Senegal gov’t hikes Teranga’s royalty rate

Teranga Gold (TGZ-T), which has been producing gold from its Sabodala open-pit gold mine in the Senegal since March 2009, has agreed to amend its stability agreement with the government to increase the royalty rate on production to 5% from 3%, bringing it in-line with prevailing rates in the rest of West Africa.

The Toronto-based junior has also agreed to start paying a portion of accrued dividends on the state’s 10% interest in Sabodala earlier than planned to help the cash-strapped government meet its needs. Under the original agreement, Teranga had committed to paying the dividend only after it had recouped its capital from the mine.

In exchange, the government has waived its right to take an additional 25% stake in any deposits that Teranga may develop and put through the Sabodala mill from its regional exploration permits or any ground it may acquire in the future, for that matter, that are not part of the company’s 33 sq. km mining licence it holds on Sabodala. (Teranga’s mining licence on the 33 sq. km land package in southeastern Senegal’s Birimian geological belt includes the Sabodala pit and the Masato, Niakafiri, Niakafiri West, Soukhoto and Dinkokhono deposits.

Outside Teranga’s mining licence, the company also owns interests in 10 exploration permits encompassing 1,200 sq. km, which the company refers to as its regional land package. Last year it spent $20 million on exploration there and over the past 24 months has identified at least 40 targets. Teranga holds stakes in the 10 exploration permits ranging from 70% through joint ventures, to 100%.

Under the new agreement, Teranga can process material from any deposits found on its regional land package — such as its Gora deposit — in exchange for an upfront royalty payment of 1% based on the size of the deposit and the gold price, and only after Teranga receives all the permits it requires to mine the deposits.

“We won’t make any payments until we get all the permits,” explains Kathy Sipos, Teranga’s head of investor relations. “They need money and we need production.”

It works out to a 1% royalty on the extra ounces that Teranga will put through the mill. Teranga pays the royalty upfront based on the size of the deposit, capped at $10 million. The company starts paying 1% in the year that the amount owed for the deposit exceeds the initial $10 million.

At Gora, for example, Teranga’s most advanced satellite deposit, about 26 km from the Sabodala mill, money owed to the government will be based on the reserves used in the feasibility study (285,000 oz. at a 95% recovery rate, or 270,750 oz.) After the government’s 5% royalty is factored in, the number of gold ounces drops to 257,213. This number is multiplied by US$16.50 per oz. (1% of the average realized gold price over the last 12 months, or US$1,650 per oz.) for a payment to the government once all the permits it needs to put Gora into production have been received.

“This provides the government with a significant upfront payment which should incentivize them to move the deposit through the permitting process efficiently [in a way that is] fair for both parties,” Sipos explains in an email, “as the amount is a function of both the gold price [each dollar per ounce paid goes up or down, depending on the gold price] and the size of the deposit [paid based on the number of ounces produced through the mill].”

To make the math simpler, if a deposit has 1 million oz. recovered after the government royalty is paid, Teranga would owe 1 million oz. times US$16.50 per oz., or US$16.5 million. The company would pay US$10 million upfront on receipt of all permits, and after producing about 606,000 oz. (10 million oz. multiplied by US$16.50), the company would start paying 1% of annual production each year.

Under the new agreement announced April 2, the government will support Teranga’s drilling on the Niakafiri deposit (which is on the existing mine licence). And it will extend the term of the mining licence by five years to 2022. The Senegalese will also extend five key exploration licences by 18 months beyond their current expiry dates, and promised to ensure full access to exploration targets currently occupied by artisanal miners.

Sipos notes that Senegal President Macky Sall, who was elected in March 2012, is a geological engineer and understands that the country has fallen behind its neighbours in West Africa, particularly Mali to the south, when it comes to resource extraction. “He understands the industry, he understands mining — we’re the only operator in the country, and he needs the capital,” Sipos says.

According to BMO mining analyst Andrew Breichmanas, the agreement in principle offers both stability and opportunity. “The higher royalty brings the fiscal regime in Senegal more in-line with its West African neighbours, but reduces net present value (NPV) by roughly 10%,” the London-based analyst writes in a research note. “Longer term, the mechanism for acquiring participation rights suggests a strong level of government support, which could allow Teranga to leverage existing infrastructure at Sabodala and process ore from nearby satellite deposits.”

As of Dec. 31, 2012, reserves on the company’s mining licence totalled 33.1 million tonnes grading 1.22 grams gold per tonne for 1.3 million contained oz. gold.

In terms of exploration this year, Teranga has lowered its exploration budget due to market conditions and minimized development expenditures at Goro. Nevertheless, Goro remains on track to start production in 2014. The satellite deposit has measured-and-indicated resources of 374,000 oz. gold grading 5 grams gold per tonne.

The Gora pit is expected to produce 500,000 tonnes per year for four years, at a grade ranging from 2.8 grams gold per tonne to 4.9 grams gold per tonne. The project capital cost is estimated to be between $45 million and $50 million.
Total cash costs for Gora average US$675 to US$700 per oz. sold on a life-of-mine basis. At a 5% discount rate, the Gora deposit is expected to return a US$105-million after-tax NPV and a 69% internal rate of return.

Richard Young, Teranga’s president and chief executive, noted in a press release announcing the new agreement that even with the additional $10 million in costs, management still expects to generate free cash flow and remains on track to eliminate its hedge book by mid-2013.

Teranga forecasts Sabodala will produce between 190,000 oz. gold and 210,000 oz. gold this year at total cash costs between US$650 and US$700 per oz.