Red Back Boosts Bought Deal To $60M

Vancouver — Within three hours of announcing a $40-million bought deal, Red Back Mining (RBI-T, RBIFF-o) went back to the wire and boosted that number by $20 million.

Red Back president Richard Clark says after the initial announcement the banks, led by Scotia Capital and BMO Capital Markets, soon asked for more.

“Even the $60 million was four times oversubscribed,” Clark says.

“Timing is everything,” he says. “We’ve been sitting here waiting for a good gold day.”

And Red Back ended up hitting a particularly good one. At presstime, the price of gold was up US$47.60 per oz. News of the bought deal boosted Red Back’s share price 60. It closed at $4.60.

Red Back hadn’t initially intended to go to the markets for cash. But having earlier planned its capital spending on US$800-per-oz. gold and with the price of gold dipping well below that recently, Clark says Red Back realized, “We’ve got do a quick equity bridge.”

The $60 million in proceeds will largely go towards funding Red Back’s ongoing mill expansions at its two operating open-pit mines: Chirano in Ghana, about 100 km southwest of Kumasi, and Tasiast in Mauritania, about 300 km north of Nouakchott.

With mill expansions nearing completion, Red Back expects gold production at Chirano, from existing open pits and its underground Akwaaba Deeps development, will increase to 250,000 oz. in 2010 from 120,000 oz. this year.

Similarly, Red Back forecasts gold production at Tasiast to hit 250,000 oz. in 2010 from its expected 135,000 oz. this year. With Tasiast and Chirano combined, Red Back is on mark to produce about 255,000 oz. gold this year.

Red Back also recently announced taking a 13% stake in Mineral Deposits (MDM-T, MNLDF-o), a company expected to pour its first gold from the Sabodala gold project in Senegal by the end of the year.

Setbacks at Chirano

During the third quarter ending Sept. 30, Red Back’s net income — $10.6 million — was down considerably. In the previous two quarters, it brought in $23.5 million (second quarter) and $19.9 million (first quarter).

The decline mostly resulted from a substantial — and likely temporary — increase in cash costs at Chirano. At US$596-per-oz. gold, cash costs were nearly US$200 per oz. higher this quarter than during the same period a year ago.

But given three hefty setbacks at Chirano, climbing costs didn’t come as a surprise.

The first and most painful hit was an overnight hiking of electricity prices in July. “It went up like crazy,” Clark says.

Chirano draws hydropower from the Ghanaian electrical grid. Before July, the price per kilowatt-hour was around 12. But with skyrocketing oil prices, Clark says the Ghanaian government realized it could increase the price of electricity without industry resorting to backup generators.

It doubled prices to about 24.

Not that resorting to generators was an option for Red Back. At the time, it didn’t have any at Chirano. But having generators probably wouldn’t have made a difference anyway, Clark says, as the government set the price of electricity just below the cost of generating electricity from diesel.

But now, having bought backup diesel generators for Chirano and with the price of oil less than half what it was this summer, Clark says he sees being able to call the government’s hydro hand.

“Look guys,” Clark says Red Back will tell the Ghanaian government, “either bring the price of power down or we’re going to the gens.”

He estimates the increase in power costs have hit Red Back by about US$60 per oz. gold.

The two other setbacks at Chirano were a caved-in pit wall that saw Red Back resort to extracting lower-grade ore from a different area of the pit, and the ongoing need to use auxiliary portable crushers due to the hardness of pit ore.

Both these difficulties are being addressed. A new crushing facility that Red Back should finish by the end of the year will eliminate the need for auxiliary crushing and a new pit wall cut in 2009 will provide access to higher-grade ore once again.

Ore grades decreased to 1.64 grams gold per tonne in the third quarter. That compares with 2.26 grams gold in the same quarter a year ago.

Exploration strategy

Between Red Back’s two mines, it has a total of about 4.1 million proven and probable oz. gold in reserves and resources of 4 million measured and indicated oz. (based on a 2007 resource estimate).

Toadd ounces, although Red Back has a number of other exploration properties, Clark says the focus is on increasing resources and reserves at its two mines primarily by expanding them at depth.

The Akwaaba Deeps expansion at the Chirano mine is a prime example of that strategy. Of Red Back’s reserves and resources, it accounts for about 2 million oz. gold and will deliver its first ore in the current quarter.

With new discoveries at both Tassius and Chirano, Clark says there will be a new resource coming out in January 2009.

As for the old numbers? “That’s all going to change,” he says.