To preface, as I listen to the 2014 European Gold Forum in Zurich, I am continually stunned by the valuations assigned to companies that have top-quartile cost structures for permitted and financed projects. Now even emerging producers with a bent for expansion have been severely marked down. I have to admit that to some degree I had become numb to it. But I now realize valuations have gone beyond silly season scenarios and have become just outright bizarre.

Most of these companies are progressing, but the market is now pricing them as if the execution and cost overrun risk is extreme and the prospect for takeovers of these emerging deposits is nil. There are some very, very compelling execution lift (de-risking) situations. The gold optionality, or call premium, on these deposits is also virtually nil. Time and time again during this forum, presenters state that the feasibility studies used were often done several years ago and that costs have since come down.  Gold Standard (GSV) (discussed Friday for subscribers) indicated that drilling costs are down 50-60%!

Typically, mine plans for the companies on which I am focused have been tweaked to be more scalable starting with smaller capex and simpler designs so as to avoid the high profile development hazards seen over the last couple years. The strategy is phased. The common quote is, “We have good flexibility,” and that it’s a “good time to build a scaleable mine” in terms of labor and material.

To illustrate this, the Teranga CEO Richard Young provided an excellent presentation at the Gold Forum. [My initial write up about Teranga is here.]

President of Senegal tours Sabadola

Teranga (TER) is a producer (Sabodala) at 250,000 ounces at about a $650 cash cost and currently trades at about two times gross cash flow. TER is the only company in Senegal with a mill.

The new president of Senegal was a mining minister when the mining code was revised. Since Senegal owns a stake in TER and the immense 1000 sq. km land package, it has a keen interest in this development. According to Young,  Senegal is as prospective as Mali but is 15 to 20 years behind in development. TER is the ideal platform to do it and has the relationships and social license.

Sabodala already has a centrally located mill with a capacity of 4 million tons per annum. It has also optimized the crushing mechanics to process 10% to 15% more material. This, along with its large capacity and utilization of higher grade oxides (600,000 oz. of 3 gram) from the Oromin acquisition, creates a “surprise” gearing factor to crank up well over 300,000 ounces or perhaps 350,000 ounces per year. Getting to full capacity with better oxides will drive cash costs down well below the $650 area.

The company is also targeting an 8 km zone called Masato that has promise of a further upgrade of ore (2 to 3 gram oxides) to process. A $10 million regional exploration program for 2014 is underway on a strike length of 70 km, and there is the likelihood that additional low-cost oxides will be found. TER could then do an economic expansion of the present mill to a production level of 500,000 ounces or more.

This has the potential become a world class operation, and much of the groundwork has already been laid. The market seems completely asleep at the switch on this one.

Teranga is one of fifteen companies at the gold forum I am commenting on.