up strongly on the announcement with the stock rallying to close 19% higher on heavy volume – followed by two days of capitulation selling pressure which saw the stock lose its prior gains and close several percentage points lower.

Now before I get into detail on this confusing trading pattern, and the pros and cons of the gold loan, I want to summarize ATW – the company as it stands today.

As you all know by now I have been associated with ATW for almost two years. I have always had a strong belief in their management structure, and management defines any successful company.

ATW is what I consider to be reflective of some of the best value out there in the gold sector today. The company has – in the space of 18 months – managed to acquire two gold mines, initiate production at their first mine, Burnakura (and in the process become a revenue generator), raise a combined $35Million on relatively non-dilutive terms and are now advancing their second mine towards production. All this was done in one of the worse financial crisis in the modern era.

The company’s goal is to have both mines in production at a combined production rate of 130,000oz gold per annum – within a relatively short time period. They can achieve this with the sort of capital expenditure requirements that fairy tales are made of – that being incrementally low! Burnakura was acquired, and up and running for under $14Million within 15 months, and Gullewa should be in production for around $20Million within 15 months – so a combined capital expenditure of $34Million to get 130,000oz Au gold production per annum – impressive. In a world of cost over-runs, and cap-ex blowouts, ATW is a very rare breed.

So the common question regarding ATW’s gold loan, and the resulting confusing stock trading pattern over the last few days, is why facilitate a gold loan and raise capital if the company is generating cash-flow from Burnakura now?

As Mr. Harris pointed out, the gold loan makes great sense for the company. Essentially, the company has sold 12% of its monthly production to increase production at Burnakura from 3000 Oz Au per month to 4000 Oz per month. In doing so it increases the net cash-flows from the project by 50%. Whereas the gold loan is a 3-year contract, netting the company $10Million, the increase of production and cash-flow is for the life of mine.

Mr. Harris also went on to state that by increasing cash-flow at Burnakura, and also using some of the proceeds from the gold loan to expedite exploration and development programs at Gullewa, ATW should be able to bring the company’s second mine into production within a 15-18 month window as opposed to 3+ years. This, he hopes, will help bolster ATW’s market cap making future developments and acquisitions less expensive as they look to grow the company beyond its current two mine portfolio.

“The confusion sets in when people start looking at us as a hedged gold producer – when the reality is, we are simply utilizing a very small portion of our monthly production from Burnakura to expedite our business plan and generate a much greater production and cash-flow scenario for the company. The net result is increased shareholder value, without the dilution of an equity raise at these levels” Mr. Harris said.

When I think of similar production profiles, the company Minefinders comes to mind. They had a similar production profile to ATW out of the gates, increasing to similar annual production rates in Au Equivalence over the next 12 – 18 months – keeping in mind of course that Minefinders has a substantially higher resource base and production costs are $180 Oz lower, the market cap difference between the two companies is still massive. Minfinders also had a substantially higher cap-ex for development costs at Delores, and the process took almost 15 years from discovery to production.

So ATW has been left in a “damned if you do, damned if you don’t” type scenario. If they continue with small scale production from Burnakura and spend 3+ years developing Gullewa, the market may continue to overlook their combined production profile. Whereas raising capital through a gold loan has upset the investors who strongly believe that gold is in the process of rocketing to record highs.

In my mind, I revert back to the reason I like ATW – good management making good decisions.  It’s been nothing short of incredible to witness the growth in such a relative short period of time during the horrific conditions companies of all size and means have had to endure. If adversity creates opportunity, the misguided analogy of this recent gold loan has opened the door for those who understand what the real bottomline is to the latest corporate developments.