Guyana Goldfields Will Be a Winner

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Yesterday, I wrote an article in which I argued that investors will do extraordinarily well if they are able to isolate mining companies that are not yet producing, but will be in the very near future (within a year), and those that are anticipated to produce at very low costs. I used Tahoe Resources (NYSE:TAHO) and Klondex Mines (MKTS:KLNDF.PK) as examples of companies that substantially outperformed their peers as they approached low cost production.

These companies, however, have had their runs, and to continue owning them one needs another justification. In order to play the theme I just outlined, one needs to locate a company that will be producing with very low costs at the beginning of 2015. One such company is Guyana Goldfields (MKTS:GUYFF.PK).

Guyana Goldfields owns the Aurora project in Guyana. It is expected to begin production at about 150,000 ounces per year in the first-quarter of 2015. A couple of years down the road, the company will expand production to over 300,000 ounces annually when it begins producing underground resources. The company still needs to accomplish a couple of things before it will see production.

First, it needs to raise capital. In fact, it recently revised its capital needs upward from $205 million to $249 million. Given that it spent $11 million in the time it took to revise its initial capex upwards, Guyana Goldfields’ capital needs going forward are $238 million. As of the end of the third-quarter, the company had $107 million in working capital, meaning that it is going to have to find an additional $131 million. This shouldn’t be an issue given the quality of the Aurora project. Management may be able to issue debt, sell a royalty, or if it has to it can issue stock, which wouldn’t be a huge blow to existing shareholders given that the current valuation is $330 million. Then it needs to finish constructing the mine, which could face delays and unexpected hurdles that could lead to additional costs. But, ultimately, production is all but a foregone conclusion.

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